Chapter 10 The Cost Capital Percent What The Internal

Fundamentals of Corporate Finance 3e Test Bank

72.

LaGrange Corp. has forecasted that over the next four years the average annual after-tax

income will be $45,731. The average book value of the manufacturing equipment that is used is

$167,095. What is the accounting rate of return? (Round your answer to one decimal place.)

A)

33.3%

B)

27.4%

C)

29.8%

D)

22.3%

Ans:

B

73.

Stump Storage Co. is expecting to generate after-tax income of $155,708, $159,312, and

$161,112 for each of the next three years. The equipment used will have an average book value

of $251,575 over that period. What is the ARR? (Do not round intermediate computations.

Round final answer to one decimal place.)

A)

65.7%

B)

69.4%

C)

63.1%

D)

66.8%

Ans:

C

Fundamentals of Corporate Finance 3e Test Bank

74.

Which of the following statements about IRR is NOT true?

A)

The IRR is the discount rate that makes the NPV greater than zero.

B)

The IRR is a discounted cash flow method.

C)

The IRR is an expected rate of return.

D)

None of the above

Ans:

A

75.

The internal rate of return is

A)

the discount rate that makes the NPV greater than zero.

B)

the discount rate that makes the NPV equal to zero.

C)

the discount rate that makes the NPV less than zero.

D)

Both a and c are correct.

Ans:

B

Fundamentals of Corporate Finance 3e Test Bank

76.

When evaluating capital projects, the decisions using the NPV method and the IRR method will

agree if

A)

the projects are independent.

B)

the cash flow pattern is conventional.

C)

the projects are mutually exclusive.

D)

Both a and b are correct.

Ans:

D

AICPA: Industry/Sector Perspective

77.

In evaluating capital projects, the decisions using the NPV method and the IRR method may

disagree if

A)

the projects are independent.

B)

the cash flows pattern is unconventional.

C)

the projects are mutually exclusive.

D)

Both b and c are correct.

Ans:

D

AICPA: Industry/Sector Perspective

78.

Which of the following cash flow patterns is NOT an unconventional cash flow pattern?

A)

A positive initial cash flow is followed by negative future cash flows.

B)

A cash flow pattern in which there are alternate inflows and outflows.

C)

A negative initial cash flow is followed by positive future cash flows.

D)

A cash flow stream looks similar to a conventional cash flow stream except for a final

negative cash flow.

Ans:

C

Fundamentals of Corporate Finance 3e Test Bank

79.

Quick Sale Real Estate Company is planning to invest in a new development. The cost of the

project will be $23 million and is expected to generate cash flows of $14,000,000, $11,750,000,

and $6,350,000 over the next three years. The company’s cost of capital is 20 percent. What is

the internal rate of return on this project? (Do not round intermediate computations. Round

final answer to the nearest percent.)

A)

22%

B)

20%

C)

24%

D)

28%

Ans:

A

Fundamentals of Corporate Finance 3e Test Bank

80.

Modern Federal Bank is setting up a brand new branch. The cost of the project will be $1.2

million. The branch will create additional cash flows of $235,000, $412,300, $665,000 and

$875,000 over the next four years. The firm’s cost of capital is 12 percent. What is the internal

rate of return on this branch expansion? (Do not round intermediate computations. Round final

answer to the nearest percent.)

A)

20%

B)

23%

C)

25%

D)

27%

Ans:

B

Fundamentals of Corporate Finance 3e Test Bank

81.

Signet Pipeline Co. is looking to install new equipment that will cost $2,750,000. The cash

flows expected from the project are $612,335, $891,005, $1,132,000, and $1,412,500 for the

next four years. What is Signet’s internal rate of return? (Do not round intermediate

computations. Round final answer to the nearest percent.)

A)

11%

B)

13%

C)

15%

D)

17%

Ans:

C

Fundamentals of Corporate Finance 3e Test Bank

82.

Casa Del Sol Property Development Company is refurbishing a 200-unit condominium

complex at a cost of $1,875,000. It expects that this will lead to expected annual cash flows of

$415,350 for the next seven years. What internal rate of return can the firm earn from this

project? (Do not round intermediate computations. Round final answer to the nearest percent.)

A)

10%

B)

12%

C)

14%

D)

16%

Ans:

B

Fundamentals of Corporate Finance 3e Test Bank

83.

Lowell Communications, Inc., has been installing a fiber-optic network at a cost of $18 million.

The firm expects annual cash flows of $3.7 million over the next 10 years. What is this project’s

internal rate of return? (Do not round intermediate computations. Round final answer to the

nearest percent.)

A)

10%

B)

12%

C)

14%

D)

16%

Ans:

D

Fundamentals of Corporate Finance 3e Test Bank

84.

Turnbull Corp. is in the process of constructing a new plant at a cost of $30 million. It expects

the project to generate cash flows of $13,000,000, $23,000,000, and 29,000,000 over the next

three years. The cost of capital is 20 percent. What is the internal rate of return that Turnbull

can earn on this project? (Do not round intermediate computations. Round final answer to the

nearest percent.)

A)

41%

B)

42%

C)

43%

D)

44%

Ans:

D

Fundamentals of Corporate Finance 3e Test Bank

85.

Turnbull Corp. is in the process of constructing a new plant at a cost of $30 million. It expects

the project to generate cash flows of $13,000,000, $23,000,000, and 29,000,000 over the next

three years. The cost of capital is 20 percent. What is the MIRR on this project? (Do not round

intermediate computations. Round final answer to the nearest percent.)

A)

36%

B)

37%

C)

38%

D)

39%

Ans:

A

Fundamentals of Corporate Finance 3e Test Bank

86.

Jamaica Corp. is adding a new assembly line at a cost of $8.5 million. The firm expects the

project to generate cash flows of $2 million, $3 million, $4 million, and $5 million over the

next four years. Its cost of capital is 16 percent. What is the internal rate of return that Jamaica

can earn on this project? (Do not round intermediate computations. Round final answer to the

nearest percent.)

A)

18%

B)

19%

C)

20%

D)

21%

Ans:

C

Fundamentals of Corporate Finance 3e Test Bank

AICPA: Industry/Sector Perspective

87.

Jamaica Corp. is adding a new assembly line at a cost of $8.5 million. The firm expects the

project to generate cash flows of $2 million, $3 million, $4 million, and $5 million over the

next four years. Its cost of capital is 16 percent. What is the MIRR on this project? (Round to

the nearest percent.)

A)

18%

B)

19%

C)

20%

D)

21%

Ans:

B

Fundamentals of Corporate Finance 3e Test Bank

88.

Strange Manufacturing Company is purchasing a production facility at a cost of $21 million.

The firm expects the project to generate annual cash flows of $7 million over the next five

years. Its cost of capital is 18 percent. What is the internal rate of return on this project? (Do not

round intermediate computations. Round final answer to the nearest percent.)

A)

17%

B)

18%

C)

19%

D)

20%

Ans:

D

Fundamentals of Corporate Finance 3e Test Bank

89.

What difficulties are associated with valuing real assets compared to financial assets?

90.

What are the advantages of the net present value technique?

3. Consistent with the goal of maximizing stockholder value.

Fundamentals of Corporate Finance 3e Test Bank

91.

Explain under what circumstances the NPV and IRR could provide different decisions.

Fundamentals of Corporate Finance 3e Test Bank

92.

Crossover Point/Rate: Packard Electronics Corp. is evaluating the two mutually exclusive

projects shown below.

Boundless Corp.

Project A

Project B

Period

Cash Flows

0

$ (100,000)

$ (150,000)

1

50,000

15,000

2

40,000

30,000

3

30,000

50,000

4

20,000

70,000

5

10,000

80,000

What is the “crossover rate” of the two projects? (Round off to the nearest (0.01%))

A)

10.82%

B)

8.24%

C)

13.76%

D)

16.38%

Ans:

A

14.65%