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78) A project produces annual net income amounts of $8,200, $17,800, and $20,900 over its 3-
year life. The initial cost is $198,900, which is depreciated straight-line to a zero book value over
three years. What is the average accounting rate of return if the required discount rate is 14.5
percent?
A) 15.72 percent
B) 16.67 percent
C) 18.98 percent
D) 17.25 percent
E) 16.84 percent
79) A project has average net income of $6,250 a year over its 6-year life. The initial cost of the
project is $98,400 which will be depreciated using straight-line depreciation to a book value of
zero over the life of the project. The firm set a minimum average accounting return of 12.5
percent. The firm should ________ the project because the AAR is ________ percent.
A) accept; 12.52
B) accept; 12.46
C) accept; 12.70
D) reject; 12.46
E) reject; 12.70
80) Project A has cash flows of –$74,900, $18,400, $26,300, and $57,100 for Years 0 to 3,
respectively. Project B has cash flows of –$79,000, $18,400, $22,700, and $51,500 for Years 0 to
3, respectively. Both projects are independent, have multiple noncash expenses, and use straight-
line depreciation to a zero balance over the project's life. Neither project has any salvage value.
Both projects have a required accounting return of 11.5 percent. Should you accept or reject
these projects based on the average accounting return?
A) Accept Project A and reject Project B
B) Reject Project A and accept Project B
C) Accept both projects
D) Reject both projects
E) The AAR cannot be computed.
81) Colin is analyzing a 3-year project that has an initial cost of $199,800. This cost will be
depreciated straight-line to zero over three years. The projected annual net income for the three
years is $11,600, $15,900, and $17,200. If the discount rate is 12 percent, what is the average
accounting rate of return?
A) 13.94 percent
B) 14.91 percent
C) 15.66 percent
D) 14.75 percent
E) 15.31 percent
82) Weston's uses straight-line depreciation to zero over a project's life. A new project has a
fixed asset cost of $2,687,300 and projected annual net income of $95,000, $162,000, $286,000,
and $304,000 over Years 1 to 4. What is the average accounting return?
A) 14.35 percent
B) 15.63 percent
C) 14.87 percent
D) 15.76 percent
E) 16.05 percent
83) Projects A and B are mutually exclusive and have an initial cost of $78,000 each. Project A
has annual cash flows for Years 1 to 3 of $28,300, $31,500, and $22,300, respectively. Project B
has annual cash flows for Year 1 of $36,900 and $40,500 for Year 2. What is the crossover rate?
A) 17.17 percent
B) 16.33 percent
C) 17.32 percent
D) 16.99 percent
E) 15.20 percent
84) Project A has cash flows of −$50,000, $49,400, $27,200, and $24,500 for Years 0 to 3,
respectively. Project B has an initial cost of $50,000 and an annual cash inflow of $18,500
for four years. These are mutually exclusive projects. What is the crossover rate?
A) 30.89 percent
B) 16.08 percent
C) −30.89 percent
D) Cannot be computed
E) −16.08 percent
85) A project has cash flows of –$148,400, $42,500, $87,300, and $43,200 for Years 0 to 3,
respectively. The required rate of return is 11 percent. Based on the internal rate of return of
________ percent for this project, you should ________ the project.
A) 7.91; accept
B) 8.03; reject
C) 6.67; reject
D) 7.91; reject
E) 8.03; accept
86) The Dry Dock is considering a project with an initial cost of $107,400 and cash inflows for
Years 1 to 3 of $37,200, $54,600, and $46,900, respectively. What is the IRR?
A) 12.62 percent
B) 13.41 percent
C) 14.48 percent
D) 13.22 percent
E) 14.56 percent
87) A proposed project has an initial cost of $38,000 and cash inflows of $12,300, $24,200, and
$16,100 for Years 1 through 3, respectively. The required rate of return is 16.8 percent. Based on
IRR, should this project be accepted? Why or why not?
A) No; The IRR exceeds the required return.
B) No; The IRR is less than the required return.
C) Yes; The IRR exceeds the required return.
D) Yes; The IRR equals the required return.
E) No; The IRR equals the required return.
88) You are considering two independent projects. Project A has an initial cost of $125,000 and
cash inflows of $46,000, $79,000, and $51,000 for Years 1 to 3, respectively. Project B costs
$135,000 with expected cash inflows for Years 1 to 3 of $50,000, $30,000, and $100,000,
respectively. The required return for both projects is 16 percent. Based on IRR, you should:
A) accept both projects.
B) accept Project A and reject Project B.
C) accept Project B and reject Project A.
D) reject both projects.
E) accept either one of the projects, but not both.
89) An investment costs $152,000 and has projected cash inflows of $71,800, $86,900, and
−$11,200 for Years 1 to 3, respectively. If the required rate of return is 15.5 percent, should you
accept the investment based solely on the internal rate of return rule? Why or why not?
A) Yes; The IRR exceeds the required return.
B) Yes; The IRR is less than the required return.
C) No; The IRR is less than the required return.
D) No; The IRR exceeds the required return.
E) You should not apply the IRR rule in this case.
90) Drinkable Water Systems is analyzing a project with projected cash inflows of $127,400,
$209,300, and –$46,000 for Years 1 to 3, respectively. The project costs $251,000 and has been
assigned a discount rate of 12.5 percent. Should this project be accepted based on the discounting
approach to the modified internal rate of return? Why or why not?
A) Yes; The MIRR is 11.85 percent.
B) No; The MIRR is 11.33 percent.
C) Yes; The MIRR is 11.33 percent.
D) No; The MIRR is 11.68 percent.
E) No; The MIRR is 11.85 percent.
91) Crystal Industries is considering an expansion project with cash flows of −$287,500,
$107,500, $196,100, $104,500, and −$92,700 for Years 0 through 4. Should the firm
proceed with the expansion based on the discounting approach to the modified internal rate
of return if the discount rate is 13.4 percent? Why or why not?
A) No; The MIRR is 9.13 percent.
B) No; The MIRR is 14.45 percent.
C) Yes; The MIRR is 9.13 percent.
D) No; The MIRR is 11.23 percent.
E) Yes; The MIRR is 14.45 percent.
92) A project has projected cash flows of −$148,500, $32,800, $64,200, −$7,500 and
$87,300 for Years 0 to 4, respectively. Should this project be accepted based on the
combination approach to the modified internal rate of return if both the discount rate and the
reinvestment rate are 10.5 percent? Why or why not?
A) Yes; The MIRR is 8.04 percent.
B) Yes; The MIRR is 9.23 percent.
C) No; The MIRR is 8.04 percent.
D) No; The MIRR is 9.06 percent.
E) No; The MIRR is 9.23 percent.
93) A project has cash flows of −$161,900, $60,800, $62,300, and $75,000 for Years 0 to
3, respectively. The required rate of return is 13 percent. Based on the internal rate of
return of ________ percent for this project, you should ________ the project.
A) 9.67; accept
B) 10.41; reject
C) 11.67; accept
D) 10.41; accept
E) 9.67; reject
94) Home & More is considering a project with cash flows of −$368,000, $133,500,
−$35,600, $244,700, and $258,000 for Years 0 to 4, respectively. Should this project be
accepted based on the combination approach to the modified internal rate of return if both the
discount rate and the reinvestment rate are 14.6 percent? Why or why not?
A) Yes; The MIRR is 14.78 percent.
B) Yes; The MIRR is 16.96 percent.
C) Yes; The MIRR is 12.91 percent.
D) No; The MIRR is 14.78 percent.
E) No; The MIRR is 16.96 percent.
95) An investment that provides annual cash flows of $20,100 for 8 years costs $87,500 today.
At what rate would you be indifferent between accepting the investment and rejecting it?
A) 17.60 percent
B) 15.90 percent
C) 15.51 percent
D) 15.93 percent
E) 16.74 percent
96) HH Companies has identified two mutually exclusive projects. Project A has cash
flows of −$40,000, $21,200, $16,800, and $14,000 for Years 0 to 3, respectively.
Project B has a cost of $38,000 and annual cash inflows of $25,500 for 2 years. At
what rate would you be indifferent between these two projects?
A) 6.34 percent
B) −1.72 percent
C) 9.41 percent
D) −4.38 percent
E) 8.28 percent
97) Projects A and B are mutually exclusive. Project A has cash flows of −$10,000, $5,100,
$3,400, and $4,500 for Years 0 to 3, respectively. Project B has cash flows of −$10,000, $4,500,
$3,400, and $5,100 for Years 0 to 3, respectively. What is the crossover rate for these two
projects?
A) 0 percent
B) 5.48 percent
C) 6.71 percent
D) 2.75 percent
E) 4.94 percent
98) You are considering two mutually exclusive projects. Project A has cash flows of
−$125,000, $51,400, $52,900, and $63,300 for Years 0 to 3, respectively. Project B has
cash flows of −$85,000, $23,100, $28,200, and $69,800 for Years 0 to 3, respectively.
Project A has a required return of 9 percent while Project B's required return is 11 percent.
Should you accept or reject these mutually exclusive projects based on IRR analysis?
A) Accept Project A and reject Project B
B) Reject Project A and accept Project B
C) Accept both projects
D) Reject both projects
E) You should not use IRR; use a different method of analysis.
99) A project has cash flows of −$152,000, $60,800, $62,300, and $75,000 for Years 0 to
3, respectively. The required rate of return is 13 percent. Based on the internal rate of
return of ________ percent, you should ________ the project.
A) 14.67; accept
B) 13.96; accept
C) 14.67; reject
D) 17.91; reject
E) 18.46; reject
100) A firm evaluates all of its projects by applying the IRR rule. The current proposed project
has cash flows of −$37,048, $16,850, $15,700, and $19,300 for Years 0 to 3, respectively. The
required return is 18 percent. What is the project IRR? Should the project be accepted or
rejected?
A) 18.42 percent; accept
B) 16.05 percent; accept
C) 16.05 percent; reject
D) 18.42 percent; reject
E) 21.08 percent; reject
101) A venture will provide a net cash inflow of $57,000 in Year 1. The annual cash flows are
projected to grow at a rate of 7 percent per year forever. The project requires an initial
investment of $739,000 and has a required return of 15.6 percent. The company is somewhat
unsure about the growth rate assumption. At what constant rate of growth would the company
just break even?
A) 9.48 percent
B) 9.29 percent
C) 7.89 percent
D) 8.49 percent
E) 7.75 percent
102) TL Lumber is evaluating a project with cash flows of −$12,800, $7,400, $11,600, and
−$3,200 for Years 0 to 3, respectively. Given an interest rate of 8 percent, what is the MIRR
using the discounted approach?
A) 13.25 percent
B) 14.08 percent
C) 15.40 percent
D) 14.36 percent
E) 19.23 percent
103) Assume a project has cash flows of −$54,300, $18,200, $37,300, and $14,300 for Years 0 to
3, respectively. What is the profitability index given a required return of 12.6 percent?
A) .946
B) .98
C) 1.02
D) 1.06
E) 1.00
104) You estimate that a project will cost $33,700 and will provide cash inflows of $14,800 in
Year 1 and $24,600 in Year 3. Based on the profitability index rule, should the project be
accepted if the discount rate is 14.2 percent? Why or why not?
A) Yes; The PI is .87.
B) Yes; The PI is .93.
C) Yes; The PI is 1.06.
D) No; The PI is 1.06.
E) No; The PI is .87.
105) Project A costs $47,800 with cash inflows of $34,200 in Year 1 and $28,700 in Year 2.
Project B costs $63,200 with cash inflows of $21,900 in Year 1 and $59,200 in Year 2. These
projects are independent and have an assigned discount rate of 15 percent. Based on the
profitability index, what is your recommendation concerning these projects?
A) Accept both projects
B) Reject both projects
C) Accept Project A and reject Project B
D) Accept Project B and reject Project A
E) Accept either, but not both projects
106) A project has a discount rate of 15.5 percent, an initial cost of $109,200, an inflow of
$56,400 in Year 1 and an inflow of $75,900 in Year 2. Your boss requires that every project
return a minimum of $1.06 for every $1 invested. Based on this information, what is your
recommendation on this project?
A) Accept the project because the PI is .97
B) Reject the project because the PI is .97
C) Accept the project because the PI is 1.03
D) Reject the project because the PI is 1.01
E) Reject the project because the PI is 1.03
107) A project has cash flows of −$152,000, $60,800, $62,300 and $75,000 for Years 0 to
3, respectively. The required rate of return is 13 percent. What is the profitability index?
Should you accept or reject the project based on this index value?
A) .93; accept
B) 1.07; accept
C) 1.02; accept
D) .93; reject
E) 1.07 reject
108) The relevant discount rate is 14 percent for a project with cash flows of −$9,200, $4,600,
$3,300, and $3,800 for Years 0 to 3, respectively. What is the profitability index?
A) .96
B) .99
C) .93
D) 1.04
E) 1.08
