Deck 8: Net Present Value and Other Investment Criteria

Question 1

Generally speaking,payback is best used to evaluate which type of projects?

A)Low-cost, short-term
B)High-cost, short-term
C)Low-cost, long-term
D)High-cost, long-term
E)Any size of long-term project

Answer 1

Low-cost, short-term

Question 2

Which one of the following indicates that a project is expected to create value for its owners?

A)Profitability index less than 1.0
B)Payback period greater than the requirement
C)Positive net present value
D)Positive average accounting rate of return
E)Internal rate of return that is less than the requirement

Answer 2

Positive net present value

Question 3

The net present value:

A)decreases as the required rate of return increases.
B)is equal to the initial investment when the internal rate of return is equal to the required return.
C)method of analysis cannot be applied to mutually exclusive projects.
D)ignores cash flows that are distant in the future.
E)is unaffected by the timing of an investment's cash flows.

Answer 3

decreases as the required rate of return increases.

Question 4

The payback method of analysis ignores which one of the following?

A)Initial cost of an investment
B)Arbitrary cutoff point
C)Cash flow direction
D)Time value of money
E)Timing of each cash inflow

Question 5

Which one of the following is generally considered to be the best form of analysis if you have to select a single method to analyze a variety of investment opportunities?

A)Payback
B)Profitability index
C)Accounting rate of return
D)Internal rate of return
E)Net present value

Question 6

Net present value involves discounting an investment's:

A)assets.
B)future profits.
C)liabilities.
D)costs.
E)future cash flows.

Question 7

Which one of the following statements is correct?

A)The net present value is a measure of profits expressed in today's dollars.
B)The net present value is positive when the required return exceeds the internal rate of return.
C)If the initial cost of a project is increased, the net present value of that project will also increase.
D)If the internal rate of return equals the required return, the net present value will equal zero.
E)Net present value is equal to an investment's cash inflows discounted to today's dollars.

Question 8

Which one of the following is the primary advantage of payback analysis?

A)Incorporation of the time value of money concept
B)Ease of use
C)Research and development bias
D)Arbitrary cutoff point
E)Long-term bias

Question 9

If an investment is producing a return that is equal to the required return,the investment's net present value will be:

A)positive.
B)greater than the project's initial investment.
C)zero.
D)equal to the project's net profit.
E)less than, or equal to, zero.

Question 10

Both Projects A and B are acceptable as independent projects.However,the selection of either one of these projects eliminates the option of selecting the other project.Which one of the following terms best describes the relationship between Project A and Project B?

A)Mutually exclusive
B)Conventional
C)Multiple choice
D)Dual return
E)Crosswise

Question 11

Which one of the following indicators offers the best assurance that a project will produce value for its owners?

A)PI equal to zero
B)Negative rate of return
C)Positive AAR
D)Positive IRR
E)Positive NPV

Question 12

The internal rate of return is the:

A)discount rate that causes a project?s aftertax income to equal zero.
B)discount rate that results in a zero net present value for the project.
C)discount rate that results in a net present value equal to the project's initial cost.
D)rate of return required by the project's investors.
E)project's current market rate of return.

Question 13

The payback period is the length of time it takes an investment to generate sufficient cash flows to enable the project to:

A)produce a positive annual cash flow.
B)produce a positive cash flow from assets.
C)offset its fixed expenses.
D)offset its total expenses.
E)recoup its initial cost.

Question 14

.Which one of the following indicates that a project should be rejected? Assume the cash flows are normal,i.e.,the initial cash flow is negative.

A)Average accounting return that exceeds the requirement
B)Payback period that is shorter than the requirement period
C)Positive net present value
D)Profitability index less than 1.0
E)Internal rate of return that exceeds the required return

Question 15

The average net income of a project divided by the project's average book value is referred to as the project's:

A)required return.
B)market rate of return.
C)internal rate of return.
D)average accounting return.
E)discounted rate of return.

Question 16

The net present value of an investment represents the difference between the investment's:

A)cash inflows and outflows.
B)cost and its net profit.
C)cost and its market value.
D)cash flows and its profits.
E)assets and liabilities.

Question 17

Which one of the following can be defined as a benefit-cost ratio?

A)Net present value
B)Internal rate of return
C)Profitability index
D)Accounting rate of return
E)Modified internal rate of return

Question 18

Which one of the following statements is correct?

A)A longer payback period is preferred over a shorter payback period.
B)The payback rule states that you should accept a project if the payback period is less than one year.
C)The payback period ignores the time value of money.
D)The payback rule is biased in favor of long-term projects.
E)The payback period considers the timing and amount of all of a project's cash flows.

Question 19

The possibility that more than one discount rate can cause the net present value of an investment to equal zero is referred to as:

A)duplication.
B)the net present value profile.
C)multiple rates of return.
D)the AAR problem.
E)the dual dilemma.

Question 20

The net present value profile illustrates how the net present value of an investment is affected by which one of the following?

A)Project's initial cost
B)Discount rate
C)Timing of the project's cash inflows
D)Inflation rate
E)Real rate of return

Question 21

An investment has conventional cash flows and a profitability index of 1.0.Given this,which one of the following must be true?

A)The internal rate of return exceeds the required rate of return.
B)The investment never pays back.
C)The net present value is equal to zero.
D)The average accounting return is 1.0.
E)The net present value is greater than 1.0.

Question 22

Which one of the following methods of analysis ignores cash flows?

A)Profitability index
B)Payback
C)Average accounting return
D)Modified internal rate of return
E)Internal rate of return

Question 23

You are using a net present value profile to compare Projects A and B,which are mutually exclusive.Which one of the following statements correctly applies to the crossover point between these two?

A)The internal rate of return for Project A equals that of Project B, but generally does not equal zero.
B)The internal rate of return of each project is equal to zero.
C)The net present value of each project is equal to zero.
D)The net present value of Project A equals that of Project B, but generally does not equal zero.
E)The net present value of each project is equal to the respective project's initial cost.

Question 24

Which one of the following methods of analysis ignores the time value of money?

A)Net present value
B)Internal rate of return
C)Discounted cash flow analysis
D)Payback
E)Profitability index

Question 25

If a project with conventional cash flows has a profitability index of 1.0,the project will:

A)never pay back.
B)have a negative net present value.
C)have a negative internal rate of return.
D)produce more cash inflows than outflows in today's dollars.
E)have an internal rate of return that equals the required return.

Question 26

Which one of the following is most closely related to the net present value profile?

A)Internal rate of return
B)Average accounting return
C)Profitability index
D)Payback
E)Discounted payback

Question 27

Which one of the following analytical methods is based on net income?

A)Profitability index
B)Internal rate of return
C)Average accounting return
D)Modified internal rate of return
E)Payback

Question 28

The modified internal rate of return is specifically designed to address the problems associated with:

A)mutually exclusive projects.
B)unconventional cash flows.
C)long-term projects.
D)negative net present values.
E)crossover points.

Question 29

The reinvestment approach to the modified internal rate of return:

A)individually discounts each separate cash flow back to the present.
B)reinvests all the cash flows, including the initial cash flow, to the end of the project.
C)discounts all negative cash flows to the present and compounds all positive cash flows to the end of the project.
D)discounts all negative cash flows back to the present and combines them with the initial cost.
E)compounds all of the cash flows, except for the initial cash flow, to the end of the project.

Question 30

Which one of the following methods of analysis has the greatest bias toward short-term projects?

A)Net present value
B)Internal rate of return
C)Average accounting return
D)Profitability index
E)Payback

Question 31

Which one of the following is specifically designed to compute the rate of return on a project that has a multiple negative cash flows that are interrupted by one or more positive cash flows?

A)Average accounting return
B)Profitability index
C)Internal rate of return
D)Indexed rate of return
E)Modified internal rate of return

Question 32

Which one of the following is true if the managers of a firm accept only projects that have a profitability index greater than 1.5?

A)The firm should increase in value each time it accepts a new project.
B)The firm is most likely steadily losing value.
C)The price of the firm's stock should remain constant.
D)The net present value of each new project is zero.
E)The internal rate of return on each new project is zero.

Question 33

Which one of the following is an indicator that an investment is acceptable? Assume cash flows are conventional.

A)Modified internal rate of return that is equal to zero
B)Profitability index of zero
C)Internal rate of return that exceeds the required return
D)Payback period that exceeds the required period
E)Negative average accounting return

Question 34

The average accounting return:

A)measures profitability rather than cash flow.
B)discounts all values to today's dollars.
C)is expressed as a percentage of an investment's current market value.
D)will equal the required return when the net present value equals zero.
E)is used more often by CFOs than the internal rate of return.

Question 35

The internal rate of return is unreliable as an indicator of whether or not an investment should be accepted given which one of the following?

A)One of the time periods within the investment period has a cash flow equal to zero.
B)The initial cash flow is negative.
C)The investment has cash inflows that occur after the required payback period.
D)The investment is mutually exclusive with another investment of a different size.
E)The cash flows are conventional.

Question 36

Which one of the following methods of analysis is most appropriate to use when two investments are mutually exclusive?

A)Internal rate of return
B)Profitability index
C)Net present value
D)Modified internal rate of return
E)Average accounting return

Question 37

Which one of the following methods of analysis is most similar to computing the return on assets (ROA)?

A)Internal rate of return
B)Profitability index
C)Average accounting return
D)Net present value
E)Payback

Question 38

The profitability index reflects the value created per dollar:

A)invested.
B)of sales.
C)of net income.
D)of taxable income.
E)of shareholders' equity.

Question 39

Which one of the following statements is correct? Assume cash flows are conventional.

A)If the IRR exceeds the required return, the profitability index will be less than 1.0.
B)The profitability index will be greater than 1.0 when the net present value is negative.
C)When the internal rate of return is greater than the required return, the net present value is positive.
D)Projects with conventional cash flows have multiple internal rates of return.
E)If two projects are mutually exclusive, you should select the project with the shortest payback period.

Question 40

Which one of the following will occur when the internal rate of return equals the required return?

A)The average accounting return will equal 1.0.
B)The profitability index will equal 1.0.
C)The profitability index will equal 0.
D)The net present value will equal the initial cash outflow.
E)The profitability index will equal the average accounting return.

Question 41

In which one of the following situations would the payback method be the preferred method of analysis?

A)A long-term capital-intensive project
B)Two mutually exclusive projects
C)A proposed expansion of a firm's current operations
D)Different-sized projects
E)Investment funds available only for a limited period of time

Question 42

Empire Industries is considering adding a new product to its lineup.This product is expected to generate sales for four years after which time the product will be discontinued.What is the project's net present value at a required rate of return of 14.8 percent? $$\begin{array} { | c | r | } \hline \text { Year } & \text { Cash Flow } \\\hline 0 & - \$ 62,000 \\\hline 1 & 16,500 \\\hline 2 & 23,800 \\\hline 3 & 27,100 \\\hline 4 & 23,300 \\\hline\end{array}$$

A)$1,505.52
B)$1,067.24
C)$1,758.71
D)$1,519.58
E)$902.71

Question 43

Professional Properties is considering remodeling the office building it leases to Heartland Insurance.The remodeling costs are.estimated at $2.8 million.If the building is remodeled,Heartland Insurance has agreed to pay an additional $820,000 a year in rent for.the next five years.The discount rate is 12.5 percent.What is the benefit of the remodeling project to Professional Properties?

A)$119,666.04
B)-$89,072.00
C)$105,214.70
D)$108,399.15
E)-$111,417.03

Question 44

Molly is considering a project with cash inflows of $811,$924,$638,and $510 over the next four years,respectively.The relevant.discount rate is 11.2 percent.What is the net present value of this project if it the start-up cost is $2,700?

A)-$425.91
B)-$131.83
C)-$383.01
D)$10.45
E)$229.50

Question 45

Corner Restaurant is considering a project with an initial cost of $211,600.The project will not produce any cash flows for the first three years.Starting in Year 4,the project will produce cash inflows of $151,000 a year for three years.This project is risky,so the firm has assigned it a discount rate of 18.6 percent.What is the project's net present value?

A)$113,585.57
B)-$4,591.11
C)$51,786.86
D)$2,255.56
E)-$16,670.67

Question 46

Which one of the following statements is correct?

A)The internal rate of return is the most reliable method of analysis for any type of investment decision.
B)The payback method is biased toward short-term projects.
C)The modified internal rate of return is most useful when projects are mutually exclusive.
D)The average accounting return is the most difficult method of analysis to compute.
E)The net present value method is applicable only if a project has conventional cash flows.

Question 47

A proposed project requires an initial cash outlay of $49,000 for equipment and an additional cash outlay of $18,700 in Year 1 to cover.operating costs.During Years 2 through 4,the project will generate cash inflows of $42,500 a year.What is the net present value of this.project at a discount rate of 11.6 percent?

A)$26,343.72
B)$26,391.08
C)$25,810.33
D)$24,399.99
E)$23,602.18

Question 48

Mary has just been asked to analyze an investment to determine if it is acceptable.Unfortunately,she is not being given sufficient time to analyze the project using various methods.She must select one method of analysis and provide an answer based solely on that method.Which method do you suggest she use in this situation?

A)Internal rate of return
B)Payback
C)Average accounting rate of return
D)Net present value
E)Profitability index

Question 49

Joe and Rich are both considering investing in a project that costs $25,500 and is expected to produce cash inflows of $15,800 in Year 1 and $15,300 in Year 2.Joe has a required return of 8.5 percent but Rich demands a return of 12.5 percent.Who,if either,should accept this project?

A)Joe, but not Rich
B)Rich, but not Joe
C)Neither Joe nor Rich
D)Both Joe and Rich
E)Joe, and possibly Rich, who will be neutral on this decision as his net present value will equal zero

Question 50

Charles Henri is considering investing $37,800 in a project that is expected to provide him with cash inflows of $11,600 at the end of each of the first two years and $20,000 at the end of the third year.What is the project's NPV at a discount rate of 0 percent? At 5 percent?
At 10 percent?

A)$0; $1,045.91; -$2,641.47
B)$4,468.39; $38.29; -$2,784.08
C)$5,400; $1,045.91; -$2,641.47
D)$5,400; $417.92; -$3,406.10
E)$4,468.39; $38.29; -$2,641.47

Question 51

What is the net present value of a project with the following cash flows if the discount rate is 13.6 percent? $$\begin{array} { | c | r | } \hline \text { Year } & \text { Cash Flow } \\\hline 0 & - \$ 63,600 \\\hline 1 & 18,200 \\\hline 2 & 34,500 \\\hline 3 & 35,900 \\\hline\end{array}$$

A)$406.11
B)$3,643.38
C)$3,207.20
D)-$1,407.92
E)-$5,433.67

Question 52

What is the net present value of a project that has an initial cost of $42,700 and produces cash inflows of $9,250 a year for 9 years if the discount rate is 14.65 percent?

A)$798.48
B)$1,240.23
C)$1,992.43
D)$2,111.41
E)$2,470.01

Question 53

Based on the most recent survey information presented in your textbook,CFOs tend to use which two methods of investment analysis the most frequently?

A)Payback and net present value
B)Payback and internal rate of return
C)Internal rate of return and net present value
D)Net present value and profitability index
E)Profitability index and internal rate of return

Question 54

Which one of the following indicates that an independent project is definitely acceptable?

A)Profitability index greater than 1.0
B)Negative net present value
C)Modified internal rate return that is lower than the requirement
D)Zero internal rate of return
E)Positive average accounting return

Question 55

You are making an investment of $110,000 and require a rate of return of14.6 percent.You expect to receive $48,000 in the first year,.$52,500 in the second year,and $55,000 in the third year.There will be a cash outflow of $900 in the fourth year to close out the.investment.What is the net present value of this investment?

A)$7,881.55
B)$4,305.56
C)$1,879.63
D)$633.33
E)$8,534.25

Question 56

What is the net present value of the following cash flows if the relevant discount rate is 11.4 percent? $$\begin{array} { | c | r | } \hline \text { Year } & \text { Cash Flow } \\\hline 0 & - \$ 32,400 \\\hline 1 & 10,620 \\\hline 2 & 16,800 \\\hline 3 & - 3,110 \\\hline 4 & 26,600 \\\hline\end{array}$$

A)$4,887.26
B)$5,006.19
C)$8,215.46
D)$13,058.39
E)$18,519.71

Question 57

What is the net present value of the following cash flows if the relevant discount rate is 7 percent? $$\begin{array} { | r | r | } \hline \text { Year } & \text { Cash Flow } \\\hline 0 & - \$ 11,520 \\\hline 1 & 81 \\\hline 2 & 650 \\\hline 3 & 880 \\\hline 4 & 2,300 \\\hline 5 & 15,800 \\\hline\end{array}$$

A)$2,861.62
B)$2,311.92
C)$2,900.15
D)$3,248.87
E)$3,545.60

Question 58

What is the net present value of a project with the following cash flows if the discount rate is 15 percent? $$\begin{array} { | c | r | } \hline \text { Year } & \text { Cash Flow } \\\hline 0 & - \$ 48,100 \\\hline 1 & 15,600 \\\hline 2 & 28,900 \\\hline 3 & 15,200 \\\hline\end{array}$$

A)-$2,687.98
B)-$1,618.48
C)$1,044.16
D)$1,035.24
E)$9,593.19

Question 59

You were recently hired by a firm as a project analyst.The owner of the firm is unfamiliar with financial analysis and wants to know only what the expected dollar return is per dollar spent on a given project.Which financial method of analysis will provide the information that the owner requests?

A)Internal rate of return
B)Modified internal rate of return
C)Net present value
D)Profitability index
E)Payback

Question 60

What is the net present value of the following set of cash flows at a discount rate of 5 percent? At 15 percent? $$\begin{array} { | c | r | } \hline \text { Year } & \text { Cash Flow } \\\hline 0 & - \$ 23,600 \\\hline 1 & 8,200 \\\hline 2 & 9,100 \\\hline 3 & 10,600 \\\hline\end{array}$$

A)$1,018.47; -$628.30
B)$1,620.17; -$2,618.99
C)$1,620.17; -$525.13
D)$722.09; -$1,708.16
E)$722.09; -$418.05

Question 61

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

Question 62

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

Question 63

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

Question 64

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

Question 65

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.

Question 66

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

Question 67

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

Question 68

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

Question 69

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.

Question 70

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

Question 71

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.

Question 72

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

Question 73

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

Question 74

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

Question 75

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

Question 76

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

Question 77

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

Question 78

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

Question 79

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

Question 80

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