Question 1

A project has expected cash inflows,starting with year 1,of $2,200,$2,900,$3,500,and finally in year 4,$4,000.The profitability index is 1.14 and the discount rate is 12 percent.What is the initial cost of the project?

Accepted Answer

The formula for calculating the initial cost of the project using profitability index is:

Initial cost = PV of cash inflows / PI

PV of cash inflows = (2200/1.12) + (2900/(1.12^2)) + (3500/(1.12^3)) + (4000/(1.12^4)) = $9,211.06

Initial cost = 9211.06 / 1.14 = $8,166.19

Therefore, the best choice is C.

Question 2

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

Accepted Answer

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

Question 3

A firm is reviewing a project that has an initial cost of $71,000.The project will produce annual cash inflows,starting with year 1,of $8,000,$13,400,$18,600,$33,100,and finally in year 5,$37,900.What is the profitability index if the discount rate is 11 percent?

Accepted Answer

The profitability index (PI) is calculated by dividing the present value of future cash inflows by the initial investment. Using a discount rate of 11%, the present value of the cash inflows is calculated and then divided by the initial cost of $71,000. The PI is approximately 1.07.

Question 4

The net present value of a project's cash inflows is $8,216 at a 14 percent discount rate.The profitability index is 1.03 and the firm's tax rate is 34 percent.What is the initial cost of the project?

Accepted Answer

Initial cost = $8,216/1.03 = $7,976.70

Question 5

Baker's Supply imposes a payback cutoff of 3.5 years for its international investment projects.If the company has the following two projects available,should it accept either of them?

Accepted Answer

Payback_A = 3 + [($57,000 - $9,000 - $14,800 - $18,900)/$19,600] = 3.73 yearsPayback_B = 3 + [($61,000 - $16,500 - $26,300 - $15,600)/$4,900 = 3.53 yearsThe firm should reject both projects.

Question 6

You are considering the following two mutually exclusive projects.The crossover point is _____ and Project _____ should be accepted if the discount rate is 14 percent.

Accepted Answer

The crossover point is 13.28 percent. Project B should be accepted at 14 percent because it has the higher net present value.

Question 7

The Black Horse is currently considering a project that will produce cash inflows of $12,000 a year for three years followed by $6,500 in year 4.The cost of the project is $38,000.What is the profitability index if the discount rate is 7 percent?

Accepted Answer

The answer of The Black Horse is currently considering a...

Question 8

The Tool Box needs to purchase a new machine costing $1.46 million.Management is estimating the machine will generate cash inflows of $223,000 the first year and $600,000 for the following three years.If management requires a minimum 12 percent rate of return,should the firm purchase this particular machine? Why or why not?

Accepted Answer

The IRR is defined as the interest rate that makes the NPV equal zero. The project should be accepted because the IRR is greater than the required rate.

Question 9

Miller Brothers is considering a project that will produce cash inflows of $61,500,$72,800,$84,600,and $68,000 a year for the next four years,respectively.What is the internal rate of return if the initial cost of the project is $225,000?

Accepted Answer

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

Question 10

You are considering the following two mutually exclusive projects.The crossover point is _____ and Project _____ should be accepted at a 12 percent discount rate.

Accepted Answer

The crossover point is 14.02 percent. At 12 percent, Project A has the higher net present value and should be accepted.

Question 11

Diamond Enterprises is considering a project that will produce cash inflows of $238,000 a year for three years followed by $149,000 in year 4.What is the internal rate of return if the initial cost of the project is $749,000?

Accepted Answer

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

Question 12

Chasteen,Inc.is considering an investment with an initial cost of $185,000 that would be depreciated straight-line to a zero book value over the life of the project.The cash inflows generated by the project are estimated at $76,000 for the first two years and $30,000 for the following two years.What is the internal rate of return?

Accepted Answer

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

Question 13

The Flour Baker is considering a project with the following cash flows.Should this project be accepted based on its internal rate of return if the required return is 11 percent?

Accepted Answer

The IRR is the interest rate that causes the NPV to equal zero.

Question 14

You are considering the following two mutually exclusive projects.The required return on each project is 14 percent.Which project should you accept and what is the best reason for that decision?

Accepted Answer

Payback has several flaws and is not the best method of comparison.The profitability index should not be used to evaluate mutually exclusive projects.The decision should be made based on net present value.

Question 15

The Steel Factory is considering a project that will produce annual cash flows of $36,800,$45,500,$56,200,and $21,800 over the next four years,respectively.What is the internal rate of return if the initial cost of the project is $135,000?

Accepted Answer

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

Question 16

You are considering the following two mutually exclusive projects.What is the crossover point?

Accepted Answer

The answer of You are considering the following two mutually...

Question 17

You are considering an investment for which you require a 14 percent rate of return.The investment costs $61,900 and will produce cash inflows of $26,000 for three years.Should you accept this project based on its internal rate of return? Why or why not?

Accepted Answer

The IRR is defined as the interest rate that makes the NPV equal zero.The project should be rejected because the IRR is less than the required rate.

Question 18

You are considering the following two mutually exclusive projects.The required return on each project is 14 percent.Which project should you accept and what is the best reason for that decision?

Accepted Answer

Payback has several flaws and is not the best method of comparison.The profitability index should not be used to evaluate mutually exclusive projects.The decision should be made based on net present value.

Question 19

Soft and Cuddly is considering a new toy that will produce the following cash flows.Should the company produce this toy if the firm requires a 15 percent rate of return?

Accepted Answer

The IRR is the interest rate that causes the NPV to equal zero.

Question 20

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

Accepted Answer

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

Quiz 8: Net Present Value and Other Investment Criteria

A project has expected cash inflows,starting with year 1,of $2,200,$2,900,$3,500,and finally in year 4,$4,000.The profitability index is 1.14 and the discount rate is 12 percent.What is the initial cost of the project?

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

A firm is reviewing a project that has an initial cost of $71,000.The project will produce annual cash inflows,starting with year 1,of $8,000,$13,400,$18,600,$33,100,and finally in year 5,$37,900.What is the profitability index if the discount rate is 11 percent?

The net present value of a project's cash inflows is $8,216 at a 14 percent discount rate.The profitability index is 1.03 and the firm's tax rate is 34 percent.What is the initial cost of the project?

Baker's Supply imposes a payback cutoff of 3.5 years for its international investment projects.If the company has the following two projects available,should it accept either of them?

You are considering the following two mutually exclusive projects.The crossover point is _ and Project _ should be accepted if the discount rate is 14 percent.

The Black Horse is currently considering a project that will produce cash inflows of $12,000 a year for three years followed by $6,500 in year 4.The cost of the project is $38,000.What is the profitability index if the discount rate is 7 percent?

Miller Brothers is considering a project that will produce cash inflows of $61,500,$72,800,$84,600,and $68,000 a year for the next four years,respectively.What is the internal rate of return if the initial cost of the project is $225,000?

You are considering the following two mutually exclusive projects.The crossover point is _ and Project _ should be accepted at a 12 percent discount rate.

Diamond Enterprises is considering a project that will produce cash inflows of $238,000 a year for three years followed by $149,000 in year 4.What is the internal rate of return if the initial cost of the project is $749,000?

The Flour Baker is considering a project with the following cash flows.Should this project be accepted based on its internal rate of return if the required return is 11 percent?

You are considering the following two mutually exclusive projects.The required return on each project is 14 percent.Which project should you accept and what is the best reason for that decision?

The Steel Factory is considering a project that will produce annual cash flows of $36,800,$45,500,$56,200,and $21,800 over the next four years,respectively.What is the internal rate of return if the initial cost of the project is $135,000?

You are considering the following two mutually exclusive projects.What is the crossover point?

You are considering an investment for which you require a 14 percent rate of return.The investment costs $61,900 and will produce cash inflows of $26,000 for three years.Should you accept this project based on its internal rate of return? Why or why not?

You are considering the following two mutually exclusive projects.The required return on each project is 14 percent.Which project should you accept and what is the best reason for that decision?

Soft and Cuddly is considering a new toy that will produce the following cash flows.Should the company produce this toy if the firm requires a 15 percent rate of return?

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