978-0133423822 Chapter 11 Part 4

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32) Aroma Candles, Inc. is evaluating a project with the following cash lows. Calculate the

IRR of the project. (Round to the nearest whole percentage.)

YearCash Flows

0 ($120,000)

1 $30,000

2 $70,000

3 $90,000

A) 18%

B) 23%

C) 28%

D) 33%

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

33) Aroma Candles, Inc. is evaluating a project with the following cash lows. The project

involves a new product that will not afect the sales of any other project. Which two

methods would always lead to the same accept/reject decision for this project, regardless of

the discount rate.

YearCash Flows

0 ($120,000)

1 $30,000

2 $70,000

3 $90,000

A) Payback and Discounted Payback

B) NPV and Payback

C) NPV and IRR

D) Discounted Payback and 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

34) Which of the following is considered to be a deiciency of the IRR?

A) It fails to properly rank capital projects.

B) It could produce more than one rate of return.

C) It fails to utilize the time value of money.

D) It is not useful in accounting for risk in capital budgeting.

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

35) You have been asked to analyze a capital investment proposal. The project’s cost is

$2,775,000. Cash inlows are projected to be $925,000 in Year 1; $1,000,000 in Year 2;

$1,000,000 in Year 3; $1,000,000 in Year 4; and $1,225,000 in Year 5. Assume that your

irm discounts capital projects at 15.5%. What is the project’s MIRR?

A) 12.62%

B) 10.44%

C) 16.73%

D) 19.99%

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

36) Dizzyland Enterprises has been presented with an investment opportunity which will

yield end-of-year 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 $150,000

today, and the irm’s cost of capital is 10%. What is the proitability index for this

investment?

A) 1.34

B) 0.87

C) 1.85

D) 0.21

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

37) We compute the proitability index of a capital-budgeting proposal by

A) multiplying the IRR by the cost of capital.

B) dividing the present value of the annual after-tax cash lows by the cost of capital.

C) dividing the present value of the annual after-tax cash lows by the cost of the project.

D) multiplying the cash inlow by the IRR.

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

38) What is the payback period for a $20,000 project that is expected to return $6,000 for

the irst two years and $3,000 for Years 3 through 5?

A) 3 1/2

B) 4 1/2

C) 4 2/3

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: payback period

Principles: Principle 1: Money Has a Time Value

39) The payback method focuses primarily on the length of time required to recover the

cost of the investment rather than estimating the total value the project will add to the

irm.

Question Status: Revised

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

40) One advantage of the payback method is that it can be readily understood by people

with no special training in inance.

Question Status: New question

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

41) When several sign reversals in the cash low stream occur, the IRR equation can have

more than one positive 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

42) If the project’s internal rate of return is greater than or equal to zero, the project

should always be accepted.

Question Status: New question

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

43) The proitability index provides the same accept/reject decision result as the net

present value (NPV) method but would not necessarily rank mutually exclusive projects the

same way.

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

44) The internal rate of return (IRR) will increase as the required rate of return of a project

is increased.

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

45) The IRR assumes that cash lows are reinvested at the cost of capital.

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

46) If the NPV of a project is zero, then the proitability index should equal one.

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

47) Unlike the basic IRR method, the MIRR method allows the analyst to specify a

reinvestment rate for positive cash lows.

Dif: 2

Question Status: New question

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

48) According to the modiied internal rate of return (MIRR) technique, when a project’s

MIRR is greater than its cost of capital, the project should 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: modiied internal rate of return

Principles: Principle 1: Money Has a Time Value

49) The IRR is the discount rate that equates the present value of the project’s future net

cash lows with the project’s initial outlay.

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

50) Determine the IRR on the following projects:

a. Initial outlay of $35,000 with an after-tax cash low at the end of the year of $5,836 for

seven years

b. Initial outlay of $350,000 with an after-tax cash low at the end of the year of $70,000

for seven years

c. Initial outlay of $3,500 with an after-tax cash low at the end of the year of $1,500 for

three years

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

51) Discuss the merits and shortcomings of using the payback period for capital budgeting

decisions.

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

52) Project November requires an initial investment of $500,000. The present value of

operating cash lows is $550,000. Project December requires an initial investment of

$750,000. The present value of operating cash lows is $810,000.

a. Compute the proitability index for each project.

b. If the projects are mutually exclusive, does the proitability index rank them correctly?

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