Question 1

The following details are provided by Dopler Company:  What is the profitability index for Project B?

Accepted Answer

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Question 2

Gladeer Company is evaluating an investment that will cost $520,000 and will yield cash flows of $300,000 in the first year, $200,000 in the second year, and $100,000 in the third and final year. Use the tables below and determine the internal rate of return. Present value of $1:  The IRR of the project will be:

Accepted Answer

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Question 3

A company is considering an iron ore extraction project which requires an initial investment of $1,000,000 and will yield annual cash flows of $350,263 for 4 years. The company's hurdle rate is 9%. Calculate IRR.

Accepted Answer

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Question 4

Which of the following best describes the profitability index?

Accepted Answer

The profitability index is defined as the ratio of the present value of net cash inflows to the initial investment. It is a measure of the profitability of an investment and helps in ranking projects based on their profitability. Therefore, the correct choice is B.

Question 5

The following details are provided by Dopler Company:  Which project has the highest profitability index?

Accepted Answer

To determine the profitability index (PI) for each project, we first need to calculate the present value of each project's cash inflows using the given information:

Project A: PV of cash inflows = $20,000/(1+0.1) + $25,000/(1+0.1)^2 + $30,000/(1+0.1)^3 = $62,371.90
PI = PV of Cash Inflows/Initial Investment = $62,371.90/$50,000 = 1.247

Project B: PV of cash inflows = $22,000/(1+0.12) + $26,000/(1+0.12)^2 + $28,000/(1+0.12)^3 = $73,482.53
PI = PV of Cash Inflows/Initial Investment = $73,482.53/$60,000 = 1.225

Project C: PV of cash inflows = $18,000/(1+0.09) + $18,000/(1+0.09)^2 + $18,000/(1+0.09)^3 + $18,000/(1+0.09)^4 + $18,000/(1+0.09)^5 = $79,230.81
PI = PV of Cash Inflows/Initial Investment = $79,230.81/$70,000 = 1.132

Project D: PV of cash inflows = $25,000/(1+0.11) + $25,000/(1+0.11)^2 + $25,000/(1+0.11)^3 = $66,025.78
PI = PV of Cash Inflows/Initial Investment = $66,025.78/$65,000 = 1.017

Therefore, Project B has the highest profitability index of 1.225, making it the best choice.

Question 6

Under conditions of limited resources, when a company is comparing several investments with different amounts of initial outlay, the decision should be made on the basis of:

Accepted Answer

The profitability index (PI) is a useful tool for comparing investments with different initial outlays because it measures the relative profitability of an investment by dividing the present value of future cash flows by the initial investment. This allows for a comparison of the efficiency of different investments in generating returns per unit of investment.

Question 7

The following details are provided by Dopler Company:  Calculate the profitability index for Project A.

Accepted Answer

To calculate the profitability index (PI), we divide the present value of future cash flows by the initial investment:
PV of future cash flows = $84,000
Initial investment = $62,000
PI = PV of future cash flows / Initial investment
PI = $84,000 / $62,000
PI = 1.355
Therefore, the best choice is C with a PI of 1.36.

Question 8

At the internal rate of return (IRR), the present value of cash inflows will be equal to:

Accepted Answer

The internal rate of return (IRR) is the discount rate that makes the net present value (NPV) of an investment equal to zero. In other words, it is the rate at which the present value of cash inflows equals the initial investment. Therefore, at the IRR, the present value of cash inflows will be equal to the initial investment (choice A). The other options (B, C, and D) are not correct because they do not necessarily represent the present value of cash inflows at the IRR.

Question 9

When comparing several investments with the same initial outlay, the decision should be made on the basis of:

Accepted Answer

The best choice when comparing investments with the same initial outlay is to choose the one with the highest NPV. NPV takes into account the time value of money and provides a more accurate picture of the actual profitability of an investment. Choosing the investment with the highest total cash inflows or longest payback period may not necessarily result in the highest profitability. ARR can also be misleading as it does not take into account the time value of money.

Question 10

Gamma Company is considering an investment opportunity with the following expected net cash inflows: Year 1, $250,000; Year 2, $350,000; Year 3, $395,000. The company uses a discount rate of 12% and the initial investment is $750,000. The following table is available:
Present Value of $1:  The IRR of the project will be:

Accepted Answer

To find the IRR of the project, we need to calculate the NPV of the cash inflows at different discount rates and find the rate at which the NPV equals zero.

Using the Present Value of $1 table, the NPV of the cash inflows at a discount rate of 12% is:

Year 1: $250,000 / (1+0.12)^1 = $223,214.29
Year 2: $350,000 / (1+0.12)^2 = $276,426.11
Year 3: $395,000 / (1+0.12)^3 = $284,330.52

NPV = -$750,000 + $223,214.29 + $276,426.11 + $284,330.52 = $33,970.92

Since the NPV is positive, the IRR is greater than 12%. To find the exact rate, we can interpolate using the table:

Discount Rate  | NPV
12%            | $33,970.92
13%            | $8,626.97
IRR = 12% + [($750,000 - $33,970.92) / ($33,970.92 - $8,626.97)] x (13% - 12%) = 14.10%

Therefore, the IRR of the project is between 14% and 15%. The best choice is C.

Question 11

Following details are provided by Dopler Company.  Refer to the following table for PV factors:  Calculate the NPV of the project.

Accepted Answer

The answer of Following details are provided by Dopler Company....

Question 12

Which of the following best describes the term sensitivity analysis?

Accepted Answer

Sensitivity analysis involves testing the results of an investment analysis with varying assumptions to see how sensitive the outcomes are to changes in these assumptions. It helps to identify the most important factors driving the investment's return and assesses the risk associated with those factors.

Question 13

Which of the following best describes the internal rate of return?

Accepted Answer

The internal rate of return (IRR) is the discount rate that makes the present value of the expected cash inflows from an investment equal to the initial cost of the investment. In other words, it is the rate at which the net present value of the investment is zero.

Question 14

Nobell Company is evaluating an investment of $1,000,000 which will yield net cash inflows of $142,369 per year for 10 years with no residual value. What is the internal rate of return? Present value of annuity of $1:

Accepted Answer

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Question 15

Which of the following is the rate of return, based on discounted cash flows, that a company can expect to earn by investing in a capital asset?

Accepted Answer

Internal rate of return (IRR) is the rate of return, based on discounted cash flows, that a company can expect to earn by investing in a capital asset. The accounting rate of return (ARR) measures the profitability of an investment using accounting information, rather than discounted cash flows. Bank interest rates and return on investment (ROI) may be relevant to investing, but they are not specifically related to the calculation of expected returns based on discounted cash flows.

Question 16

A company seeking investment opportunities has collected the following information.  If the company makes a decision based on the NPV, the most preferable project would be:

Accepted Answer

The answer of A company seeking investment opportunities has collected...

Question 17

Canbera Company is considering investing $450,000 in telecommunications equipment which would have an estimated life of 5 years with zero residual value. The cash flows are as shown below:  The present value of $1 factors are given below:  The IRR of the project would be:

Accepted Answer

To calculate the IRR, we need to find the discount rate at which the present value of the cash inflows equals the initial investment of $450,000.

Using the present value of $1 factors, we can calculate the present value of each cash flow as follows:

Year 1: $100,000 × 0.909 = $90,900
Year 2: $125,000 × 0.826 = $103,250
Year 3: $150,000 × 0.751 = $112,650
Year 4: $200,000 × 0.683 = $136,600
Year 5: $100,000 × 0.621 = $62,100

Total present value = $505,500

Now we can use trial and error or a financial calculator to find the discount rate that makes the present value equal to the initial investment. Using trial and error, we can try different discount rates until we get a present value close to $450,000.

- At 12%, the present value is $462,904
- At 13%, the present value is $430,373

Therefore, the IRR of the project is between 12% and 13%. Answer choice A is correct.

Question 18

Following details are provided by VPN Company.  Refer to the following table for PV factors:  What is the NPV of the project?

Accepted Answer

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Question 19

Which of the following would be the best basis on whether to accept an investment opportunity or not?

Accepted Answer

The net present value (NPV) is the most comprehensive measure of an investment opportunity's potential profitability. It takes into account the present value of all future cash flows, discounted at the required rate of return. A positive NPV indicates that the investment opportunity is expected to generate more cash than it costs, taking into account the time value of money. Therefore, accepting investment opportunities with positive NPV is the best basis for making investment decisions.

Question 20

The following details are provided by Dopler Company:  What is the profitability index for Project C?

Accepted Answer

The answer of The following details are provided by Dopler...

Quiz 26: Capital Investment Decisions

The following details are provided by Dopler Company: What is the profitability index for Project B?

A company is considering an iron ore extraction project which requires an initial investment of $1,000,000 and will yield annual cash flows of $350,263 for 4 years. The company's hurdle rate is 9%. Calculate IRR.

Which of the following best describes the profitability index?

The following details are provided by Dopler Company: Which project has the highest profitability index?

Under conditions of limited resources, when a company is comparing several investments with different amounts of initial outlay, the decision should be made on the basis of:

The following details are provided by Dopler Company: Calculate the profitability index for Project A.

At the internal rate of return (IRR) , the present value of cash inflows will be equal to:

When comparing several investments with the same initial outlay, the decision should be made on the basis of:

Following details are provided by Dopler Company. Refer to the following table for PV factors: Calculate the NPV of the project.

Which of the following best describes the term sensitivity analysis?

Which of the following best describes the internal rate of return?

Nobell Company is evaluating an investment of $1,000,000 which will yield net cash inflows of $142,369 per year for 10 years with no residual value. What is the internal rate of return? Present value of annuity of $1:

Which of the following is the rate of return, based on discounted cash flows, that a company can expect to earn by investing in a capital asset?

A company seeking investment opportunities has collected the following information. If the company makes a decision based on the NPV, the most preferable project would be:

Canbera Company is considering investing $450,000 in telecommunications equipment which would have an estimated life of 5 years with zero residual value. The cash flows are as shown below: The present value of $1 factors are given below: The IRR of the project would be:

Following details are provided by VPN Company. Refer to the following table for PV factors: What is the NPV of the project?

Which of the following would be the best basis on whether to accept an investment opportunity or not?

The following details are provided by Dopler Company: What is the profitability index for Project C?