6) The owner of a number of gas stations is considering installing cofee machines in his
gas stations. It will cost $270,000 to install the cofee machines, and they are expected to
boost cash lows by $120,536 per year for their ive-year working life. What must the cost
of capital be if this investment has a proitability index of 1?
A) 1.89%
B) 3.78%
C) 7.55%
D) 9.44%
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
7) Book NPV Number of writers needed
Prep for the College Entry Test $800,000 24
Prep for the Dental School Entry Test $250,0008
Prep for the Grad School Entry Test $450,00012
Prep for the Law School Entry Test$320,000 9
Prep for the Medical School Entry Test $400,00010
A company that creates education products is planning to create a suite of books to help
customers prepare for high-stakes tests for entry into college and grad school. They have
33 in-house writers to create these books. Due to the expertise needed in creating this
content it will not be possible to hire temporary writers within the planned time-frame.
Which projects should be undertaken?
A) Prep for the College Entry Test and Prep for the Law School Entry Test
B) Prep for the College Entry Test and Prep for the Grad School Entry Test
C) Prep for the Dental School Entry Test, Prep for the Grad School Entry Test, and Prep for
the Medical School Entry Test
D) Prep for the Grad School Entry Test, Prep for the Law School Entry Test, and Prep for
the Medical School Entry Test
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
8) Outstanding Job Hours to Print Job Penalty for not
completing job in 24 hours
Job A 6 -$120
Job B 9 -$200
Job C 12 -$360
Job D 16 -$400
41
Job E 2 –$50
A print shop has contracted to print a number of jobs within 24 hours. Any jobs not
completely printed within this time will result in a penalty, as shown in the table above.
However too many jobs have been accepted, and not all can be printed. Which jobs should
be printed in the next 24 hours?
A) Job D and Job A
B) Job C and Job B
C) Job C, Job B, and Job E
D) Job D, Job A, and Job E
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
42
9)
Department Yearly Proit Space Required (square feet)
Pet $600,000 6000
Fabrics $1,000,000 7000
Book $320,000 4000
Luggage $360,000 3000
Hardware $900,000 6000
Watches $300,000 2000
Shoe Repair $30,000 1000
A small department store in a mall has the opportunity to rent an additional 20,000 square
feet of space for ive years. It can divide up this space between the above new departments.
Each department will require a diferent amount of space, and each department is expected
to make a yearly proit as shown, for each of the next ive years. The discount rate is 10%.
Based on this information, what departments should be added?
A) Pet, Fabrics, Hardware, and Shoe Repair
B) Fabrics, Luggage, Hardware, Watches, and Shoe Repair
C) Pets, Fabrics, Books, and Luggage
D) Pet, Fabrics, Luggage, Hardware, and Shoe Repair
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
43
10)
Project Capital Investment Cash Flows from Investment
I $7 million $1.2 million per year in perpetuity
II $12 million $1.5 million per year in perpetuity
III $16 million $2.2 million per year in perpetuity
IV $10 million $1.4 million per year in perpetuity
A company has four projects it wishes to undertake. Which of these investments should be
the lowest priority, given a discount rate of 5%?
A) Project I
B) Project II
C) Project III
D) Project IV
AACSB Objective: Analytic Skills
Author: DS
Question Status: Revised
11) You are opening up a brand new retail strip mall. You presently have more potential
retail outlets wanting to locate in your mall than you have space available. What is the most
appropriate tool to use if you are trying to determine the optimal allocation of your retail
space?
A) internal rate of return (IRR)
B) payback period
C) net present value (NPV)
D) proitability index
AACSB Objective: Analytic Skills
Author: JN
Question Status: Revised
44
12) Consider a project with the following cash lows:
Year Cash Flow
0 -8000
1 3200
2 3200
3 3200
4 3200
Assume the appropriate discount rate for this project is 14%. The proitability index for this
project is closest to ________.
A) 0.17
B) 0.25
C) 0.66
D) 0.18
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
13) Consider the following two projects:
Projec
t
Year 0
Cash
Flow
Year 1
Cash
Flow
Year 2
Cash
Flow
Year 3
Cash
Flow
Year 4
Cash
Flow
Discount
Rate
A -100 40 50 60 N/A 0.13
B -73 30 30 30 30 0.13
The proitability index for project A is closest to ________.
A) 0.16
B) 32.28
C) 0.24
D) 16.14
AACSB Objective: Analytic Skills
Author: JN
Question Status: Revised
45
14) Consider the following two projects:
Projec
t
Year 0
Cash
Flow
Year 1
Cash
Flow
Year 2
Cash
Flow
Year 3
Cash
Flow
Year 4
Cash
Flow
Discount
Rate
A -100 40 50 60 N/A 0.16
B -73 30 30 30 30 0.16
The proitability index for project B is closest to ________.
A) 22.49
B) 14.99
C) 0.15
D) 0.09
AACSB Objective: Analytic Skills
Author: JN
Question Status: Revised
46
Use the table for the question(s) below.
Consider the following list of projects:
Project Investment NPV
A $135,000 $6,000
B 200,000 30,000
C 125,000 20,000
D 150,000 2,000
E 175,000 10,000
F 75,000 10,000
G 80,000 9,000
H 200,000 20,000
I 50,000 4,000
15) Assuming that your capital is constrained, which investment tool should you use to
determine the correct investment decisions?
A) proitability Index
B) incremental IRR
C) net present value (NPV)
D) internal rate of return (IRR)
AACSB Objective: Analytic Skills
Author: JN
Question Status: Revised
47
16) Assuming that your capital is constrained, which project should you invest in irst?
A) Project C
B) Project G
C) Project B
D) Project F
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
48
17) Assuming that your capital is constrained, what is the ifth project that you should
invest in?
A) Project H
B) Project I
C) Project B
D) Project A
AACSB Objective: Analytic Skills
Author: JN
Question Status: Previous Edition
49
18) Assuming that your capital is constrained, which project should you invest in last?
A) Project A
B) Project I
C) Project D
D) Project C
AACSB Objective: Analytic Skills
Author: JN
Question Status: Revised
50