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42) The final decision on which one of two mutually exclusive projects to accept ultimately
depends upon which one of the following?
A) Initial cost of each project
B) Timing of the cash inflows
C) Total cash inflows of each project
D) Net present value
E) Length of each project's life
43) Isaac has analyzed two mutually exclusive projects that have 3-year lives. Project A has an
NPV of $81,406, a payback period of 2.48 years, and an AAR of 9.31 percent. Project B has an
NPV of $82,909, a payback period of 2.57 years, and an AAR of 9.22 percent. The required
return for Project A is 11.5 percent while it is 12 percent for Project B. Both projects have a
required AAR of 9.25 percent. Isaac must make a recommendation and justify it in 15 words or
less. What should his recommendation be?
A) Accept both projects because both NPVs are positive
B) Accept Project A because it has the shortest payback period
C) Accept Project B and reject Project A based on the NPVs
D) Accept Project A and reject Project B based on their AARs
E) Accept Project A because it has the lower required return
44) The present value of an investment's future cash flows divided by the initial cost of the
investment is called the:
A) net present value.
B) internal rate of return.
C) average accounting return.
D) profitability index.
E) profile period.
45) The profitability index is most closely related to which one of the following?
A) Payback
B) Discounted payback
C) Average accounting return
D) Net present value
E) Modified internal rate of return
46) Roger's Meat Market is considering two independent projects. The profitability index
decision rule indicates that both projects should be accepted. This result most likely does which
one of the following?
A) Conflicts with the results of the net present value decision rule
B) Assumes the firm has sufficient funds to undertake both projects
C) Agrees with the decision that would also apply if the projects were mutually exclusive
D) Bases the accept/reject decision on the same variables as the average accounting return
E) Fails to provide useful information as the firm must reject at least one of the projects
47) Which one of the following methods of analysis provides the best information on the cost-
benefit aspects of a project?
A) Net present value
B) Payback
C) Internal rate of return
D) Average accounting return
E) Profitability index
48) When the present value of the cash inflows exceeds the initial cost of a project, then the
project should be:
A) accepted because the payback period is less than the required time period.
B) accepted because the profitability index is greater than 1.
C) accepted because the profitability index is negative.
D) rejected because the internal rate of return is negative.
E) rejected because the net present value is positive.
49) Which one of the following statements would generally be considered as accurate given
independent projects with conventional cash flows?
A) The internal rate of return decision may contradict the net present value decision.
B) Business practice dictates that independent projects should have three distinct accept
indicators before a project is actually implemented.
C) The payback decision rule could override the net present value decision rule should cash
availability be limited.
D) The profitability index rule cannot be applied in this situation.
E) The projects cannot be accepted unless the average accounting return decision ruling is
positive.
50) In actual practice, managers most frequently use which two types of investment criteria?
A) Net present value and payback
B) Average accounting return and internal rate of return
C) Internal rate of return and net present value
D) Internal rate of return and payback
E) Net present value and profitability index
51) Kristi wants to start training her most junior assistant, Amy, in the art of project analysis.
Amy has just started college and has no experience or background in business finance. To get her
started, Kristi is going to assign the responsibility for all projects that have initial costs less than
$1,000 to Amy to analyze. Which method is Kristi most apt to ask Amy to use in making her
initial decisions?
A) Discounted payback
B) Profitability index
C) Internal rate of return
D) Payback
E) Average accounting return
52) Which two methods of project analysis are the most biased towards short-term projects?
A) Net present value and internal rate of return
B) Internal rate of return and profitability index
C) Payback and discounted payback
D) Net present value and discounted payback
E) Discounted payback and profitability index
53) Western Beef Exporters is considering a project that has an NPV of $32,600, an IRR of 15.1
percent, and a payback period of 3.2 years. The required return is 14.5 percent and the required
payback period is 3.0 years. Which one of the following statements correctly applies to this
project?
A) The net present value indicates accept while the internal rate of return indicates reject.
B) Payback indicates acceptance.
C) The payback decision rule could override the accept decision indicated by the net present
value.
D) The payback rule will automatically be ignored since both the net present value and the
internal rate of return indicate an accept decision.
E) The net present value decision rule is the only rule that matters when making the final
decision.
54) You are considering a project with conventional cash flows, an IRR of 11.63 percent, a PI of
1.04, an NPV of $987, and a payback period of 2.98 years. Which one of the following
statements is correct given this information?
A) The discounted payback period must be greater than 2.98 years.
B) The break-even discount rate must be less than 11.63 percent.
C) The discount rate used in computing the net present value was less than 11.63 percent.
D) The AAR is equal to the IRR/PI.
E) The project should be rejected based on its PI value.
55) Which one of the following indicates an accept decision for an independent project with
conventional cash flows?
A) PI greater than 1.0
B) AAR lower than the required rate
C) Payback period that exceeds the requirement
D) Required discount rate greater than the IRR
E) Discounted payback period less than the payback period
56) A project has an initial cash outflow of $42,600 and produces cash inflows of $17,680,
$19,920, and $15,670 for Years 1 through 3, respectively. What is the NPV at a discount rate of
12 percent?
A) $186.95
B) –$108.19
C) $219.41
D) $229.09
E) $311.16
57) A project has a required return of 12.6 percent, an initial cash outflow of $42,100, and cash
inflows of $16,500 in Year 1, $11,700 in Year 2, and $10,400 in Year 4. What is the net present
value?
A) −$11,748.69
B) −$10,933.52
C) −$11,208.62
D) −$10,457.09
E) −$12,006.13
58) A project will produce cash inflows of $5,400 a year for 3 years with a final cash inflow of
$2,400 in Year 4. The project's initial cost is $13,400. What is the net present value if the
required rate of return is 14.2 percent?
A) −$311.02
B) $505.92
C) −$165.11
D) $218.98
E) $668.02
59) Two mutually exclusive projects have an initial cost of $47,500 each. Project A produces
cash inflows of $25,300, $37,100, and $22,000 for Years 1 through 3, respectively. Project B
produces cash inflows of $43,600, $19,800 and $10,400 for Years 1 through 3, respectively. The
required rate of return is 14.7 percent for Project A and 14.9 percent for Project B. Which
project(s) should be accepted and why?
A) Project A, because it has the higher required rate of return.
B) Project A, because it has the larger NPV.
C) Project B, because it has the largest cash inflow in Year 1.
D) Project B, because it has the higher required rate of return.
E) Project B, because it has the larger NPV
60) Projects A and B are mutually exclusive and have an initial cost of $82,000 each. Project A
provides cash inflows of $34,000 a year for three years while Project B produces a cash inflow of
$115,000 in Year 3. Which project(s) should be accepted if the discount rate is 11.7 percent?
What if the discount rate is 13.5 percent?
A) Accept A at both discount rates
B) Accept A at 11.7 percent and neither at 13.5 percent
C) Accept B at both discount rates
D) Accept both at 11.7 percent and neither at 13.5 percent
E) Accept B at 11.7 percent and neither at 13.5 percent
61) Project A has a required return on 9.2 percent and cash flows of −$87,000, $32,600, $35,900,
and $43,400 for Years 0 to 3, respectively. Project B has a required return of 12.7 percent and
cash flows of −$85,000, $14,700, $21,200, and $89,800 for Years 0 to 3, respectively. Which
project(s) should you accept based on net present value if the projects are mutually exclusive?
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) Accept either one, but not both
62) Assume an investment has cash flows of −$39,700, $21,750, $18,500, and $12,500 for
Years 0 to 3, respectively. What is the NPV if the required return is 12.9 percent? Should the
project be accepted or rejected?
A) $1,684.22; reject
B) $2,764.89; accept
C) $2,264.95; reject
D) $1,684.22; accept
E) $2,764.89; reject
63) A project has an initial cost of $384,200 and cash inflows of $187,636, $93,496, $103,802,
and $92,556, for Years 1 to 4, respectively. What is the NPV of this project if the discount rate is
infinite?
A) $384,200
B) −$93,290
C) $93,290
D) $128,415
E) −$384,200
64) It will cost $9,600 to acquire an ice cream cart that is expected to produce cash inflows of
$3,600 a year for three years. After the three years, the cart is expected to be worthless. What is
the payback period?
A) 1.82 years
B) 2.67 years
C) 2.82 years
D) 1.67 years
E) 1.79 years
65) A project has an initial cost of $7,900 and cash inflows of $2,100, $3,140, $3,800, and
$4,500 a year over the next four years, respectively. What is the payback period?
A) 2.70 years
B) 3.28 years
C) 3.36 years
D) 3.70 years
E) 2.28 years
66) A project has an initial cost of $6,900. The cash inflows are $850, $2,400, $3,100, and
$4,100 over the next four years, respectively. What is the payback period?
A) 3.73 years
B) 2.51 years
C) 3.13 years
D) 3.51 years
E) 3.94 years
67) Alicia is considering adding toys to her gift shop. She estimates the cost of new inventory
will be $9,500 and remodeling expenses will be $850. Toy sales are expected to produce net cash
inflows of $1,300, $4,900, $4,400, and $4,100 over the next four years, respectively. Should
Alicia add toys to her store if she assigns a 3-year payback period to this project? Why or why
not?
A) No; The payback period is 3.94 years.
B) No; The payback period is 2.94 years.
C) Yes; The payback period is 3.94 years.
D) Yes; The payback period is 3.09 years.
E) Yes; The payback period is 2.94 years.
68) You are considering two mutually exclusive projects. Project A has cash flows of
−$72,000, $21,400, $22,900, and $56,300 for Years 0 to 3, respectively. Project B has cash
flows of −$81,000, $20,100, $22,200, and $74,800 for Years 0 to 3, respectively. Both
projects have a required 2.5-year payback period. Should you accept or reject these
projects based on payback analysis?
A) Accept Project A and reject Project B
B) Reject Project A and accept Project B
C) Accept both Projects A and B
D) Reject both Projects A and B
E) You cannot apply the payback method to these projects.
69) An investment project provides cash flows of $1,562 per year for 10 years. If the initial cost
is $8,720, what is the payback period?
A) 7.36 years
B) 5.28 years
C) 5.58 years
D) 8.13 years
E) Never
70) A project has cash flows of –$108,000, $52,800, $53,200, and $83,100 for Years 0 to 3,
respectively. The required payback period is two years. Based on the payback period of
________ years for this project, you should ________ the project.
A) 1.98; accept
B) 1.79; accept
C) 2.46; accept
D) 2.02; reject
E) 2.29; reject
71) A project has an initial cost of $18,400 and expected cash inflows of $7,200, $8,900, and
$7,500 over Years 1 to 3, respectively. What is the discounted payback period if the required rate
of return is 11.2 percent?
A) 2.31 years
B) 2.45 years
C) 2.55 years
D) 2.87 years
E) Never
72) Scott is considering a project that will produce cash inflows of $2,900 a year for 3 years. The
required rate of return is 15.4 percent and the initial cost is $6,800. What is the discounted
payback period?
A) Never
B) .91 years
C) .26 years
D) 1.28 years
E) 1.39 years
73) JJ's is reviewing a project with a required discount rate of 15.2 percent and an initial cost of
$309,000. The cash inflows are $47,000, $198,000, and $226,000 for Years 2 to 4, respectively.
Should the project be accepted based on discounted payback if the required payback period is 2.5
years?
A) Accept; The discounted payback period is 2.18 years.
B) Accept; The discounted payback period is 2.32 years.
C) Accept; The discounted payback period is 2.98 years.
D) Reject; The discounted payback period is 3.87 years.
E) Reject; The project never pays back on a discounted basis.
74) An investment project costs $10,200 and has annual cash flows of $6,500 for 3 years. If the
discount rate is 13 percent, what is the discounted payback period?
A) 2.87 years
B) 1.87 years
C) 1.61 years
D) 2.61 years
E) Never
75) The Square Box is considering two independent projects with an initial cost of $18,000 each.
The cash inflows of Project A are $3,000, $7,000, and $10,000 for Years 1 to 3, respectively.
The cash inflows for Project B are $3,000, $7,000, and $15,000 for Years 1 to 3, respectively.
The required return is 12 percent and the required discounted payback period is 3 years. Based
on discounted payback, which project(s), if either, should be accepted?
A) Both projects should be accepted.
B) Both projects should be rejected.
C) Project A should be accepted and Project B should be rejected.
D) Project A should be rejected and Project B should be accepted.
E) You should be indifferent to accepting either or both projects.
76) The Green Fiddle is considering a project with sales of $86,800 a year for the next four
years. The profit margin is 6 percent, the project cost is $97,500, and depreciation is straight-line
to a zero book value over the life of the project. The required accounting return is 10.8 percent.
This project should be ________ because the AAR is ________ percent.
A) rejected; 11.03
B) accepted; 10.68
C) rejected; 11.16
D) accepted; 11.03
E) rejected; 10.68
77) A project has an initial cost of $31,300 and a three-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 $1,750, $2,100, and $1,700 a year for the next three years, respectively. What is the
average accounting return?
A) 12.79 percent
B) 11.82 percent
C) 10.35 percent
D) 11.69 percent
E) 10.14 percent
