FIN - CH9 questions 4 - C9-q4 PDF

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MGMT 2014: Financial Management Chapter 09 Net Present Value and Other Investment Criteria Textbook: Fundamentals of Corporate Finance, 10th Edition By Stephen A. Ross, Randolph W. Westerfield, Bradford D. Jordan, Gordon Roberts, J. Ari Pandes, Thomas Holloway

Mid-term 2 review Multiple Choice Questions

151. A 25- year project has a cost of $1,500,000 and has annual cash flows of $400,000 in years 1-15, and $200,000 in years 16-25. The company's required rate is 14%. Given this information, calculate the IRR of the project. A. 30.25% B. 28.28% C. 26.22% D. 24.25% E. 22.25%

152. A four year project that has an initial cost of $60,000. The future cash inflows are $40,000, $30,000, $20,000, and $10,000, respectively. Given this information, what is the IRR for? A. 25.68% B. 27.14% C. 29.35% D. 30.03% E. 31.38%

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MGMT 2014: Financial Management 153. Floyd Clymer is the CFO of Bonavista Mustang, a manufacturer of parts for classic automobiles. Floyd is considering the purchase of a two-ton press which will allow the firm to stamp out auto fenders. The equipment costs $250,000. The project is expected to produce after-tax cash flows of $60,000 the first year, and increase by $10,000 annually; the after-tax cash flow in year 5 will reach $100,000. Liquidation of the equipment will net the firm $10,000 in cash at the end of five years, making the total cash flow in year five $110,000. What is the payback period for the proposed investment? A. 2.0 years B. 2.4 years C. 3.0 years D. 3.4 years E. The investment doesn't pay back

154. A project has an initial cost of $72,500. The cash inflows are $11,500, $36,900, $22,900, and $18,200 over the next four years, respectively. What is the payback period? A. 2.67 years B. 2.98 years C. 3.01 years D. 3.07 years E. 3.13 years 155. A project has an initial cost of $1,900. The cash inflows are $0, $500, $900, and $700 over the next four years, respectively. What is the payback period? A. 2.71 years B. 2.98 years C. 3.11 years D. 3.71 years E. never

156. A 25- year project has a cost of $1,500,000 and has annual cash flows of $400,000 in years 1-15, and $200,000 in years 16-25. The company's required rate is 14%. Given this information, calculate the payback of the project. A. 2.25 years B. 2.75 years C. 3.25 years D. 3.75 years E. 4.25 years 2

MGMT 2014: Financial Management 157. Bill plans to open a do-it-yourself dog bathing center in a storefront. The bathing equipment will cost $160,000. Bill expects the after-tax cash inflows to be $40,000 annually for seven years, after which he plans to scrap the equipment and retire to the beaches of Jamaica. What is the project's payback period? A. 1.5 years B. 2.0 years C. 3.3 years D. 4.0 years E. 4.3 years

158. You are analyzing a project and have prepared the following data:

Year

Cash flow

0

-$192,700

1

$53,200

2

$77,600

3

$51,000

4

$26,000

Required payback period Required AAR Required return

3.5 years 8.25 percent 10.50 percent

3

MGMT 2014: Financial Management Based on the payback period of _____ years for this project, you should _____ the project. A. 3.27; accept B. 3.27; reject C. 3.42; accept D. 3.42; reject E. 3.51; reject 159. The following four-year project has an initial cost of $1,000,000. The future cash inflows for the next four years are $400,000, $300,000, $200,000, and $200,000, respectively. What is the payback period for this project? A. 2.5 years. B. 3.0 years. C. 3.5 years. D. 4.0 years. E. 4.5 years. 160. Yancy is considering a project which will produce cash inflows of $900 a year for 4 years. The project has a 9 % required rate of return and an initial cost of $2,800. What is the discounted payback period? A. 3.11 years B. 3.18 years C. 3.82 years D. 4.18 years E. never 161. You are considering a project with an initial cost of $6,400. What is the payback period for this project if the cash inflows are $900, $1,350, $2,800, and $1,500 a year over the next four years, respectively? A. 3.21 years B. 3.48 years C. 3.90 years D. 4.21 years E. 4.90 years

162. Annmarie is considering a project which will produce cash inflows of $1,200 a year for 6 years. The project has a 15 % required rate of return and an initial cost of $3,400. What is the discounted payback period? A. 2.83 years B. 2.92 years C. 3.96 years D. 3.99 years E. 4.13 years 4

MGMT 2014: Financial Management 163. You are evaluating two mutually exclusive projects, A and B. Project A costs $350 and has cash flows of $250 in each of the next two years. Project B costs $300 and generates cash flows of $300 and $100 for the next two years, respectively. What is the crossover rate for these projects? A. 26.38% B. 27.47% C. 30.28% D. 61.80% E. 83.48% 164. Jinny's Ice Cream is considering opening a new outlet for a period of three years. The up-front costs are $288,000. The outlet is expected to earn net income of $31,500 a year. What is the expected average accounting rate of return on this venture? A. 14.93% B. 21.88% C. 31.25% D. 38.76% E. 43.75%

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MGMT 2014: Financial Management

165. Suppose a firm invests $600 in a project. The initial cost is depreciated straight-line to zero over 3 years. Net income from the project is $100, $125, and $140 in each of the three years of the project's life. What is the average accounting return? A. 18.25% B. 20.28% C. 35.49% D. 40.56% E. 60.83% 166. If the required return is 12%, what is the discounted payback period of the following cash flows?

Year

0

1

2

3

4

5

Cash Flow

-$65,000

$25,000

$25,000

$25,000

$10,000

$10,000

A. 2 years B. 3 years C. 4 years D. 5 years E. The project does not pay back on a discounted basis.

167. What is the discounted payback of the following project if the required return is 14%? Year Cash Flow

0

1

2

3

4

5

-$60

$22

$22

$25

$10

$5

6

MGMT 2014: Financial Management

A. 2 years B. 3 years C. 4 years D. 5 years E. It doesn't pay back on a discounted basis.

168. You are looking at an investment which has an initial cost of $400,000 and a salvage value of zero after five years. What is the average accounting return for this investment given the following annual net incomes:

Year Net Income

1

2

3

4

5

$100,000

$150,000

$150,000

$100,000

$50,000

A. 1% B. 36% C. 44% D. 48% E. 55%

169. A 50- year project has a cost of $500,000 and has annual cash flows of $100,000 in years 1-25, and $200,000 in years 26-50. The company's required rate is 8%. Given this information, calculate the payback of the project. A. 7 years B. 6 years C. 5 years D. 4 years E. 3 years

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MGMT 2014: Financial Management

170. A project costs $475 and has cash flows of $100 for the first three years and $75 in each of the project's last five years. What is the payback period of the project? A. The project never pays back. B. 4.75 years C. 5.00 years D. 5.33 years E. 6.00 years 171. A 25- year project has a cost of $1,500,000 and has annual cash flows of $400,000 in years 1-15, and $200,000 in years 16-25. The company's required rate is 14%. Given this information, calculate the discounted payback of the project. A. 5.5 years B. 5.70 years C. 5.90 years D. 6.10 years E. 6.30 years 172. Calculate the payback of a 20-year project with a cost of $400,000 and annual cash flows of $50,000 in years 1-10 and $25,000 in years 11-20. The company's required rate of return is 10%. A. 4 B. 5 C. 6 D. 7 E. 8

173. A project costs $475 and has cash flows of $100 for the first three years and $75 in each of the project's last five years. If the discount rate is 10%, what is the discounted payback period? A. The project never pays back on a discounted basis B. 5 years C. 6 years D. 7 years E. 8 years

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MGMT 2014: Financial Management 174. A project produces annual net income of $11,500, $13,700, and $16,900 over the three years of its life, respectively. The initial cost of the project is $257,000. This cost 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 6.75 %? A. 5.33 % B. 5.46 % C. 6.58 % D. 10.92 % E. 13.90 %

175. What is the internal rate of return on an investment with the following cash flows?

Year

Cash Flow

0

-$356,900

1

$121,400

2

$154,700

3

$136,800

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MGMT 2014: Financial Management

A. 6.33 % B. 6.75 % C. 6.87 % D. 7.50 % E. 7.67 %

176. Matthew's Construction is considering a project that will cost $1.2 million to start. The project is expected to produce cash flows starting in year 2 of $269,000 a year for the following six years. What is the internal rate of return on this project? A. 4.09% B. 5.62% C. 6.97% D. 8.32% E. 9.19%

177. Hayolom is analyzing a project and has gathered the following data. The firm depreciates its assets using straight-line depreciation to a zero book value over the life of the asset. What is the project's average accounting rate of return?

Year

Cash Flow

Net Income

0

-$208,000

n/a

1

$78,500

$6,500

2

$80,500

$8,500

3

$81,800

$9,800

4

$81,900

$9,900

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MGMT 2014: Financial Management

A. 6.02 % B. 6.41 % C. 7.21 % D. 8.34 % E. 8.54 % 178. Fulton Corporation purchased an asset costing $525,000. The asset has a 4 year life, $90,000 salvage value, and is depreciated on a straight line method. During the past four years, Fulton posted net income of $15,000, $18,500, $20,000 and $21,000. Given the following information, calculate the company's average accounting return over the past four years. A. 5.12% B. 6.24% C. 7.36% D. 8.48% E. 9.60% 179. A 30 year project is estimated to cost $35 million and provide annual cash flows of $5 million per year in years 1-5; $4 million per year in years 6-20 and $2 million per year in years 21-30. If the company's required rate of return is 10%, determine the payback of the project. A. 6.50 years B. 7.00 years C. 7.50 years D. 8.00 years E. 8.50 years

180. A 50- year project has a cost of $500,000 and has annual cash flows of $100,000 in years 1-25, and $200,000 in years 26-50. The company's required rate is 8%. Given this information, calculate the discounted payback of the project. A. 9.95years B. 8.85years C. 7.75years D. 6.65years E. 5.55years

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MGMT 2014: Financial Management

181. Peter is considering a project with an initial cost of $42,000 and annual cash inflows of $9,100 a year for six years. What discount rate, when applied to this project, will produce a profitability index of 1.0? A. 7.00% B. 7.65% C. 7.88% D. 8.05% E. 8.11%

182. Project A has a five-year life and an initial cost of $2,000 and annual cash flows of $700 per year. Project B also has a five-year life and an initial cost of $3,000 with annual cash flows of $950 per year. Given this information, calculate the IRR cross-over rate. A. 5.93% B. 6.93% C. 7.93% D. 8.93% E. 9.93% 183. A project has an initial cost of $61,000 and a 5-year life. The company uses straight-line depreciation to a zero book value over the life of the project. The projected net income from the project is $1,500, $1,600, $1,900, $2,100, and $2,200 a year for the next five years, respectively. What is the average accounting rate of return? A. 6.10 % B. 7.62 % C. 7.97 % D. 8.48 % E. 9.42 %

184. Kim Lee is analyzing two projects. The first requires a $1,200 initial investment and returns $600 a year for four years. The second project requires a $1,500 initial investment and returns $700 a year for four years. What is the crossover point for these two projects? A. 4.25% B. 6.37% C. 8.14% D. 12.59% E. The crossover point cannot be computed based on the information provided.

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MGMT 2014: Financial Management 185. Freeley Co. is considering an expansion project costing $390,000 up front. The expansion is expected to produce cash flows of $120,000 a year for two years. In Year 3, the project is expected to produce a cash flow of $225,000. The expected return on this expansion project is: A. 7.12% B. 8.16% C. 8.33% D. 8.51% E. 8.47%

186. You are analyzing a project and have prepared the following data:

Year

Cash flow

0

-$169,000

1

$46,200

2

$87,300

3

$41,000

4

$39,000

Required payback period

2.5 years

Required AAR

7.25 percent

Required return

8.50 percent

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MGMT 2014: Financial Management

Based on the internal rate of return of _____ for this project, you should _____ the project. A. 8.95 %; accept B. 10.75 %; accept C. 8.44 %; reject D. 9.67 %; reject E. 10.33 %; reject

187. Calculate the IRR of a 20-year project with a cost of $400,000 and annual cash flows of $50,000 in years 1-10 and $25,000 in years 11-20. The company's required rate of return is 10%. A. 4.53% B. 6.53% C. 8.53% D. 10.53% E. 12.53% 188. Project A has a cost of $300 and a three year annual cash flow of $100, $200 and $300. Project B has a cost of $400 and a three year annual cash flow of $185, $215 and $315. Given this information, calculate the IRR cross-over rate. A. 6.77% B. 7.77% C. 8.77% D. 9.77% E. 10.77%

189. You are analyzing a project and have prepared the following data:

Year

Cash flow

0

-$192,700

1

$53,200

2

$77,600

3

$51,000

4

$26,000

14

MGMT 2014: Financial Management Required payback period Required AAR

3.5 years 8.25 percent

Required return

10.50 percent

Based on the internal rate of return of _____ % for this project, you should _____ the project. A. 3.45; reject B. 5.68; reject C. 8.79; accept D. 9.45; reject E. 9.96; accept 190. A project produces annual net income of $9,500, $12,500, and $15,500 over the three years of its life, respectively. The initial cost of the project is $260,400. This cost 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 7 %? A. 4.80 % B. 7.32 % C. 8.97 % D. 9.60 % E. 10.27 %

191. Yuli is analyzing the following two mutually exclusive projects and has developed the following cash flow information. What is the crossover rate? Year

Project A

Project B

0

-$92,900

-$66,500

1

$31,000

$18,000

2

$35,000

$27,000

3

$42,000

$31,000

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MGMT 2014: Financial Management

A. 8.39 % B. 8.70 % C. 9.69 % D. 10.02 % E. 10.66 % 192. Without using formulas, provide a definition of internal rate of return (IRR). A. The rate of return provided by a project. The value is compared with a company's rate of return to determine viability of a project. B. A situation whereby a choice has to be made between two or more projects, and choosing multiple projects is not an option. C. A graphical representation of the relationship between varying rates of return and the corresponding NPV value. D. A project analysis tool that measures the acceptability of a project through the difference between a project's initial investment and whether the present value of its cash flow will repay the investment. E. A project analysis tool that measures the acceptability of a project by determining the amount of profit that can be expected based on an investment made. 193. Net present value can be defined as: A. The rate of return that causes the present value of all cash flows associated with a project to equal zero. B. The discount rate that causes the current value of cash inflows to exceed the current value of cash outflows. C. A measure of the value created or added today by undertaking a project. D. The cash outflows from a project subtracted from the cash inflows for the project. E. The net costs of a project subtracted from the net income generated from the project. 194. Without using formulas, provide a definition of net present value (NPV). A. A project analysis tool that measures the acceptability of a project through the difference between a project's initial investment and whether the present value of its cash flow will repay the investment. B. A project analysis tool that measures the acceptability of a project by determining the amount of profit that can be expected based on an investment made. C. A project analysis tool that measures the acceptability of a project by determining the length of time required for an investment's discounted cash flows to equal its initial cost. D. A project analysis tool that determines the amount of time required for an investment to generate cash flows to recover its initial cost. E. A ranking method used to assess projects. PI greater than 1 signify positive NPV projects, while PI less than 1 signify negative NPV projects.

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MGMT 2014: Financial Management 195. Without using formulas, provide a definition of payback period. A. A project analysis tool that determines the amount of time required for an investment to generate cash flows to recover its initial cost. B. A project analysis tool that measures the acceptability of a project by determining the length of time required for an investment's discounted cash flows to equal its initial cost. C. A project analysis tool that measures the acceptability of a project through the difference between a project's initial investment and whether the present value of its cash flow will repay the investment. D. A project analysis tool that measures the acceptability of a project by determining the amount of profit that can be expected based on an investment made. E. A ranking method used to assess projects. PI greater than 1 signify positive NPV projects, while PI less than 1 signify negative NPV projects.

196. Without using formulas, provide a definition of discounted payback period. A. A project analysis tool that measures the acceptability of a project by determining the length of time required for an investment's discounted cash flows to equal its initial cost. B. A project analysis tool that measures the acceptability of a project through the difference between a project's initial investment and whether the present value of its cash flow will repay the investment. C. A project analysis tool that measures the acceptability of a project by determining the amount of profit that can be expected based on an investment made. D. A project analysis tool that determines the amount of time required for an investment to generate cash flows to recover its initial cost. E. A ranking method used to assess projects. PI greater than 1 signify positive NPV projects, while P...