Question 1

A project has the following cash flows.What is the payback period? 
A)2.48 years
B)2.59 years
C)2.96 years
D)3.21 years
E)3.43 years

Accepted Answer

Payback = 3 + ($92,000 - $27,000 - $45,800 - $16,800)/$11,200 = 3.21 years

Question 2

An investment has an initial cost of $420,000 and will generate the net income amounts shown below.This investment will be depreciated straight-line to zero over the four-year life of the project.Should this project be accepted based on the average accounting rate of return if the required rate is 16 percent? Why or why not?

A)Yes, because the AAR is equal to 16 percent
B)Yes, because the AAR is greater than 16 percent
C)Yes, because the AAR is less than 16 percent
D)No, because the AAR is greater than 16 percent
E)No, because the AAR is less than 16 percent

Accepted Answer

AAR = [($21,000 + $24,800 + $37,500 + $45,000)/4]/[($420,000 + $0)/2] = 15.27 percentBecause the AAR is less than the required rate, the project should be rejected.

Question 3

Delta Mu Delta is considering purchasing some new equipment costing $400,000.The equipment will be depreciated on a straight-line basis to a zero book value over the four-year life of the project.Projected net income for the four years is $18,900,$21,300,$26,700,and $25,000.What is the average accounting rate of return?
A)11.49 percent
B)11.63 percent
C)12.01 percent
D)12.49 percent
E)13.20 percent

Accepted Answer

AAR = [($18,900 + $21,300 + $26,700 + $25,000)/4]/[($400,000 + $0)/2] = 11.49 percent

Question 4

Auto Detailers is buying some new equipment at a cost of $228,900.This equipment will be depreciated on a straight-line basis to a zero book value its eight-year life.The equipment is expected to generate net income of $36,000 a year for the first four years and $22,000 a year for the last four years.What is the average accounting rate of return?
A)15.48 percent
B)17.76 percent
C)18.09 percent
D)22.68 percent
E)25.34 percent

Accepted Answer

AAR = {[(4 × $36,000) + (4 × $22,000)]/8}/{($228,900 + $0)/2} = 25.34 percent

Question 5

What is the payback period for a project with the following cash flows? 
A)2.56 years
B)2.89 years
C)3.17 years
D)3.74 years
E)never

Accepted Answer

Payback = 3 + ($60,700 - $20,600 - $23,300 - $14,800)/$11,600 = 3.17 years

Question 6

A project has the following cash flows.What is the payback period? 
A)2.38 years
B)2.49 years
C)2.60 years
D)3.01 years
E)3.33 years

Accepted Answer

Payback = 2 + ($31,000 - $15,600 - $10,200)/$8,700 = 2.60 years

Question 7

What is the payback period for a $28,500 investment with the following cash flows? 
A)3.65 years
B)3.89 years
C)4.22 years
D)4.44 years
E)The project never pays back.

Accepted Answer

Payback period = 3 + ($28,500 - $6,200 - $7,800 - $8,600)/$9,100 = 3.65 years

Question 8

An investment has an initial cost of $3.3 million.This investment will be depreciated by $900,000 a year over the three-year life of the project.Should this project be accepted based on the average accounting rate of return if the required rate is 10.0 percent? Why or why not?

A)Yes, because the AAR is 10.0 percent
B)Yes, because the AAR is less than 10.0 percent
C)Yes, because the AAR is greater than 10.0 percent
D)No, because the AAR is greater than 10.0 percent
E)No, because the AAR is less than 10.0 percent

Accepted Answer

Average net income = ($211,700 + $186,400 + $165,500)/3 = $187,866.67Average book value = ($3.3m + $2.4m + $1.5M + 0.6m)/4 = $1.95mAAR = $187,866.67/$1.95m = 9.63 percentThe AAR is less than the requirement, so the investment should be rejected.

Question 9

An investment has an initial cost of $300,000 and a life of four years.This investment will be depreciated by $60,000 a year and will generate the net income shown below.Should this project be accepted based on the average accounting rate of return (AAR)if the required rate is 9.5 percent? Why or why not?

A)Yes, because the AAR less than 9.5 percent
B)Yes, because the AAR is 9.5 percent
C)Yes, because the AAR is greater than 9.5 percent
D)No, because the AAR is 9.5 percent
E)No, because the AAR is greater than 9.5 percent

Accepted Answer

Average net income = ($14,500 + $16,900 + $19,600 + $23,700)/4 = $18,675Average book value = ($300,000 + $240,000 + $180,000 + $120,000 + $60,000)/5 = $180,000AAR = $18,675/$180,000 = 10.38 percentThe project should be accepted because the AAR is greater than the required return.

Question 10

Today,Sweet Snacks is investing $491,000 in a new oven.As a result,the company expects its cash flows to increase by $64,000 a year for the next two years and by $98,000 a year for the following three years.How long must the firm wait until it recovers all of its initial investment?
A)3.97 years
B)4.18 years
C)4.46 years
D)4.70 years
E)The project never pays back.

Accepted Answer

The project never pays back because the total cash inflow is only $422,000.

Question 11

You are considering an equipment purchase costing $187,000.This equipment will be depreciated straight-line to zero over its three-year life.What is the average accounting return if this equipment produces the following net income? 
A)12.29 percent
B)14.38 percent
C)15.67 percent
D)16.51 percent
E)21.00 percent

Accepted Answer

AAR = [($16,300 + $17,800 + $12,200)/3]/[($187,000 + $0)/2] = 16.51 percent

Question 12

What is the net present value of the following cash flows if the relevant discount rate is 8.0 percent? 
A)$1,482.15
B)$4,529.59
C)$23,507.19
D)$54,211.40
E)$71,402.02

Accepted Answer

The answer of What is the net present value of...

Question 13

A project has the following cash flows.What is the internal rate of return? 
A)10.53 percent
B)10.58 percent
C)10.60 percent
D)10.67 percent
E)11.10 percent

Accepted Answer

The IRR is defined as the interest rate that makes the NPV equal zero.

Question 14

EKG,Inc.is considering a new project that will require an initial cash investment of $398,000.The project will produce no cash flows for the first two years.The projected cash flows for years 3 through 7 are $79,000,$88,000,$102,000,$140,000,and $160,000,respectively.How long will it take the firm to recover its initial investment in this project?
A)3.81 years
B)3.98 years
C)5.57years
D)5.92 years
E)The project never pays back.

Accepted Answer

Payback = 5 + ($398,000 - $0 - $0 - $79,000 - $88,000 - $102,000)/$140,000 = 5.92 years

Question 15

Greenbriar Cotton Mill is spending $330,000 to update its facility.The company estimates that this investment will improve its cash inflows by $56,500 a year for 10 years.What is the payback period?
A)4.03 years
B)4.95 years
C)5.48 years
D)5.84 years
E)The project never pays back.

Accepted Answer

Payback = $330,000/$56,500 = 5.84 years

Question 16

The Golden Goose is considering a project with an initial cost of $46,700.The project will produce cash inflows of $10,000 a year for the first two years and $12,000 a year for the following three years.What is the payback period?
A)2.87 years
B)3.23 years
C)3.41 years
D)3.79 years
E)4.23 years

Accepted Answer

Payback = 4 + ($46,700 - $10,000 - $10,000 - $12,000 - $12,000)/$12,000 = 4.23 years

Question 17

China Importers would like to spend $221,000 to expand its warehouse.However,the company has a loan outstanding that must be repaid in 2.5 years and thus will need the $221,000 at that time.The warehouse expansion project is expected to increase the cash inflows by $58,000 in the first year,$139,000 in the second year,and $210,000 a year for the following 2 years.Should the firm expand at this time? Why or why not?
A)Yes, because the money will be recovered in 1.69 years
B)Yes, because the money will be recovered in 1.87 years
C)Yes, because the money will be recovered in 2.11 years
D)No, because the project never pays back
E)No, because the money will not be recovered in time to repay the loan

Accepted Answer

Payback = 2 + ($221,000 - $58,000 - $139,000)/$210,000 = 2.11 yearsYes, the company should buy the equipment because it pays back within the required 2.5 years.

Question 18

Woodcrafters requires an average accounting return (AAR)of at least 17 percent on all fixed asset purchases.Currently,it is considering some new equipment costing $178,000.This equipment will have a four-year life over which time it will be depreciated on a straight-line basis to a zero book value.The annual net income from this equipment is estimated at $10,100,$10,300,$17,900,and $19,600 for the four years.Should this purchase occur based on the accounting rate of return? Why or why not?
A)Yes, because the AAR is less than 17 percent
B)Yes, because the AAR is equal to 17 percent
C)Yes, because the AAR is greater than 17 percent
D)No, because the AAR is less than 17 percent
E)No, because the AAR is greater than 17 percent

Accepted Answer

AAR = [($10,100 + $10,300 + $17,900 + $19,600)/4]/[($178,000 + $0)/2] = 16.26 percentBecause the AAR is less than the required rate, the equipment should not be purchased.

Question 19

The Nifty Fifty is considering opening a new store at a start-up cost of $720,000.The initial investment will be depreciated straight-line to zero over the 15-year life of the project.What is the average accounting rate of return? 
A)13.05 percent
B)13.68 percent
C)14.01 percent
D)14.18 percent
E)14.35 percent

Accepted Answer

AAR = {[($62,000 × 5) + ($54,000 × 5) + ($39,000 × 5)]/15}/[($720,000 + $0)/2] = 14.35 percent

Question 20

Services United is considering a new project that requires an initial cash investment of $78,000.The project will generate cash inflows of $29,500,$32,700,$18,500,and $10,000 over each of the next four years,respectively.How long will it take to recover the initial investment?
A)2.74 years
B)2.85 years
C)2.99 years
D)3.27 years
E)3.68 years

Accepted Answer

Payback = 2 + ($78,000 - $29,500 - $32,700)/$18,500 = 2.85 years

Quiz 8: Net Present Value and Other Investment Criteria

A project has the following cash flows.What is the payback period?

What is the payback period for a project with the following cash flows?

A project has the following cash flows.What is the payback period?

What is the payback period for a $28,500 investment with the following cash flows?

An investment has an initial cost of $3.3 million.This investment will be depreciated by $900,000 a year over the three-year life of the project.Should this project be accepted based on the average accounting rate of return if the required rate is 10.0 percent? Why or why not?

Today,Sweet Snacks is investing $491,000 in a new oven.As a result,the company expects its cash flows to increase by $64,000 a year for the next two years and by $98,000 a year for the following three years.How long must the firm wait until it recovers all of its initial investment?

You are considering an equipment purchase costing $187,000.This equipment will be depreciated straight-line to zero over its three-year life.What is the average accounting return if this equipment produces the following net income?

What is the net present value of the following cash flows if the relevant discount rate is 8.0 percent?

A project has the following cash flows.What is the internal rate of return?

Greenbriar Cotton Mill is spending $330,000 to update its facility.The company estimates that this investment will improve its cash inflows by $56,500 a year for 10 years.What is the payback period?

The Golden Goose is considering a project with an initial cost of $46,700.The project will produce cash inflows of $10,000 a year for the first two years and $12,000 a year for the following three years.What is the payback period?

The Nifty Fifty is considering opening a new store at a start-up cost of $720,000.The initial investment will be depreciated straight-line to zero over the 15-year life of the project.What is the average accounting rate of return?

Services United is considering a new project that requires an initial cash investment of $78,000.The project will generate cash inflows of $29,500,$32,700,$18,500,and $10,000 over each of the next four years,respectively.How long will it take to recover the initial investment?