79) Project A has an initial cost of $75,000 and annual cash flows of $33,000 for three years.
Project B costs $60,000 and has cash flows of $25,000, $30,000, and $25,000 for Years 1 to 3,
respectively. Projects A and B are mutually exclusive. The incremental IRR is ________ and if
the required rate is higher than the crossover rate then Project ________ should be accepted.
A) 13.94 percent; A
B) 12.89 percent; B
C) 12.89 percent; A
D) 13.94 percent; B
E) 15.86 percent; A
80) Bernstein’s proposed project has an initial cost of $128,600 and cash flows of $64,500,
$98,300, and −$15,500 for Years 1 to 3 respectively. If all negative cash flows are moved to
Time 0 at a discount rate of 10 percent, what is the modified internal rate of return?
A) 10.00 percent
B) 9.82 percent
C) 10.04 percent
D) 9.69 percent
E) 9.97 percent
81) You are considering two independent projects with the same discount rate of 11 percent.
Project A costs $284,700 and has cash flows of $75,900, $106,400, and $159,800 for Years 1 to
3, respectively. Project B costs $115,000, and has a cash flow of $50,000 a year for Years 1 to 3.
You have sufficient funds to finance any decision you make. Which project or projects, if either,
should you accept and why?
A) Project A; because it is the larger-sized project with a positive IRR
B) Project A; because it has the larger NPV
C) Neither project; because their NPVs are less than their initial costs
D) Project B; because its IRR exceeds the discount rate
E) Both projects; because their NPVs are both positive
82) A financing project has an initial cash inflow of $42,000 and cash flows of −$15,600,
−$22,200, and −$18,000 for Years 1 to 3, respectively. The required rate of return is 13 percent.
What is the internal rate of return? Should the project be accepted?
A) 15.26 percent; accept
B) 15.26 percent; reject
C) 13.44 percent; reject
D) 13.44 percent; accept
E) 10.33 percent; accept
83) Down Under Stores is considering an investment with an initial cost of $236,000. In Year 4,
the project will require an additional investment and finally, the project will be shut down in
Year 7. The annual cash flows for Years 1 to 7, respectively, are projected as $64,000, $87,000,
$91,000, −$48,000, $122,000, $154,000, and −$30,000. If all negative cash flows are moved to
Time 0 using a discount rate of 13 percent, what is the project’s modified IRR?
A) 15.44 percent
B) 17.67 percent
C) 18.54 percent
D) 14.91 percent
E) 22.08 percent
84) Project X has an initial cost of $20,000 and a cash inflow of $25,000 in Year 3. Project Y
costs $40,700 and has cash flows of $12,000, $25,000, and $10,000 in Years 1 to 3, respectively.
The discount rate is 6 percent and the projects are mutually exclusive. Based on the individual
project’s IRRs you should accept Project ________; based on NPV you should accept Project
________; the final decision should be to accept Project ________.
A) Y; Y; Y
B) Y; X; X
C) X; Y; Y
D) X; X; X
E) Y; X: Y
85) Two mutually exclusive projects have 3-year lives and a required rate of return of 10.5
percent. Project A costs $75,000 and has cash flows of $18,500, $42,900, and $28,600 for Years
1 to 3, respectively. Project B costs $72,000 and has cash flows of $22,000, $38,000, and
$26,500 for Years 1 to 3, respectively. Using the IRR, which project, or projects, if either, should
be accepted?
A) Accept both projects
B) Select either project as there is no significant difference between them
C) Accept Project A and reject Project B.
D) Accept Project B and reject Project A.
E) Reject both projects
86) Flo’s Flowers has a proposed project with an initial cost of $40,000 and cash flows of $8,500,
$15,600, and $22,700 for Years 1 to 3, respectively. Based on the profitability index rule, should
the project be accepted if the discount rate is 9.5 percent? Why or why not?
A) Yes; because the PI is 1.03
B) Yes; because the PI is .95
C) Yes; because the PI is negative
D) No; because the PI is 1.03
E) No; because the PI is .95
87) Anne is considering two independent projects with 2-year lives. Both projects have been
assigned a discount rate of 13 percent. She has sufficient funds to finance one or both projects.
Project A costs $38,500 and has cash flows of $19,400 and $28,700 for Years 1 and 2,
respectively. Project B costs $41,000, and has cash flows of $25,000 and $22,000 for Years 1
and 2, respectively. Which project, or projects, if either, should you accept based on the
profitability index method and what is the correct reason for that decision?
A) You should accept both projects since both of their PIs are positive.
B) You should accept Project A since it has the higher PI and you can only select one project.
C) You should accept both projects since both of their PIs are greater than 1.
D) You should only accept Project A since it is the only project with a PI greater than 1.
E) Neither project is acceptable.
88) Roy’s Welding projects cash flows of $13,500, $20,400, and $32,900 for Years 1 to 3 for a
project with an initial cost of $45,000. What is the profitability index given an assigned discount
rate of 15 percent?
A) .92
B) .97
C) 1.03
D) 1.08
E) 1.14
89) Ted, a project manager, wants to invest in a project with an initial cost of $58,500 and cash
flows of $32,400 and $38,500 in Years 1 and 2. Rosita, his boss, requires a discount rate of 10
percent and also a return of $1.10 in today’s dollars for every $1 invested. Will Ted get his
project approved? Why or why not?
A) Yes; because the NPV is positive
B) Yes; because the PI is greater than 1
C) Yes; because both criteria are met
D) No; because the project does not meet either requirement
E) No; while the project returns more than 10 percent it does meet $1.10 per $1 requirement.
90) Juan is considering two independent projects. Project A costs $74,600 and has projected cash
flows of $18,700, $46,300, and $12,200 for Years 1 to 3, respectively. Project B costs $70,000
and has cash flows of $10,600, $15,800, and $67,900 for Years 1 to 3, respectively. Juan assigns
a discount rate of 10 percent to Project A and 12 percent to Project B. Which project or projects,
if either, should he accept based on the profitability index rule?
A) Accept both projects.
B) Accept Project A and reject Project B.
C) Accept either A or B, but not both.
D) Reject both projects.
E) Accept Project B and reject Project A.
91) A proposed project costs $300 and has cash flows of $80, $200, $75, and $90 for Years 1 to
4, respectively. Because of its high risk, the project has been assigned a discount rate of 16
percent. In dollars, how much will this project return in today’s dollars for every $1 invested?
A) $1.01
B) $.99
C) $1.05
D) $.97
E) $1.03
92) Ginny is considering an investment costing $55,000 that has cash flows of $35,000 in Year
2, $36,000 in Year 3, and −$5,000 in Year 4. She requires a rate of return of 8 percent and has a
required discounted payback period of three years. Should this project be accepted? Why?
A) Yes; The project pays back on a discounted basis within the assigned time period and also
produces a positive NPV.
B) Yes; The discounted payback requirement is met and other methods of analysis are less
desirable.
C) No; Although the project earns more than 8 percent, there is no situation where the project
can pay back on a discounted basis within three years.
D) No; The discounted payback period is too short.
E) No; The NPV indicates rejection as does DPB when all cash flows are considered.
93) A proposed new venture will cost $175,000 and should produce annual cash flows of
$48,500, $85,000, $40,000, and $40,000 for Years 1 to 4, respectively. The required payback
period is 3 years and the discounted payback period is 3.5 years. The required rate of return is 9
percent. Which methods indicate project acceptance and which indicate project rejection?
A)
Accept: NPV, IRR, PI, payback;
Reject: discounted payback
B)
Accept: NPV, IRR, PI;
Reject: payback, discounted payback
C)
Accept: payback, PI;
Reject: NPV, IRR, discounted payback
D)
Accept: payback, discounted payback;
Reject: NPV, IRR, PI
E)
Accept: NPV, IRR;
Reject: PI, payback, discounted payback
94) Given the goal of maximization of firm value and shareholder wealth, we have stressed the
importance of net present value (NPV). And yet, some financial decision-makers continue to use
less desirable measures such as the payback method. Why do you think this is the case?
95) List and briefly discuss the advantages and disadvantages of the internal rate of return (IRR).
96) The IRR rule is said to be a special case of the NPV rule. Explain why this is so and why
IRR has some limitations NPV does not.
97) Explain the differences and similarities between net present value (NPV) and the profitability
index (PI).
98) Most financial experts will agree that net present value is the best capital budgeting method.
However, even NPV can be unreliable when projecting project results. Explain why this is so.