Question 1

What is the net present value of the following cash flows if the relevant discount rate is 5.75 percent? $$\begin{array} { | c | r | } 
\hline \text { Year } & \text { Cash Flow } \
\hline 0 & \$ 11,400 \
\hline 1 & - 2,500 \
\hline 2 & - 2,500 \
\hline 3 & - 9,500 \
\hline
\end{array}$$
A)-$1,482.15
B)-$1,232.68
C)$507.19
D)$1,211.40
E)$1,402.02

Accepted Answer

Using a financial calculator or spreadsheet software, we can find the NPV as follows:

CF0 = 11,400
CF1 = -2,500
CF2 = -2,500
CF3 = -9,500
I = 5.75

NPV = -1,232.68

Therefore, the best choice is B, since it is the closest option to the calculated NPV.

Question 2

China Importers would like to spend $215,000 to expand its warehouse.However,the company has a loan outstanding that must be.repaid in 2.5 years and thus will need the $215,000 at that time.The warehouse expansion project is expected to increase the cash.inflows by $60,000 in the first year,$140,000 in the second year,and $150,000 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 2.10 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

The answer of China Importers would like to spend $215,000...

Question 3

The Nifty Fifty is considering opening a new store at a start-up cost of $628,000.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 given the following net income projections? $$\begin{array} { | c | r | } 
\hline \text { Years } & \text { Net Income } \
\hline 1 - 6 & \$ 58,000 \
\hline 6 - 10 & 52,000 \
\hline 11 - 15 & 44,000 \
\hline
\end{array}$$
A)16.42 percent
B)16.68 percent
C)17.01 percent
D)17.18 percent
E)16.35 percent

Accepted Answer

The answer of The Nifty Fifty is considering opening a...

Question 4

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

The answer of The Golden Goose is considering a project...

Question 5

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 answer of Today,Sweet Snacks is investing $491,000 in a...

Question 6

Services United is considering a new project that requires an initial cash investment of $26,000.The project will generate cash inflows of $2,500,$11,700,$13,500,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)2.87 years
C)2.99 years
D)3.27 years
E)3.68 years

Accepted Answer

To find out how long it will take to recover the initial investment, we need to calculate the payback period.

Payback period = Initial investment ÷ Annual cash inflow

For this project:

Payback period = $26,000 ÷ $2,500 (year 1 cash inflow) = 10.4 years

Since the payback period is longer than the project's life, we need to consider the cumulative cash inflows to determine the payback period.

Year 1: $2,500 / ($2,500 + $11,700) = 0.1754
Year 2: $11,700 / ($2,500 + $11,700) = 0.8246
Year 3: $13,500 / ($2,500 + $11,700 + $13,500) = 0.4939
Year 4: $10,000 / ($2,500 + $11,700 + $13,500 + $10,000) = 0.2703

Cumulative cash inflows:
Year 1: $2,500
Year 2: $2,500 + $11,700 = $14,200
Year 3: $2,500 + $11,700 + $13,500 = $27,700
Year 4: $2,500 + $11,700 + $13,500 + $10,000 = $37,700

Payback period = Year of last outflow + (Unrecovered cost at start of year ÷ Cash inflow during year)
Payback period = 3 + ((26,000 - 27,700) ÷ 13,500)
Payback period = 2.87 years

Therefore, the best choice is B.

Question 7

Auto Detailers is buying some new equipment at a cost of $188,900.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 $11,000 a year for the first four years and $24,000 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)18.53 percent

Accepted Answer

The answer of Auto Detailers is buying some new equipment...

Question 8

A project has the following cash flows.What is the payback period? $$\begin{array} { | c | r | } 
\hline \text { Year } & \text { Cash Flow } \
\hline 0 & - \$ 28,000 \
\hline 1 & 11,600 \
\hline 2 & 11,600 \
\hline 3 & 6,600 \
\hline 4 & 6,600 \
\hline
\end{array}$$
A)2.38 years
B)2.49 years
C)2.74 years
D)3.01 years
E)3.33 years

Accepted Answer

The payback period is the time it takes for the cumulative cash flows to equal the initial investment. After 2 years, the cumulative cash flow is $23,200. In year 3, an additional $4,800 is needed to reach $28,000. Since $6,600 is received in year 3, the payback period is 2 + ($4,800/$6,600) = 2.74 years.

Question 9

EKG,Inc.is considering a new project that will require an initial cash investment of $419,000.The project will produce no cash flows for the first two years.The projected cash flows for Years 3 through 7 are $69,000,$98,000,$109,000,$145,000,and $165,000,.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)5.57 years
D)5.99 years
E)The project never pays back.

Accepted Answer

The answer of EKG,Inc.is considering a new project that will...

Question 10

An investment has an initial cost of $2.7 million and net income of $189,400,$178,600,and $172,500 for Years 1 to 3.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 12.5 percent? Why or why not?
A)Yes, because the AAR is 12.5 percent
B)Yes, because the AAR is less than 12.5 percent
C)Yes, because the AAR is greater than 12.5 percent
D)No, because the AAR is greater than 12.5 percent
E)No, because the AAR is less than 12.5 percent

Accepted Answer

The answer of An investment has an initial cost of...

Question 11

Greenbriar Cotton Mill is spending $284,000 to update its facility.The company estimates that this investment will improve its cash.inflows by $50,500 a year for 8 years.What is the payback period?
A)4.03 years
B)4.95 years
C)5.48 years
D)5.62 years
E)The project never pays back.

Accepted Answer

The answer of Greenbriar Cotton Mill is spending $284,000 to...

Question 12

What is the payback period for a $16,700 investment with the following cash flows? $$\begin{array} { | c | r | } 
\hline \text { Year } & \text { Cash Flow } \
\hline 1 & \$ 2,100 \
\hline 2 & 6,800 \
\hline 3 & 6,900 \
\hline 4 & 7,300 \
\hline 5 & 5,100 \
\hline
\end{array}$$
A)3.12 years
B)3.89 years
C)2.12 years
D)3.44 years
E)3.67 years

Accepted Answer

The cumulative cash flow becomes positive between years 3 and 4. By the end of year 3, the cumulative cash flow is $15,800. To recover the remaining $900, it takes $900/$7,300 = 0.12 of a year. Thus, the payback period is 3 + 0.12 = 3.12 years.

Question 13

A project has the following cash flows.What is the internal rate of return? $$\begin{array} { | c | r | } 
\hline \text { Year } & \text { Cash Flow } \
\hline 0 & - \$ 33,800 \
\hline 1 & 12,360 \
\hline 2 & 14,680 \
\hline 3 & 16,710 \
\hline
\end{array}$$
A)13.23 percent
B)13.58 percent
C)12.96percent
D)13.67 percent
E)13.10 percent

Accepted Answer

The internal rate of return is the discount rate that makes the net present value of a project equal to zero. In this case, the net present value is:-33,800 + 12,360/(1+r) + 14,680/(1+r)^2 + 16,710/(1+r)^3 = 0Solving for r using a financial calculator gives r = 13.23%.

Question 14

What is the payback period for a project with the following cash flows? $$\begin{array} { | c | r | } 
\hline \text { Year } & \text { Cash Flow } \
\hline 0 & - \$ 75,000 \
\hline 1 & 15,000 \
\hline 2 & 23,000 \
\hline 3 & 35,000 \
\hline 4 & 25,000 \
\hline
\end{array}$$
A)2.56 years
B)2.89 years
C)3.08 years
D)3.24 years
E)Never

Accepted Answer

The cumulative cash flow becomes positive between years 2 and 3. By the end of year 2, the cumulative cash flow is -$37,000. In year 3, $35,000 is received. The payback period is 2 + (37,000/35,000) = 3.08 years.

Question 15

Delta Mu Delta is considering purchasing some new equipment costing $393,000.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 $16,900,$25,300,$27,700,and $18,400.What is the average accounting rate of return?
A)11.23 percent
B)11.63 percent
C)12.01 percent
D)12.49 percent
E)10.87 percent

Accepted Answer

The answer of Delta Mu Delta is considering purchasing some...

Question 16

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? $$\begin{array} { | c | r | } 
\hline \text { Year } & \text { Net Income } \
\hline 1 & \$ 14,500 \
\hline 2 & 16,900 \
\hline 3 & 19,600 \
\hline 4 & 23,700 \
\hline
\end{array}$$
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

The average accounting rate of return (AAR) is calculated by dividing the average net income of the project by the initial investment cost.

First, we need to find the average net income:
Average Net Income = (14,500 + 16,900 + 19,600 + 23,700)/4 = $18,175

Now we can calculate the AAR:
AAR = (Average Net Income / Initial Investment) x 100%
AAR = (18,175/300,000) x 100%
AAR = 6.06%

Since the required rate of return is 9.5 percent, the AAR (6.06%) is less than the required rate of return. Therefore, we should accept the project. Choice C is the correct answer.

Question 17

Woodcrafters requires an average accounting return (AAR)of at least 17.5 percent on all fixed asset purchases.Currently,it is considering some new equipment costing $169,700.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 $7,100,$13,300,$18,600,and $19,200 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 17.5 percent
B)Yes; because the AAR is equal to 17.5 percent
C)Yes; because the AAR is greater than 17.5 percent
D)No; because the AAR is less than 17.5 percent
E)No; because the AAR is greater than 17.5 percent

Accepted Answer

The calculation of the average accounting rate of return (AAR) is as follows:

Average Annual Operating Income / Average Investment

The Average Annual Operating Income is the sum of the net income from the equipment over the four years, divided by four:

($7,100 + $13,300 + $18,600 + $19,200) / 4 = $14,550

The Average Investment is the sum of the initial cost and the salvage value, divided by two:

($169,700 + $0) / 2 = $84,850

Therefore, the AAR is:

$14,550 / $84,850 = 17.14%

Since the AAR is less than the required 17.5% return, the purchase should not occur based on the accounting rate of return. Therefore, the answer is D) No; because the AAR is less than 17.5%.

Question 18

An investment has an initial cost of $462,000 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 14.75 percent? Why or why not? $$\begin{array} { | c | r | } 
\hline \text { Year } & \text { Net Income } \
\hline 1 & \$ 27,000 \
\hline 2 & 24,800 \
\hline 3 & 37,500 \
\hline 4 & 45,000 \
\hline
\end{array}$$
A)Yes, because the AAR is equal to 14.75 percent
B)Yes, because the AAR is greater than 14.75 percent
C)Yes, because the AAR is less than 14.75 percent
D)No, because the AAR is greater than 14.75 percent
E)No, because the AAR is less than 14.75 percent

Accepted Answer

The average accounting rate of return (AAR) is calculated by dividing the average net income by the initial investment cost.

Average net income = (27,000 + 24,800 + 37,500 + 45,000)/4 = $33,075

AAR = ($33,075/$462,000) x 100% = 7.15%

The required rate of return is 14.75%, which is greater than the AAR of 7.15%. Therefore, the project should not be accepted based on the average accounting rate of return.

Question 19

You are considering an equipment purchase costing $167,000.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? $$\begin{array} { | c | r | } 
\hline \text { Year } & \text { Net Income } \
\hline 1 & 15,600 \
\hline 2 & 14,200 \
\hline 3 & 13,500 \
\hline
\end{array}$$
A)18.29 percent
B)18.38 percent
C)15.67 percent
D)17.29 percent
E)16.67 percent

Accepted Answer

The answer of You are considering an equipment purchase costing...

Question 20

A project has the following cash flows.What is the payback period? $$\begin{array} { | c | r | } 
\hline \text { Year } & \text { Cash Flow } \
\hline 0 & - \$ 14,500 \
\hline 1 & 2,200 \
\hline 2 & 4,800 \
\hline 3 & 6,500 \
\hline 4 & 7,600 \
\hline
\end{array}$$
A)3.04 years
B)2.59 years
C)2.96 years
D)3.13 years
E)3.24 years

Accepted Answer

The answer of A project has the following cash flows.What...

Quiz 8: Net Present Value and Other Investment Criteria

What is the net present value of the following cash flows if the relevant discount rate is 5.75 percent? $\begin{array} { | c | r | } \hline \text { Year } & \text { Cash Flow } \\\hline 0 & \$ 11,400 \\\hline 1 & - 2,500 \\\hline 2 & - 2,500 \\\hline 3 & - 9,500 \\\hline\end{array}$

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?

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?

Services United is considering a new project that requires an initial cash investment of $26,000.The project will generate cash inflows of $2,500,$11,700,$13,500,and $10,000 over each of the next four years,respectively.How long will it take to recover the initial investment?

A project has the following cash flows.What is the payback period? $\begin{array} { | c | r | } \hline \text { Year } & \text { Cash Flow } \\\hline 0 & - \$ 28,000 \\\hline 1 & 11,600 \\\hline 2 & 11,600 \\\hline 3 & 6,600 \\\hline 4 & 6,600 \\\hline\end{array}$

Greenbriar Cotton Mill is spending $284,000 to update its facility.The company estimates that this investment will improve its cash.inflows by $50,500 a year for 8 years.What is the payback period?

What is the payback period for a $16,700 investment with the following cash flows? $\begin{array} { | c | r | } \hline \text { Year } & \text { Cash Flow } \\\hline 1 & \$ 2,100 \\\hline 2 & 6,800 \\\hline 3 & 6,900 \\\hline 4 & 7,300 \\\hline 5 & 5,100 \\\hline\end{array}$

A project has the following cash flows.What is the internal rate of return? $\begin{array} { | c | r | } \hline \text { Year } & \text { Cash Flow } \\\hline 0 & - \$ 33,800 \\\hline 1 & 12,360 \\\hline 2 & 14,680 \\\hline 3 & 16,710 \\\hline\end{array}$

What is the payback period for a project with the following cash flows? $\begin{array} { | c | r | } \hline \text { Year } & \text { Cash Flow } \\\hline 0 & - \$ 75,000 \\\hline 1 & 15,000 \\\hline 2 & 23,000 \\\hline 3 & 35,000 \\\hline 4 & 25,000 \\\hline\end{array}$

A project has the following cash flows.What is the payback period? $\begin{array} { | c | r | } \hline \text { Year } & \text { Cash Flow } \\\hline 0 & - \$ 14,500 \\\hline 1 & 2,200 \\\hline 2 & 4,800 \\\hline 3 & 6,500 \\\hline 4 & 7,600 \\\hline\end{array}$