16) Osterwitz Company is evaluating an investment of $1,000,000 which will yield cash flows of $142,400 per year
for 10 years with no residual value.
Present Value of an Annuity of $1
5% 6% 7% 8% 9% 10%
1 0.952 0.943 0.935 0.926 0.917 0.909
2 1.859 1.833 1.808 1.783 1.759 1.736
3 2.723 2.673 2.624 2.577 2.531 2.487
4 3.546 3.465 3.387 3.312 3.240 3.170
5 4.329 4.212 4.100 3.993 3.890 3.791
6 5.076 4.917 4.767 4.623 4.486 4.355
7 5.786 5.582 5.389 5.206 5.033 4.868
8 6.463 6.210 5.971 5.747 5.535 5.335
9 7.108 6.802 6.515 6.247 5.995 5.759
10 7.722 7.360 7.024 6.710 6.418 6.145
If Osterwitz has a hurdle rate of 6%, they should accept the investment because it has an internal rate of return
greater than 6%.
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17) Allied Chemicals has a hurdle rate of 9% for new investments. The production manager suggests that an
equipment upgrade costing $84,460 would yield net cash flows of $40,000 in the first year, $30,000 in the second
year, $20,000 in the third year, and $10,000 in the fourth and final year.
Present Value of $1
5% 6% 7% 8% 9% 10%
1 0.952 0.943 0.935 0.926 0.917 0.909
2 0.907 0.890 0.873 0.857 0.842 0.826
3 0.864 0.840 0.816 0.794 0.772 0.751
4 0.823 0.792 0.763 0.735 0.708 0.683
5 0.784 0.747 0.713 0.681 0.650 0.621
The investment meets the company’s hurdle rate requirement and should be adopted.
18) If an investment project’s IRR is higher than the company’s hurdle rate, the company should go forward with the
investment.
19) The rate of return and payback methods DO NOT take into consideration the time value of money. Discounted
cash flow methods DO make use of the time value of money.
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20) Which of the following is TRUE of discounted cash flow methods like NPV and IRR?
A) They use simple interest calculations.
B) They use net income amounts rather than cash flows.
C) They focus on the payback period.
D) They incorporate compound interest calculations.
21) Compound interest used in discounted cash flow calculations assumes that companies will reinvest future cash
flows when they are received.
22) Which of the following is TRUE of discounted cash flow methods like NPV and IRR?
A) They use simple interest calculations.
B) They assume that cash flows will be reinvested when received.
C) They focus on the payback period.
D) They must follow the rules of GAAP.
23) Cash flows used in NPV and IRR analyses include all of the following EXCEPT:
A) future increased sales.
B) future cost savings.
C) depreciation expense.
D) residual value.
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24) An investment would be considered a good prospect under which of the following conditions?
A) The present value of the cash flows exceeds the initial investment.
B) The IRR is lower than the hurdle rate.
C) The cash inflows are greater than the initial investment.
D) It has a residual value.
25) The term net present value means the difference between:
A) the total net income of the project and the initial investment.
B) the initial investment and the residual value.
C) the future value of the cash flows and the present value of the cash flows.
D) present value of the net inflows and the investment’s cost.
26) Which of the following most accurately describes the discount rate used in NPV and IRR analyses?
A) The rate of inflation
B) The rate of interest earned on a savings account
C) The required rate of return, also known as the “hurdle rate”
D) The rate of interest charged for debt financing of an investment
27) When a company is evaluating an investment with discounted cash flows, if the investment has a higher risk, the
company will use a lower discount rate, and vice versa.
28) Alpha Company is considering an investment of $1,000,000 in a land development project. It will yield cash
flows of $300,000 for 5 years. Alpha uses a discount rate of 7%. What is the net present value of the investment?
Present Value of an Annuity of $1
5% 6% 7% 8% 9% 10%
1 0.952 0.943 0.935 0.926 0.917 0.909
2 1.859 1.833 1.808 1.783 1.759 1.736
3 2.723 2.673 2.624 2.577 2.531 2.487
4 3.546 3.465 3.387 3.312 3.240 3.170
5 4.329 4.212 4.100 3.993 3.890 3.791
A) $230,000
B) $312,000
C) $330,000
D) $444,000
29) Beta Company is considering an investment in a new storage facility that would require an initial outlay of
$250,000, and would yield yearly cash flows of $48,000 for 8 years. Beta uses a discount rate of 7% What is the
NPV of the investment?
Present Value of an Annuity of $1
5% 6% 7% 8% 9% 10%
1 0.952 0.943 0.935 0.926 0.917 0.909
2 1.859 1.833 1.808 1.783 1.759 1.736
3 2.723 2.673 2.624 2.577 2.531 2.487
4 3.546 3.465 3.387 3.312 3.240 3.170
5 4.329 4.212 4.100 3.993 3.890 3.791
6 5.076 4.917 4.767 4.623 4.486 4.355
7 5.786 5.582 5.389 5.206 5.033 4.868
8 6.463 6.210 5.971 5.747 5.535 5.335
9 7.108 6.802 6.515 6.247 5.995 5.759
10 7.722 7.360 7.024 6.710 6.418 6.145
A) $36,608
B) $24,177
C) $13,184
D) $44,000
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30) Centurion Company is considering a mineral extraction project which requires an initial investment of
$2,000,000 and will yield annual cash flows of $300,000 for 8 years. Centurion has an 8% hurdle rate. What is the
NPV of the project?
Present Value of an Annuity of $1
5% 6% 7% 8% 9% 10%
1 0.952 0.943 0.935 0.926 0.917 0.909
2 1.859 1.833 1.808 1.783 1.759 1.736
3 2.723 2.673 2.624 2.577 2.531 2.487
4 3.546 3.465 3.387 3.312 3.240 3.170
5 4.329 4.212 4.100 3.993 3.890 3.791
6 5.076 4.917 4.767 4.623 4.486 4.355
7 5.786 5.582 5.389 5.206 5.033 4.868
8 6.463 6.210 5.971 5.747 5.535 5.335
9 7.108 6.802 6.515 6.247 5.995 5.759
10 7.722 7.360 7.024 6.710 6.418 6.145
A) Positive $275,900
B) Negative $275,900
C) Positive $103,184
D) Negative $240,000
31) Which of the following would be the best basis on which to accept an investment opportunity?
A) If it has positive net cash flows
B) If it has a payback period in less than 10 years
C) If the investment’s rate of return is higher than the company’s current year rate of return
D) If the net present value of all cash flows is positive
32) Please refer to the following data about an investment opportunity:
Initial investment $500,000
Discount rate 10%
Yearly cash flows
Year 1 $100,000
Year 2 $200,000
Year 3 $200,000
Year 4 $200,000
Year 5 $100,000
Refer to the following table for PV factors:
Present Value of $1
5% 6% 7% 8% 9% 10%
1 0.952 0.943 0.935 0.926 0.917 0.909
2 0.907 0.890 0.873 0.857 0.842 0.826
3 0.864 0.840 0.816 0.794 0.772 0.751
4 0.823 0.792 0.763 0.735 0.708 0.683
5 0.784 0.747 0.713 0.681 0.650 0.621
6 0.746 0.705 0.666 0.630 0.596 0.564
7 0.711 0.665 0.623 0.583 0.547 0.513
8 0.677 0.627 0.582 0.540 0.502 0.467
9 0.645 0.592 0.544 0.500 0.460 0.424
10 0.614 0.558 0.508 0.463 0.422 0.386
How much is the NPV of the project?
A) $9,500 negative
B) $94,220 positive
C) $105,000 positive
D) $240,000 positive
33) Please refer to the following data about an investment opportunity:
Initial investment $1,000,000
Discount rate 7%
Yearly cash flows
Year 1 $250,000
Year 2 $350,000
Year 3 $400,000
Year 4 $150,000
Refer to the following PV factors:
Present Value of $1
5% 6% 7% 8% 9% 10%
1 0.952 0.943 0.935 0.926 0.917 0.909
2 0.907 0.890 0.873 0.857 0.842 0.826
3 0.864 0.840 0.816 0.794 0.772 0.751
4 0.823 0.792 0.763 0.735 0.708 0.683
5 0.784 0.747 0.713 0.681 0.650 0.621
6 0.746 0.705 0.666 0.630 0.596 0.564
7 0.711 0.665 0.623 0.583 0.547 0.513
8 0.677 0.627 0.582 0.540 0.502 0.467
9 0.645 0.592 0.544 0.500 0.460 0.424
10 0.614 0.558 0.508 0.463 0.422 0.386
What is the NPV of the project?
A) $150,000 negative
B) $19,000 positive
C) $21,455 positive
D) $19,850 negative
34) Farragut Company is evaluating an opportunity to invest $45,000 in new manufacturing equipment. It will have
a useful life of 3 years, and will generate $20,000 cash flows at the end of Year 1, $30,000 of cash flows at the end
of Year 2, and $10,000 of cash flows at the end of Year 3. If Farragut uses a discount rate of 5%, what is the NPV
of the project?
Present Value of $1
5% 6% 7% 8% 9% 10%
1 0.952 0.943 0.935 0.926 0.917 0.909
2 0.907 0.890 0.873 0.857 0.842 0.826
3 0.864 0.840 0.816 0.794 0.772 0.751
4 0.823 0.792 0.763 0.735 0.708 0.683
5 0.784 0.747 0.713 0.681 0.650 0.621
6 0.746 0.705 0.666 0.630 0.596 0.564
7 0.711 0.665 0.623 0.583 0.547 0.513
8 0.677 0.627 0.582 0.540 0.502 0.467
9 0.645 0.592 0.544 0.500 0.460 0.424
10 0.614 0.558 0.508 0.463 0.422 0.386
A) $944 negative
B) $1,008 positive
C) $4,100 positive
D) $9,890 positive
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35) Harvard Investments is considering an opportunity which will require an initial outlay of $100,000 but will
return cash flows for the next 5 years as follows: $10,000 in Year 1, $20,000 in Year 2, $30,000 in Year 3, $40,000
in Year 4, and $50,000 in Year 5. If Harvard uses a discount rate of 9%, how much is the NPV of the project?
Present Value of $1
5% 6% 7% 8% 9% 10%
1 0.952 0.943 0.935 0.926 0.917 0.909
2 0.907 0.890 0.873 0.857 0.842 0.826
3 0.864 0.840 0.816 0.794 0.772 0.751
4 0.823 0.792 0.763 0.735 0.708 0.683
5 0.784 0.747 0.713 0.681 0.650 0.621
6 0.746 0.705 0.666 0.630 0.596 0.564
7 0.711 0.665 0.623 0.583 0.547 0.513
8 0.677 0.627 0.582 0.540 0.502 0.467
9 0.645 0.592 0.544 0.500 0.460 0.424
10 0.614 0.558 0.508 0.463 0.422 0.386
A) $2,400 positive
B) $1,090 negative
C) $9,990 positive
D) $5,867 positive
36) When comparing several investments with the same initial outlay, the decision should be made on the basis of
which of the following?
A) Which project has the most total cash flows
B) Which project has the shortest payback
C) Which project has the highest NPV
D) Which project is completed first
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37) Under conditions of limited resources, when a company is comparing several investments with the different
amounts for their initial outlay, the decision should be made on the basis of which of the following?
A) Which project has the most total cash flows
B) Which project has the shortest payback
C) Which project has the highest profitability index
D) Which project is completed first
38) Which of the following best describes the profitability index?
A) An index of projects in order of which has the most net income
B) The ratio of present value of cash flows to initial investment
C) The ratio of total cash flows to initial investment
D) An array of possible investment outcomes at different discount rates
39) Which of the following best describes capital rationing?
A) When a company’s limited resources prevents them from taking on all good investment opportunities
B) The budgeting of investment funds among the divisions of a company
C) Putting limits on amounts of funds available to pay dividends
D) When a company’s limited resources forces them to reduce operating expenses
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40) Please review the information on 4 potential investments:
Project A Project B Project C Project D
Initial investment $200,000 $250,000 $300,000 $90,000
PV of cash inflows $285,000 $295,000 $420,000 $94,000
Payback period (years) 7.2 6.0 9.5 2.0
NPV of project $85,000 $45,000 $120,000 $4,000
Profitability index 1.43 1.18 1.40 1.04
Under conditions of capital rationing, which project would be favored?
A) Project A
B) Project B
C) Project C
D) Project D
41) Please review the information on 4 potential investments:
Project A Project B Project C Project D
Initial investment $200,000 $250,000 $300,000 $90,000
PV of cash inflows $285,000 $295,000 $420,000 $94,000
Payback period (years) 7.2 6.0 9.5 2.0
NPV of project $85,000 $45,000 $120,000 $4,000
Profitability index 1.43 1.18 1.40 1.04
Based on the above data, which project carries the lowest level of risk?
A) Project A
B) Project B
C) Project C
D) Project D