8) Project Black Swan requires an initial investment of $115,000. It has positive cash lows
of $140,000 for each of the next two years. Because of major demolition and environmental
clean-up costs, cash low for the third and inal year of the project is $(170,000).
A) All possible IRR’s for this project are negative.
B) It is not possible to compute an IRR for this project.
C) The project is unacceptable at any required rate of return.
D) This project might have more than one IRR.
Question Status: Previous edition
Objective: 11.3 Use the proitability index, internal rate of return, and payback criteria to evaluate
investment opportunities.
Keywords: internal rate of return
Principles: Principle 1: Money Has a Time Value
9) Compute the payback period for a project with the following cash lows, if the company’s
discount rate is 12%.
Initial outlay = $450
Cash lows: Year 1 = $325
Year 2 = $65
Year 3 = $100
A) 3.43 years
B) 3.17 years
C) 2.88 years
D) 2.6 years
Question Status: Previous edition
Objective: 11.3 Use the proitability index, internal rate of return, and payback criteria to evaluate
investment opportunities.
Keywords: payback period
Principles: Principle 1: Money Has a Time Value
21
10) Project Black Swan requires an initial investment of $115,000. It has positive cash
lows of $140,000 for each of the next two years. Because of major demolition and
environmental clean-up costs, cash low for the third and inal year of the project is
$(170,000).
A) All possible IRR’s for this project are negative.
B) It is not possible to compute an IRR for this project.
C) This project might have more than one IRR, but only one MIRR.
D) The project is unacceptable at any required rate of return. This project might have more
than one IRR.
Question Status: Previous edition
Objective: 11.3 Use the proitability index, internal rate of return, and payback criteria to evaluate
investment opportunities.
Keywords: internal rate of return
Principles: Principle 1: Money Has a Time Value
11) Project Black Swan requires an initial investment of $115,000. It has positive cash
lows of $140,000 for each of the next two years. Because of major demolition and
environmental clean-up costs, cash low for the third and inal year of the project is
$(170,000). The company accepts all projects with a payback period of 2 years or less.
A) The payback rule would reject this project because of its risks are too high.
B) The payback rule would reject this project because all negative cash lows are added
together.
C) If strictly applied, the payback rule would reject this project.
D) If strictly applied, the payback rule would accept this project.
Question Status: Previous edition
Objective: 11.3 Use the proitability index, internal rate of return, and payback criteria to evaluate
investment opportunities.
Keywords: payback period
Principles: Principle 1: Money Has a Time Value
22
12) Consider a project with the following cash lows:
After-Tax After-Tax
Accounting Cash Flow
Year Proits from Operations
1 $799 $750
2 $150 $1,000
3 $200 $1,200
Initial outlay = $1,500
Terminal cash low = 0
Compute the proitability index if the company’s discount rate is 10%.
A) 15.8
B) 1.61
C) 1.81
D) 0.62
Question Status: Previous edition
Objective: 11.3 Use the proitability index, internal rate of return, and payback criteria to evaluate
investment opportunities.
Keywords: proitability index
Principles: Principle 1: Money Has a Time Value
13) Manheim Candles is considering a project with the following incremental cash lows.
Assume a discount rate of 10%.
Year Cash Flow
0 ($20,000)
1 0
2 $30,000
3 $30,000
Calculate the project’s MIRR. (Round to the nearest whole percentage.)
A) 31%
B) 47%
C) 53%
D) 61%
Question Status: Previous edition
Objective: 11.3 Use the proitability index, internal rate of return, and payback criteria to evaluate
investment opportunities.
Keywords: modiied internal rate of return
Principles: Principle 1: Money Has a Time Value
23
14) Project H requires an initial investment of $100,000 and produces annual cash lows of
$50,000, $40,000, and $30,000. Project T requires an initial investment of $100,000 and
the produces annual cash lows of $30,000, $40,000, and $50,000. The projects are
mutually exclusive. The company accepts projects with payback periods of 3 years or less.
A) Project H will be accepted.
B) Project T will be accepted.
C) H and T will both be accepted.
D) Neither projected will be accepted.
Question Status: Previous edition
Objective: 11.3 Use the proitability index, internal rate of return, and payback criteria to evaluate
investment opportunities.
Keywords: payback period
Principles: Principle 1: Money Has a Time Value
15) A new forklift under consideration by Home Warehouse requires an initial investment
of $100,000 and produces annual cash lows of $50,000, $40,000, and $30,000. Which of
the following will not change if the required rate of return is increased from 10% to 12%.
A) The net present value.
B) The internal rate of return.
C) The proitability index.
D) The modiied internal rate of return.
Question Status: Previous edition
Objective: 11.3 Use the proitability index, internal rate of return, and payback criteria to evaluate
investment opportunities.
Keywords: internal rate of return
Principles: Principle 1: Money Has a Time Value
16) Project Ell requires an initial investment of $50,000 and the produces annual cash
lows of $30,000, $25,000, and $15,000. Project Ess requires an initial investment of
$60,000 and then produces annual cash lows of $25,000 per year for the next ten years.
The company ranks projects by their payback periods.
A) Projects with unequal lives cannot be ranked using the payback method.
B) Ess will be ranked higher than Ell.
C) Ell and Ess will be ranked equally.
D) Ell will be ranked higher than Ess.
Question Status: Previous edition
Objective: 11.3 Use the proitability index, internal rate of return, and payback criteria to evaluate
investment opportunities.
Keywords: payback period
Principles: Principle 1: Money Has a Time Value
24
17) Which of the following series of cash lows could have more than one IRR? (Negative
cash lows are in parentheses.)
A) $(XX,XXX), $X,XXX , $X,XXX, $X,XXX
B) $(XX,XXX), $X,XXX , $X,XXX, $X,XXX, $(XX,XXX)
C) $X,XXX, $X,XXX , $X,XXX, $X,XXX, $(XX,XXX)
D) $XX,XXX, $X,XXX , $X,XXX, $X,XXX
Question Status: Previous edition
Objective: 11.3 Use the proitability index, internal rate of return, and payback criteria to evaluate
investment opportunities.
Keywords: internal rate of return
Principles: Principle 1: Money Has a Time Value
Use the following information to answer the following question.
Below are the expected after-tax cash lows for Projects Y and Z. Both projects have an
initial cash outlay of $20,000 and a required rate of return of 17%.
Project Y Project Z
Year 1 $12,000 $10,000
Year 2 $8,000 $10,000
Year 3 $6,000 0
Year 4 $2,000 0
Year 5 $2,000 0
18) Payback for Project Y is
A) two years.
B) one year.
C) three years.
D) four years.
Question Status: Previous edition
Objective: 11.3 Use the proitability index, internal rate of return, and payback criteria to evaluate
investment opportunities.
Keywords: payback period
Principles: Principle 1: Money Has a Time Value
25
19) What is payback for Project Z?
A) Two years
B) One year
C) Zero years
D) Project Z does not payback the original investment.
Question Status: Previous edition
Objective: 11.3 Use the proitability index, internal rate of return, and payback criteria to evaluate
investment opportunities.
Keywords: payback period
Principles: Principle 1: Money Has a Time Value
20) MacHinery Manufacturing Company is considering a three-year project that has a cost
of $75,000. The project will generate after-tax cash lows of $33,100 in Year 1, $31,500 in
Year 2, and $31,200 in Year 3. Assume that the irm’s proper rate of discount is 10% and
that the irm’s tax rate is 40%. What is the project‘s payback?
A) 0.33 years
B) 1.22 years
C) 2.33 years
D) Three years
Question Status: Previous edition
Objective: 11.3 Use the proitability index, internal rate of return, and payback criteria to evaluate
investment opportunities.
Keywords: payback period
Principles: Principle 1: Money Has a Time Value
21) MacHinery Manufacturing Company is considering a three-year project that has a cost
of $75,000. The project will generate after-tax cash lows of $33,100 in Year 1, $31,500 in
Year 2, and $31,200 in Year 3. Assume that the appropriate discount rate is 10% and that
the irm’s tax rate is 40%. What is the project’s discounted payback period?
A) 2.81 years
B) 2.33 years
C) 1.22 years
D) The project never reaches payback.
Question Status: Previous edition
Objective: 11.3 Use the proitability index, internal rate of return, and payback criteria to evaluate
investment opportunities.
Keywords: discounted payback period
Principles: Principle 1: Money Has a Time Value
26
22) Analysis of a machine indicates that it has a cost of $5,375,000. The machine is
expected to produce cash inlows of $1,825,000 in Year 1; $1,775,000 in Year 2; $1,630,000
in Year 3; $1,585,000 in Year 4; and $1,650,000 in Year 5. What is the machine’s IRR?
A) 12.16%
B) 17.81%
C) 23.00%
D) 11.11%
Question Status: Previous edition
Objective: 11.3 Use the proitability index, internal rate of return, and payback criteria to evaluate
investment opportunities.
Keywords: internal rate of return
Principles: Principle 1: Money Has a Time Value
Use the following information to answer the following question.
Below are the expected after-tax cash lows for Projects Y and Z. Both projects have an
initial cash outlay of $20,000 and a required rate of return of 17%.
Project Y Project Z
Year 1 $12,000 $10,000
Year 2 $8,000 $10,000
Year 3 $6,000 0
Year 4 $2,000 0
Year 5 $2,000 0
23) Discounted payback periods for projects Y and Z are
A) 1.64 and 1.71 years.
B) 3.14 years and never.
C) 2 years and 2 years.
D) 5 years and never.
Question Status: Revised
Objective: 11.3 Use the proitability index, internal rate of return, and payback criteria to evaluate
investment opportunities.
Keywords: discounted payback period
Principles: Principle 1: Money Has a Time Value
27
24) You are considering investing in a project with the following year-end after-tax cash
lows:
Year 1: $5,000
Year 2: $3,200
Year 3: $7,800
If the initial outlay for the project is $12,113, compute the project’s IRR.
A) 14%
B) 10%
C) 32%
D) 24%
Question Status: Previous edition
Objective: 11.3 Use the proitability index, internal rate of return, and payback criteria to evaluate
investment opportunities.
Keywords: internal rate of return
Principles: Principle 1: Money Has a Time Value
25) WKW, Inc. is analyzing a project that requires an initial investment of $10,000, followed
by cash inlows of $1,000 in Year 1, $4,000 in Year 2, and $15,000 in Year 3. The cost of
capital is 10%. What is the proitability index of the project?
A) 1.04
B) 1.55
C) 1.78
D) 1.97
Question Status: Revised
Objective: 11.3 Use the proitability index, internal rate of return, and payback criteria to evaluate
investment opportunities.
Keywords: proitability index
Principles: Principle 1: Money Has a Time Value
28
26) Frazier Fudge has a project with an initial outlay of $40,000, followed by three years of
annual incremental cash lows of $35,000. At the end of the third year, equipment will be
sold producing additional cash low of $10,000. Assuming a cost of capital of 10%, calculate
the MIRR of the project.
A) 46.5%
B) 51.3%
C) 62.9%
D) 74.7%
Question Status: Revised
Objective: 11.3 Use the proitability index, internal rate of return, and payback criteria to evaluate
investment opportunities.
Keywords: modiied internal rate of return
Principles: Principle 1: Money Has a Time Value
27) Frazier Fudge has a project with an initial outlay of $40,000, followed by three years of
annual incremental cash lows of $35,000. At the end of the third year, equipment will be
sold producing additional cash low of $10,000. Assuming a discount rate of 10%, which of
the following is the correct equation to solve for the IRR of the project?
A) $40,000 = $35,000(1.12)1 + $35,000(1.12)2 + $45,000(1.12)3
B) $40,000 = $35,000(1 + IRR)1 + $35,000(1 + IRR)2 + $45,000(1 + IRR)3
C) $40,000 = $35,000/(1.12)IRR + $35,000/(1.12)IRR + $45,000/(1.12)IRR
D) $40,000 = $35,000/(1 + IRR) + $35,000/(1.IRR) + $45,000/(1 + IRR)
Question Status: Revised
Objective: 11.3 Use the proitability index, internal rate of return, and payback criteria to evaluate
investment opportunities.
Keywords: internal rate of return
Principles: Principle 1: Money Has a Time Value
28) The Seattle Corporation has been presented with an investment opportunity which will
yield cash lows of $30,000 per year in Years 1 through 4, $35,000 per year in Years 5
through 9, and $40,000 in Year 10. This investment will cost the irm $100,000 today, and
the irm’s cost of capital is 10%. Assume cash lows occur evenly during the year.
A) 5.23 years
B) 4.26 years
C) 4.35 years
D) 3.72 years
Question Status: Revised
Objective: 11.3 Use the proitability index, internal rate of return, and payback criteria to evaluate
investment opportunities.
Keywords: discounted payback period
Principles: Principle 1: Money Has a Time Value
29) The director of capital budgeting of South Park Development Corporation is evaluating
a project that will cost $200,000; it is expected to last for 10 years and produce after-tax
cash lows, including depreciation, of $44,503 per year. If the irm’s cost of capital is 14%
and its tax rate is 40%, what is the project’s IRR?
A) 8%
B) 14%
C) 18%
29
D) -5%
Question Status: Previous edition
Objective: 11.3 Use the proitability index, internal rate of return, and payback criteria to evaluate
investment opportunities.
Keywords: internal rate of return
Principles: Principle 1: Money Has a Time Value
30) The owner of a small construction business has asked you to evaluate the purchase of a
new front end loader. You have determined that this investment has a large, positive, NPV,
but are afraid that your client will not understand the method. A good alternative method
in this circumstance might be
A) the payback method.
B) the proitability index.
C) the internal rate of return.
D) the modiied internal rate of return.
Question Status: Previous edition
Objective: 11.3 Use the proitability index, internal rate of return, and payback criteria to evaluate
investment opportunities.
Keywords: payback period
Principles: Principle 1: Money Has a Time Value
31) Whenever the IRR on a project equals that project‘s required rate of return
A) the NPV equals 0.
B) The NPV equals the initial investment.
C) The proitability index equals 0.
D) The NPV equals 1.
Question Status: Previous edition
Objective: 11.3 Use the proitability index, internal rate of return, and payback criteria to evaluate
investment opportunities.
Keywords: internal rate of return
Principles: Principle 1: Money Has a Time Value
30