978-1259918940 Test Bank Chapter 5 Part 2

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55) Why do managers suggest that ignoring all cash flows following the required payback period

is not a major flaw of the payback method of capital budgeting analysis?

A) Payback is never used in real practice so it makes no difference how academics apply the

method in their studies.

B) All projected cash flows after the required period are highly inaccurate so including them

lessens the reliability of the resulting decision.

C) If the cash flows after the required period are significant, managers will use their discretion to

override the payback rule.

D) All cash flows after the required period are relatively worthless in today’s dollars so ignoring

them has no consequence.

E) Any consideration of the cash flows after the required period rarely has any effect on the

accept/reject decision.

56) Graham and Harvey (2001) found that ________ were the two most popular capital

budgeting methods.

A) IRR and payback

B) IRR and NPV

C) NPV and PI

D) IRR and modified IRR

E) discounted payback and NPV

57) What is the net present value of a project with an initial cost of $36,900 and cash inflows of

$13,400, $21,600, and $10,000 for Years 1 to 3, respectively? The discount rate is 13 percent.

A) −$287.22

B) −$1,195.12

C) −$1,350.49

D) $204.36

E) $797.22

58) What is the net present value of a project that has an initial cash outflow of $7,670 and cash

inflows of $1,280 in Year 1, $6,980 in Year 3, and $2,750 in Year 4? The discount rate is 12.5

percent.

A) $86.87

B) $270.16

C) $68.20

D) $249.65

E) $371.02

59) A project costing $6,200 initially should produce cash inflows of $2,860 a year for three

years. After the three years, the project will be shut down and will be sold at the end of Year 4

for an estimated net cash amount of $3,300. What is the net present value of this project if the

required rate of return is 11.3 percent?

A) $2,474.76

B) $2,903.19

C) $935.56

D) $3,011.40

E) $1,980.02

60) Wilson’s Market is considering two mutually exclusive projects that will not be repeated. The

required rate of return is 13.9 percent for Project A and 12.5 percent for Project B. Project A has

an initial cost of $54,500, and should produce cash inflows of $16,400, $28,900, and $31,700 for

Years 1 to 3, respectively. Project B has an initial cost of $69,400, and should produce cash

inflows of $0, $48,300, and $42,100, for Years 1 to 3, respectively. Which project, or projects, if

either, should be accepted and why?

A) Project A; because its NPV is positive while Project B’s NPV is negative

B) Project A; because it has the higher required rate of return

C) Project B; because it has the largest total cash inflow

D) Project B; because it has a negative NPV which indicates acceptance

E) Neither project; because neither has an NPV equal to or greater than its initial cost

61) You are considering two independent projects that have differing requirements. Project A has

a required return of 12 percent compared to Project B’s required return of 13.5 percent. Project A

costs $75,000 and has cash flows of $21,000, $49,000, and $12,000 for Years 1 to 3,

respectively. Project B has an initial cost of $70,000 and cash flows of $15,000, $18,000, and

$41,000 for Years 1 to 3, respectively. Based on the NPV, you should:

A) accept both Project A and Project B.

B) accept Project A and reject Project B.

C) accept Project B and reject Project A.

D) reject both Project A and Project B.

E) accept whichever one you want but not both.

62) A food cart costs $4,500 and is expected to return $1,750 a year for three years and then be

worthless. What is the payback period for this cart?

A) 2.83 years

B) 3.14 years

C) 2.78 years

D) 2.57 years

E) 1.57 years

63) You are considering a project with an initial cost of $4,300. What is the payback period for

this project if the cash inflows are $550, $970, $2,600, and $500 a year for Years 1 to 4,

respectively?

A) 2.04 years

B) 2.36 years

C) 2.89 years

D) 3.04 years

E) 3.36 years

64) A project has an initial cost of $2,250. The cash inflows are $0, $500, $900, and $700 for

Years 1 to 4, respectively. What is the payback period?

A) 2.97 years

B) 2.84 years

C) 3.98 years

D) 3.92 years

E) Never

65) Jack is considering adding toys to his general store. He estimates the cost of toy inventory

will be $4,200. The remodeling and shelving costs are estimated at $1,500. Toy sales are

expected to produce net annual cash inflows of $1,200, $1,500, $1,600, and $1,750 over the next

four years, respectively. Should Jack add toys to his merchandise if he requires a three-year

payback period? Why or why not?

A) Yes; because the payback period is 2.94 years

B) Yes; because the payback period is 2.02 years

C) Yes; because the payback period is 3.80 years

D) No; because the payback period is 2.02 years

E) No; because the payback period is 3.80 years

66) Consider an investment with an initial cost of $20,000 that expected to last for 5 years. The

expected cash flows in Years 1 and 2 are $5,000 each, in Years 3 and 4 are $5,500 each, and the

Year 5 cash flow is $1,000. Assume each annual cash flow is spread evenly over its respective

year. What is the payback period?

A) 3.18 years

B) 3.82 years

C) 4.00 years

D) 4.55 years

E) None of these

67) A project costing $218,000 has equal annual cash inflows over its 7-year life. If the

discounted payback period is seven years and the discount rate is zero percent, what is the

amount of the cash flow in each of the seven years?

A) $31,142.86 per year for each of the seven years

B) $0 for Years 1 to 6 and $218,000 in Year 7

C) Any amount between $0 and $218,000 for any one year, provided the sum of the seven cash

flows totals $218,000.

D) $218,000 for Year 1 and $0 for Years 2 through 7.

E) $0 for each of the seven years

68) A project has an initial cost of $10,600 and produces cash inflows of $3,700, $4,900, and

$2,500 for Years 1 to 3, respectively. What is the discounted payback period if the required rate

of return is 7.5 percent?

A) 2.65 years

B) 2.78 years

C) 2.94 years

D) 2.88 years

E) Never

69) An investment project has an initial cost of $260 and cash flows $75, $105, $100, and $50

for Years 1 to 4, respectively. The cost of capital is 12 percent. What is the discounted payback

period?

A) 3.76 years

B) Never

C) 3.42 years

D) 3.68 years

E) 3.92 years

70) An investment project has an initial cost of $382 and cash flows $105, $130, $150, and $150

for Years 1 to 4, respectively. The cost of capital is 9 percent. What is the discounted payback

period?

A) 2.76 years

B) 3.57 years

C) 3.42 years

D) 3.68 years

E) 2.92 years

71) Homer is considering a project with cash inflows of $950 a year for Years 1 to 4,

respectively. The project has a required discount rate of 11 percent and an initial cost of $2,100.

What is the discounted payback period?

A) 3.05 years

B) 2.68 years

C) 3.39 years

D) 2.21 years

E) Never

72) Leslie is charged with determining which small projects should be funded. Along with this

assignment, she has been granted the use of $15,000 for a maximum of two years on a

discounted basis. She is considering three projects. Project A costs $7,500 and has cash flows of

$4,000 a year for Years 1 to 3. Project B costs $8,000 and has cash flows of $3,000, $4,000, and

$3,000 for Years 1 to 3, respectively. Project C costs $2,000 and has a cash inflow of $2,500 in

Year 2. What decisions should she make regarding these projects if she assigns them a

mandatory discount rate of 8.5 percent? Explain why.

A) Accept either Projects A and C or Projects B and C, but not all three as there is insufficient

financing

B) Accept Project C and reject Projects A and B because only Project C has a discounted

payback that is less than two years

C) Accept Projects A and C and reject Project B as they have the shortest discounted payback

periods that fit within the $15,000 allocation

D) Accept Projects A and C and reject Project B as A and B payback within two years

E) Accept Projects B and C and reject Project A as this combination uses the most initial capital

73) An investment with an initial cost of $15,000 produces cash flows of $5,000 annually for 5

years. At a discount rate of 10 percent, what is the discounted payback period?

A) 3.00 years

B) 3.21 years

C) 3.75 years

D) 3.89 years

E) Never

74) An investment cost $10,000 with expected cash flows of $3,000 a year for 5 years. At what

discount rate will the project’s IRR equal its discount rate?

A) 15.24 percent

B) 27.22 percent

C) 0 percent

D) 16.67 percent

E) 21.08 percent

75) An investment costing $25 returns $27.50 at the end of one year with no risk. Given this, you

know that the NPV:

A) is zero at any given discount rate.

B) is negative if the required return is less than 10 percent.

C) equals 1.0 if the required return is 10 percent.

D) is zero if the required rate of return is 10 percent.

E) must be positive at any given discount rate.

76) Lucie is reviewing a project with an initial cost of $38,700 and cash inflows of $9,800,

$16,400, and $21,700 for Years 1 to 3, respectively. Should the project be accepted if it has been

assigned a required return of 9.75 percent? Why or why not?

A) Yes; because the IRR exceeds the required return by .34 percent

B) Yes; because the IRR is less than the required return by .28 percent

C) Yes; because the IRR exceeds the required return by .28 percent

D) No; because the IRR exceeds the required return by .34 percent

E) No; because the IRR is only 9.69 percent

77) Sun Lee’s is considering two mutually exclusive projects that have been assigned the same

discount rate of 10.5 percent. Project A has an initial cost of $54,500, and should produce cash

inflows of $16,400, $28,900, and $31,700 for Years 1 to 3, respectively. Project B has an initial

cost of $79,400, and should produce cash inflows of $0, $48,300, and $42,100, for Years 1 to 3,

respectively. What is the incremental IRR?

A) −15.40 percent

B) −11.23 percent

C) 4.08 percent

D) 7.83 percent

E) 13.89 percent

78) Project A costs $84,500 and has cash flows of $32,300, $36,400, and $30,000 for Years 1 to

3, respectively. Project B has an initial cost of $79,000 and has cash flows of $30,000, $36,000,

and $29,000 for Years 1 to 3, respectively. What is the incremental IRR of these two mutually

exclusive projects?

A) 18.11 percent

B) −13.01 percent

C) 14.91 percent

D) 16.75 percent

E) −20.37 percent