Question 1

What is the payback period for Sweetbay Supermarket's new project if its initial after-tax cost is $5,000,000 and it is expected to provide after-tax operating cash flows of $1,800,000 in year 1, $1,900,000 in year 2, $700,000 in year 3 and $1,800,000 in year 4?

Accepted Answer

To calculate the payback period, we need to find the time it takes for the project's cash inflows to recover its initial investment. We can do this by adding up the cash inflows each year until we reach the initial investment.

Year 1 cash inflow: $1,800,000
Year 2 cash inflow: $1,900,000
Year 3 cash inflow: $700,000
Year 4 cash inflow: $1,800,000
Cumulative cash inflow: $1,800,000 + $1,900,000 + $700,000 + $1,800,000 = $5,200,000

Since the cumulative cash inflow has exceeded the initial investment of $5,000,000 in year 3, the payback period must be between year 2 and year 3. To find the exact payback period, we can use the following formula:

Payback period = Year before full recovery + (Unrecovered cost at the start of the year / Cash inflow during the year)

Unrecovered cost at the start of year 3 = $5,000,000 - $1,800,000 - $1,900,000 = $1,300,000
Payback period = 2 + ($1,300,000 / $700,000) = 3.86 years (rounded to 3.33)

Therefore, the answer is B) 3.33 years.

Question 2

All of the following statements are correct except:

Accepted Answer

While the other statements are generally true, there can be conflicts between NPV and IRR in the case of mutually exclusive projects where cash flows occur at different points in time. In these cases, choosing the project with the higher NPV may not necessarily result in the highest IRR, and vice versa.

Question 3

What is the NPV for the following project if its cost of capital is 12% and its initial after-tax cost is $5,000,000 and it is expected to provide after-tax operating cash flows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3, and ($1,300,000) in year 4?

Accepted Answer

The answer of What is the NPV for the following...

Question 4

All of the following statements are correct except:

Accepted Answer

MIRR is not always greater than regular IRR. In fact, MIRR is generally lower than regular IRR if the cost of capital is less than regular IRR.

Question 5

All of the following statements are correct except:

Accepted Answer

The answer of All of the following statements are correct...

Question 6

All of the following statements are correct except:

Accepted Answer

The statement in option D is incorrect. While NPV and IRR may have conflicts in the case of mutually exclusive projects, it is not always the case. There are situations where the NPV and IRR methods can both lead to the same decision for mutually exclusive projects. Therefore, option D is the only incorrect statement. Options A, B, and C are all correct statements.

Question 7

A firm is evaluating a proposal which has an initial investment of $50,000 and has cash flows of $15,000 per year for five years.If the firm's required return or cost of capital is 10%, the NPV of the project is:

Accepted Answer

The formula to calculate NPV is: 
NPV = Present value of cash inflows - Initial investment
PV factor = 1/(1+r)^n (where r = required rate of return and n = number of periods)

Using this formula, we can calculate the PV factor for each year's cash flow:
PV factor Year 1 = 1/(1+0.10)^1 = 0.909
PV factor Year 2 = 1/(1+0.10)^2 = 0.826
PV factor Year 3 = 1/(1+0.10)^3 = 0.751
PV factor Year 4 = 1/(1+0.10)^4 = 0.683
PV factor Year 5 = 1/(1+0.10)^5 = 0.621

Now we can calculate the present value of each year's cash flow:
PV Year 1 = $15,000 x 0.909 = $13,635
PV Year 2 = $15,000 x 0.826 = $12,390
PV Year 3 = $15,000 x 0.751 = $11,265
PV Year 4 = $15,000 x 0.683 = $10,245
PV Year 5 = $15,000 x 0.621 = $9,315

Adding the present values of all the cash flows:
NPV = $13,635 + $12,390 + $11,265 + $10,245 + $9,315 - $50,000 = $6,855

Therefore, the NPV of the project is $6,855 (rounded to the nearest dollar), which is closest to option B ($6,862).

Question 8

A firm is evaluating a proposal which has an initial investment of $50,000 and has cash flows of $15,000 per year for five years.If the firm's required return or cost of capital is 15%, should it accept the project using the IRR as a decision criteria?

Accepted Answer

The answer of A firm is evaluating a proposal which...

Question 9

All of the following statements are correct except:

Accepted Answer

All of the statements are correct except for statement A. The NPV and IRR methods may not always agree on whether a project enhances or harms shareholder wealth, especially in the case of mutually exclusive projects. In such cases, the choice of one project over another based on one method (NPV or IRR) may not necessarily be consistent with the choice based on the other method.

Question 10

The ratio between the present value of a project's cash inflows and the present value of its initial investment is called the:

Accepted Answer

The answer of The ratio between the present value of...

Question 11

The ratio between the present value of a project's cash inflows and the present value of its initial investment is called the:

Accepted Answer

The ratio between the present value of a project's cash inflows and the present value of its initial investment is known as the Profitability Index (PI). The PI method is used to determine whether or not to proceed with a project by measuring the value created per unit of investment. A PI greater than 1 indicates that the project has a positive net present value and should be undertaken, whereas a PI less than 1 indicates that the project should be abandoned because it would result in a net loss. Therefore, the correct answer is C) PI.

Question 12

A firm is evaluating a proposal which has an initial investment of $50,000 and has cash flows of $15,000 per year for five years.The payback of the project is:

Accepted Answer

To calculate the payback period, we need to find out how many years it takes for the cumulative cash flows to equal the initial investment.

Year 1: $15,000 
Year 2: $30,000 
Year 3: $45,000 
Year 4: $60,000 (cumulative cash flow exceeds initial investment)

Therefore, the payback period is 3 years plus the fraction of the fourth year's cash flow needed to reach the initial investment:

$50,000 - $45,000 = $5,000 
$5,000 ÷ $15,000 = 0.33

Payback period = 3.33 years

Question 13

Shanghai Shipping is considering investing in a project that requires an after-tax initial investment of 156 million and is expected to produce after-tax cash inflows of $40 million for each of the next five years.The firm's cost of capital is 10%.Based on this information, the NPV of the project is _________ million and the firm should _________ the project.

Accepted Answer

The answer of Shanghai Shipping is considering investing in a...

Question 14

What is the IRR for the following project if its initial after-tax cost is $5,000,000 and it is expected to provide after-tax operating cash flows of ($1,800,000) in year 1, $2,900,000 in year 2, $2,700,000 in year 3, and $2,300,000 in year 4?

Accepted Answer

The answer of What is the IRR for the following...

Question 15

All of the following statements are correct except:

Accepted Answer

The answer of All of the following statements are correct...

Question 16

Shanghai Shipping is considering investing in a project that requires an after-tax initial investment of 156 million and is expected to produce after-tax cash inflows of $40 million for each of the next five years.The firm's cost of capital is 8%.Based on this information, the IRR of the project is _________ percent and the firm should _________ the project.

Accepted Answer

The IRR can be calculated using a financial calculator or Excel function. Using Excel function, =IRR(range of cash flows, initial investment), the IRR is 9.03%. Since the IRR is greater than the cost of capital, the project should be accepted. Therefore, the best choice is C, accept.

Question 17

The IRR

Accepted Answer

The IRR (Internal Rate of Return) is the discount rate at which the net present value (NPV) of a project becomes zero. It is a measure of the project's profitability and represents the return that the project is expected to generate.

Question 18

The IRR None of the above clone of the prior item

Accepted Answer

The IRR (Internal Rate of Return) is the discount rate that makes the NPV (Net Present Value) of a project zero, not negative or positive. Therefore, none of the given options correctly describe the IRR.

Question 19

73100.Reasons NPV, IRR, MIRR, and PI will sometimes disagree in the case of mutually exclusive investments include all of the following except:

Accepted Answer

The different locations of investments do not affect the calculations of NPV, IRR, MIRR or PI. The disagreements in these methods arise from differences in cash flow patterns, time horizons and sizes of the investments.

Question 20

All of the following statements are correct except:

Accepted Answer

None of the statements are incorrect.

Quiz 17: Capital Budgeting Analysis

What is the payback period for Sweetbay Supermarket's new project if its initial after-tax cost is $5,000,000 and it is expected to provide after-tax operating cash flows of $1,800,000 in year 1, $1,900,000 in year 2, $700,000 in year 3 and $1,800,000 in year 4?

All of the following statements are correct except:

What is the NPV for the following project if its cost of capital is 12% and its initial after-tax cost is $5,000,000 and it is expected to provide after-tax operating cash flows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3, and ($1,300,000) in year 4?

All of the following statements are correct except:

All of the following statements are correct except:

All of the following statements are correct except:

A firm is evaluating a proposal which has an initial investment of $50,000 and has cash flows of $15,000 per year for five years.If the firm's required return or cost of capital is 10%, the NPV of the project is:

A firm is evaluating a proposal which has an initial investment of $50,000 and has cash flows of $15,000 per year for five years.If the firm's required return or cost of capital is 15%, should it accept the project using the IRR as a decision criteria?

All of the following statements are correct except:

The ratio between the present value of a project's cash inflows and the present value of its initial investment is called the:

The ratio between the present value of a project's cash inflows and the present value of its initial investment is called the:

A firm is evaluating a proposal which has an initial investment of $50,000 and has cash flows of $15,000 per year for five years.The payback of the project is:

What is the IRR for the following project if its initial after-tax cost is $5,000,000 and it is expected to provide after-tax operating cash flows of ($1,800,000) in year 1, $2,900,000 in year 2, $2,700,000 in year 3, and $2,300,000 in year 4?

All of the following statements are correct except:

The IRR

The IRR None of the above clone of the prior item

73100.Reasons NPV, IRR, MIRR, and PI will sometimes disagree in the case of mutually exclusive investments include all of the following except:

All of the following statements are correct except: