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42) Please refer to the following data concerning 4 investment alternatives:
Project A Project B Project C Project D
Initial investment $210,000 $400,000 $550,000 $1,000,000
PV of cash inflows $285,000 $490,000 $800,000 $990,000
Payback period (years) 7.2 6.0 9.5 2.0
NPV of project $75,000 $90,000 $250,000 ($10,000)
What is the profitability index for Project A?
A) 0.98
B) 1.08
C) 1.36
D) 1.66
43) Please refer to the following data concerning 4 investment alternatives:
Project A Project B Project C Project D
Initial investment $210,000 $400,000 $550,000 $1,000,000
PV of cash inflows $285,000 $490,000 $800,000 $990,000
Payback period (years) 7.2 6.0 9.5 2.0
NPV of project $75,000 $90,000 $250,000 ($10,000)
What is the profitability index for Project B?
A) 1.98
B) 1.38
C) 1.26
D) 1.23
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44) Please refer to the following data concerning 4 investment alternatives:
Project A Project B Project C Project D
Initial investment $210,000 $400,000 $550,000 $1,000,000
PV of cash inflows $285,000 $490,000 $800,000 $990,000
Payback period (years) 7.2 6.0 9.5 2.0
NPV of project $75,000 $90,000 $250,000 ($10,000)
What is the profitability index for Project C?
A) 1.45
B) 1.38
C) 1.26
D) 1.23
45) Please refer to the following data concerning 4 investment alternatives:
Project A Project B Project C Project D
Initial investment $210,000 $400,000 $550,000 $1,000,000
PV of cash inflows $285,000 $490,000 $800,000 $990,000
Payback period (years) 7.2 6.0 9.5 2.0
NPV of project $75,000 $90,000 $250,000 ($10,000)
Which project has the highest profitability index?
A) Project A
B) Project B
C) Project C
D) Project D
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46) Which of the following best describes the term opportunity cost?
A) The cost incurred to qualify for an investment opportunity
B) The benefit that is given up when choosing one out of a series of options
C) The benefits of an investment which has come available suddenly
D) The opportunity to invest in certain cash flows and returns
47) Marsh Products is evaluating an investment in new production machinery. The initial investment is $250,000
and will yield cash flows of $60,000 per year for a 5 year period. At the end of 5 years, the machinery will be sold
and has expected residual value of $40,000. Marsh 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
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
A) $13,460
B) $90,000
C) $2,990
D) $24,520
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48) Natick Products is evaluating an investment in new production machinery. The initial investment is $700,000
and will yield cash flows of $120,000 per year for an 8 year period. At the end of 8 years, the machinery will be
sold and has expected residual value of $90,000. Natick uses a discount rate of 6%. 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
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
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) $93,460
B) $98,700
C) $101,630
D) $204,520
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49) Which of the following best describes the term sensitivity analysis?
A) Evaluating the risk level of an investment
B) Analyzing the effect of an investment on workers’ morale
C) Evaluating several different investment options
D) Testing the results of an investment under varying different assumptions
50) Which of the following is the rate of return, based on discounted cash flows, that a company can expect to earn
by investing in a capital asset?
A) Rate of return
B) Net present value (NPV)
C) Internal rate of return (IRR)
D) Payback period
51) Which of the following best describes the internal rate of return?
A) The discount rate that makes the cost of the investment equal to the present value of the cash flows
B) The discount rate that is used to borrow funds from a lender
C) The ratio of average annual income to average amount invested
D) The rate at which an investment pays back
52) Carte Blanco Company is evaluating an investment of $1,000,000 which will yield cash flows of $257,000 per
year for 5 years with no residual value. What is the internal rate of return? (Please choose the rate that is closest to
the actual solution.)
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) 7%
B) 8%
C) 9%
D) 10%
53) 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. What is the internal rate of return? (Please choose the rate that is closest to the
actual solution.)
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) 6%
B) 7%
C) 8%
D) 9%
54) MacNamara Development Company is evaluating a possible investment in a construction project. The cost will
be $100,000, and it will generate cash flows as follows:
Year 1 $10,000
Year 2 $20,000
Year 3 $30,000
Year 4 $40,000
Year 5 $35,000
The VP for construction believes this project has an internal rate of return somewhere in the range of 7% to 10%,
but has asked the Controller to crunch the numbers. Using the trial and error method, and the PV factors shown
here, determine what the IRR of this project is.
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
Choose the rate below which comes closest to the actual IRR.
A) 7%
B) 8%
C) 9%
D) 10%
55) Petrus Company is looking at an energy-saving investment which will cost $500,000 and will save the company
$300,000 in the first year, $200,000 in the second year, and $48,000 in the third year. They have a hurdle rate of
7%, and they believe this project will have a return somewhere close to the hurdle rate. Please refer to the tables
below and calculate the IRR of the investment.
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
Choose the option that comes closest to describing the actual IRR.
A) Less than 6%
B) Between 6% and 7%
C) Exactly 7%
D) More than 7%
56) Quasar Company is evaluating an investment that will cost $520,000 and will yield cash flows of $300,000 in
the first year, $200,000 in the second year, and $100,000 in the third and final year. Please use the tables below and
determine the internal rate of return.
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
Please choose the percentage below that comes closest to the actual IRR.
A) 7%
B) 8%
C) 9%
D) 10%
57) Cantrell Company is considering investing $396,000 in high-tech communications equipment which would
have an estimated life of 4 years and zero residual value. The technology manager says that it will return cash flows
as shown below:
Year 1 $100,000
Year 2 $200,000
Year 3 $100,000
Year 4 $50,000
The VP Finance points out that the project must pass the company’s 7% hurdle rate, and asks one of the analysts to
calculate the internal rate of return before they discuss the project further. Using the tables below, please calculate
the IRR for this 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
Please choose the percentage below that comes closest to the actual IRR.
A) 5%
B) 6%
C) 7%
D) 8%
