20
50) Rodriquez’s Hot Rods is considering a new project with an initial cost of $54,780 and a
discount rate of 14 percent. The project is expected to have cash inflows of $27,000 a year for 3
years. What is the discounted payback period?
A) 2.17 years
B) 2.11 years
C) 2.62 years
D) 2.57 years
E) Never
51) A project has an initial cost of $12,300 and produces cash inflows of $5,200, $5,300, and
$4,800 over Years 1 to 3, respectively. What is the discounted payback period if the required rate
of return is 12 percent?
A) 2.13 years
B) 2.34 years
C) 2.78 years
D) 2.91 years
E) Never
52) Motor Sales is considering a project that costs $15,900 will produce cash inflows of $5,500 a
21
year for 4 years. The project has a required rate of return of 11.25 percent. What is the discounted
payback period?
A) 3.70 years
B) 3.91 years
C) 3.82 years
D) 3.64 years
E) Never
53) Janice is considering an investment costing $65,500 with cash flows of $48,700 in Year 2,
$36,500 in Year 3, and $19,900 in Year 4. The discount rate is 11 percent, and the required
discounted payback period is 3 years. Should this project be accepted or rejected? What is the
discounted payback period?
A) Rejected 2.82 years
B) Accepted; 1.97 years
C) Accepted; 2.38 years
D) Rejected; 3.77 years
E) Accepted; 2.97 years
54) The Depot is considering a project with an initial cost for fixed assets of $279,900 and annual
sales of $284,000 for four years. The profit margin is 6.72 percent, and the tax rate is 34 percent.
The fixed assets will be depreciated straight-line over the life of the project to a zero book value.
The required average accounting rate of return is 14.5 percent. Should this project be accepted or
rejected? What is the AAR?
A) Rejected; 14.81%
B) Rejected; 13.68%
C) Rejected; 15.03%
D) Accepted; 14.81%
E) Accepted; 13.68%
55) A project has an initial cost of $16,780 and a 3-year life. The company uses straight-line
depreciation to a book value of zero over the life of the project. The projected net income from the
project is $3,320, $3,080, and $1,700 for Years 1 to 3, respectively. What is the average
accounting return?
A) 28.56%
B) 34.13%
C) 14.28%
D) 27.11%
E) 32.18%
56) A project produces annual net income of $10,500, $15,700, and $16,200 over its 3-year life
and requires an initial investment in fixed assets of $210,000. The book value of these assets will
be $140,007, $46,662, and $15,561 at the end of Years 1 to 3, respectively. What is the average
accounting rate of return if the required discount rate is 14.5 percent?
A) 13.46%
B) 14.32%
C) 13.98%
D) 13.71%
E) 14.62%
57) A 5-year project requires $65,000 of fixed assets that will be depreciated using straight-line
depreciation to a zero book value over the life of the project. If the firm requires a minimum
average accounting return of 11.65 percent, what must be the minimum average net income for the
project to be accepted?
A) $7,572.50
B) $8,001.29
C) $3,786.25
D) $4,029.14
E) $5,504.73
58) What is the internal rate of return on an investment that has an initial cost of $63,100 and
projected cash inflows of $18,700, $38,600, and $34,100 for Years 1 to 3, respectively?
A) 11.86%
B) 12.37%
C) 20.08%
D) 13.92%
E) 19.10%
59) Toy Town is considering a new toy with initial costs of $35,900. This toy is expected to
produce cash flows of $52,500 in Year 1, $11,300 in Year 2, and nothing thereafter. The discount
rate assigned to the toy is 18.7 percent. What is the IRR?
A) 65.28%
B) 24.79%
C) 38.03%
D) 56.65%
E) 20.04%
60) Webster’s wants to introduce a new product that has a start-up cost of $7,800. The product has
a 2-year life and will provide cash flows of $6,700 in Year 1 and $4,300 in Year 2. The required
rate of return is 14 percent. Should the product be introduced? Why or why not?
A) Yes; the NPV is $1,108.15.
B) Yes; the IRR is 12.97 percent.
C) Yes; the IRR is 28.72 percent.
D) Yes; the NPV is $1,409.27.
E) No; the IRR is 12.94 percent.
61) You are considering two independent projects that have a required return of 15 percent. Project
A has an initial cost of $198,700 and cash inflows of $67,200, $109,600, and $88,700 for Years 1
to 3, respectively. Project B has an initial cost of $102,000 and cash inflows of $37,600 and
$91,200 for Years 1 and 2, respectively. Given this information, which one of the following
statements is correct based on the NPV and IRR methods of analysis?
A) You should accept both projects.
B) You should accept Project A and reject Project B.
C) You should accept Project B and reject Project A.
D) NPV indicates accept Project A while IRR indicates accepting Project B.
E) You should reject both projects.
62) A project has an initial cost of $51,900 and cash flows of $18,700, $56,500, and –$9,100 for
Years 1 to 3, respectively. If the required rate of return for this investment is 17 percent, should
you accept it based solely on the internal rate of return rule? Why or why not?
A) Yes, because the IRR exceeds the required return.
B) Yes, because the IRR is a positive rate of return.
C) You cannot apply the IRR rule in this case because there are multiple IRRs.
D) No, because the IRR is a negative rate of return.
E) No, because the IRR is less than the required return.
63) A project has an initial cash inflow of $40,800 and a cash outflow of $44,900 in Year 1. The
discount rate is 10 percent. Should this project be accepted or rejected based on IRR? Why?
A) Accepted, because the IRR is less than the discount rate.
B) Rejected, because the IRR is less than the discount rate.
C) Accepted, because the IRR is greater than the discount rate.
D) Rejected, because the IRR is greater than the discount rate.
E) Accepted, because the IRR equals the discount rate.
64) A project has an initial cash inflow of $87,700 and cash flows of –$48,700 in Year 1 and –
$57,200 in Year 2. The discount rate is 14 percent. Should this project be accepted or rejected
based on IRR? Why?
A) Accepted, because this is a financing project and the IRR is less than the discount rate.
B) Rejected, because this is an investing project and the IRR is less than the discount rate.
C) Accepted, because this is a financing project and the IRR is greater than the discount rate.
D) Rejected, because this is an investing project and the IRR is greater than the discount rate.
E) Accepted, because the IRR equals the discount rate.
65) A project is expected to have annual cash flows of $36,800, $24,600, and –$9,200 for Years 1
to 3, respectively. The initial cash outlay is $44,500 and the discount rate is 11 percent. What is the
modified IRR?
A) 14.66%
B) 13.22%
C) 12.73%
D) 18.67%
E) 15.70%
66) A project has an initial cost of $48,900 and cash flows of $31,300, –$11,600, and $40,300 for
Years 1 to 3, respectively. The discount rate is 14 percent. What is the modified IRR?
A) 11.68%
B) 15.59%
C) 10.59%
D) 12.67%
E) 14.92%
67) Turner Enterprises is analyzing a project that is expected to have annual cash flows of $46,400,
$51,300 and –$15,200 for Years 1 to 3, respectively. The initial cash outlay is $65,900 and the
discount rate is 12 percent. What is the modified IRR?
A) 17.77%
B) 18.13%
C) 18.66%
D) 17.04%
E) 16.98%
68) Project Water has an initial cost of $598,900 and projected cash flows of $302,000, $264,000,
and $250,000 for Years 1 to 3, respectively. Project Aqua has an initial cost of $512,200 and
projected cash flows of $290,000, $214,000, and $220,000 for Years 1 to 3, respectively. What is
the incremental IRRA–B of these two mutually exclusive projects?
A) 8.67%
B) 6.93%
C) 2.75%
D) 11.06%
E) 4.37%
69) Project A has an initial cost of $211,400 and projected cash flows of $46,200, $64,900, and
$135,800 for Years 1 to 3, respectively. Project B has an initial cost of $187,900 and projected
cash flows of $43,200, $59,700, and $125,600 for Years 1 to 3, respectively. What is the
incremental IRRA–B of these two mutually exclusive projects?
A) 8.67%
B) −6.93%
C) 11.06%
D) −9.62%
E) 9.37%
70) Project A has an initial cost of $16,400 and cash flows of $5,100, $6,800, and $6,900 for Years
1 to 3, respectively. Project B has an initial cost of $21,200 and cash flows of $8,300, $7,900, and
$7,700 for Years 1 to 3, respectively. What is the incremental IRRB–A?
A) 2.89%
B) 4.07%
C) 5.91%
D) 6.75%
E) 7.90%
71) The Walk-Up Window is considering two mutually exclusive projects. Project A has an initial
cost of $64,230 and annual cash flows of $25,200 for three years. Project B has an initial cost of
$45,400 and annual cash flows of $21,400, $21,900, and $10,200 for Years 1 to 3, respectively.
What is the incremental IRRA–B? Which project should be accepted if the discount rate is 9
percent? Which project should be accepted if the discount rate is 6 percent?
A) 6.65%; Project A; Project A
B) 6.65%; Project B; Project A
C) 7.21%; Project A; Project B
D) 7.21%; Project B: Project A
E) 6.65%; Project A; Project B
72) Project I has an initial cash outflow of $18,300 and annual cash flows of $8,700 for Years 1 to
3. Project II has an initial cash outflow of $25,400 and annual cash flows of $10,500 for Years 1 to
3. These projects are mutually exclusive. The required rate of return is 11 percent. Based on the
incremental NPV(II – I) which project(s) should be accepted and why?
A) Project II; because the incremental NPV(II – I) is negative.
B) Project I; because both the incremental NPV(II – I)and NPVI are positive.
C) Both Project I and II; because both project NPVs are positive.
D) Project II; because it has the larger NPV.
E) Project I; because the incremental NPV(II – I) is negative and NPVI is positive.
73) A project has an initial cost of $40,100 and anticipated cash flows of $10,200, $21,700,
$15,600, and $7,800 for Years 1 to 4, respectively. What is the profitability index value if the
required return is 12.6 percent?
A) .92
B) 1.05
C) .99
D) 1.01
E) .96
74) Project Q has an initial cost of $257,412 and projected cash flows of $123,300 in Year 1 and
$180,300 in Year 2. Project R has an initial cost of $345,000 and projected cash flows of $184,500
in Year 1 and $230,600 in Year 2. The discount rate is 12.2 percent and the projects are
independent. Which project(s), if either, should be accepted based on its profitability index value?
A) Accept both Project Q and R
B) Reject both Project Q and R
C) Accept Project Q and reject Project R
D) Accept Project R and reject Project Q
E) Accept either Project R or Project Q, but not both
75) A new product has start-up costs of $389,200 and projected cash flows of $102,000, $187,500,
and $245,000 for Years 1 to 3, respectively. What is the profitability index given a required return
of 14 percent?
A) 0.98
B) 0.83
C) 1.16
D) 1.03
E) 1.21
76) Miller’s is considering a 2-year expansion project that will require $398,000 up front. The
project will produce cash flows of $361,000 and $114,000 for Years 1 and 2, respectively. Based
on the profitability index (PI) rule, should the project be accepted if the discount rate is 12 percent?
Should it be accepted if the discount rate is 17 percent?
A) Yes; Yes, because the PI is 1.2
B) Yes; No, because the PI is 0.98
C) No; Yes, because the PI is 0.98
D) No; No, because the PI is 1.2
E) Yes; Yes, because the PI is 1.19
77) You are considering two independent projects both of which have been assigned a discount
rate of 12 percent. Project A costs $39,100 and produces cash flows of $15,900 a year for 3 years.
Project B costs $22,900 and produces cash flows of $14,000 a year for 2 years. Based on the
profitability index, what is your recommendation concerning these projects?
A) Accept both projects
B) Accept Project B because it has the lower PI
C) Accept Project A because it has the lower PI
D) Accept Project A and reject Project B
E) Reject Project A and accept Project B
78) A proposed project has an initial cost of $200,000 and cash flows of –$13,200, $124,500, and
$187,900 for Years 1 to 3, respectively. Victoria, the boss, insists that only projects that can return
at least $1.10 in today’s dollars for every $1 invested can be accepted. She also insists on applying
a discount rate of 14 percent to all cash flows. Based on these criteria, the project should be
A) accepted because the PI is 0.89.
B) rejected because the PI exceeds 1.
C) accepted because the PI is 1.17.
D) rejected because the PI is 1.06.
E) rejected because the PI is 0.95.
79) Assume a project has an initial cost of $207,600 and cash flows of $62,100, $99,100, and
$105,300 for Years 1 to 3, respectively. The required discount rate is 11 percent, the required
payback period is 3 years, and the required AAR is 13 percent. Should this project be accepted
based on the two most commonly used methods of analysis by large firms? Justify your answer.
A) Accept based on the positive NPV but reject based on the payback period.
B) Accept based on the positive NPV and an IRR that exceeds the required discount rate.
C) Reject based on the negative NPV and the long payback period.
D) Accept based on payback and an IRR that exceeds the required discount rate.
E) Reject based on the negative NPV and an IRR that is less than the required rate of return.
80) Dorian International has $75,000 that it can invest for 2.5 years. After that, the funds are
needed to repay an outstanding bond issue. The company has two potential projects that are within
the funding limit. Project A has an initial cost of $40,000 and cash flows of $24,000 a year for 2
years. Project B has an initial cost of $75,000 and cash flows of $27,000 a year for 4 years. If the
required rate of return on both projects is 12 percent, what is your recommendation?
A) Accept Project A and reject Project B
B) Reject Project A and accept Project B
C) Accept either Project A or Project B, but not both
D) Reject both projects
E) Accept both projects