Question 1

It will cost $9,600 to acquire an ice cream cart that is expected to produce cash inflows of $3,600 a year for three years. After the three years, the cart is expected to be worthless. What is the payback period?
A) 1.82 years
B) 2.67 years
C) 2.82 years
D) 1.67 years
E) 1.79 years

Accepted Answer

The payback period is the time it takes for the cash inflows to cover the initial investment. Here, $9,600 / $3,600 per year = 2.67 years.

Question 2

A project has an initial cost of $31,300 and a three-year life. The company uses straight-line depreciation to a book value of zero over the life of the project. The projected net income from the project is $1,750, $2,100, and $1,700 a year for the next three years, respectively. What is the average accounting return?
A) 12.79 percent
B) 11.82 percent
C) 10.35 percent
D) 11.69 percent
E) 10.14 percent

Accepted Answer

Step 1: Calculate the average net income: 
Average net income = (1750+2100+1700)/3 = $1850

Step 2: Calculate the average investment:
Average investment = (Initial cost + Salvage value) / 2 
Since the salvage value is zero, the average investment is $15,650 = (31,300+0)/2

Step 3: Calculate the average accounting return (AAR):
AAR = (Average net income / Average investment) x 100%
AAR = (1,850 / 15,650) x 100% = 11.82%

Therefore, the average accounting return is 11.82%, which corresponds to choice B.

Question 3

The Square Box is considering two independent projects with an initial cost of $18,000 each. The cash inflows of Project A are $3,000, $7,000, and $10,000 for Years 1 to 3, respectively. The cash inflows for Project B are $3,000, $7,000, and $15,000 for Years 1 to 3, respectively. The required return is 12 percent and the required discounted payback period is 3 years. Based on discounted payback, which project(s), if either, should be accepted?
A) Both projects should be accepted.
B) Both projects should be rejected.
C) Project A should be accepted and Project B should be rejected.
D) Project A should be rejected and Project B should be accepted.
E) You should be indifferent to accepting either or both projects.

Accepted Answer

To determine which project(s) should be accepted based on the discounted payback period, we need to calculate the present value of the cash inflows for each project and see if they cover the initial investment within the required period of 3 years. For Project A:- Year 1: $3,000 / (1 + 0.12)^1 = $2,678.57- Year 2: $7,000 / (1 + 0.12)^2 = $5,580.36- Year 3: $10,000 / (1 + 0.12)^3 = $7,103.29Total PV of cash inflows = $2,678.57 + $5,580.36 + $7,103.29 = $15,362.22For Project B:- Year 1: $3,000 / (1 + 0.12)^1 = $2,678.57- Year 2: $7,000 / (1 + 0.12)^2 = $5,580.36- Year 3: $15,000 / (1 + 0.12)^3 = $10,629.92Total PV of cash inflows = $2,678.57 + $5,580.36 + $10,629.92 = $18,888.85The initial cost of each project is $18,000. Project A's total present value of cash inflows over 3 years is less than its initial cost, meaning it does not meet the discounted payback period requirement. Project B's total present value of cash inflows exceeds its initial cost within the 3-year period, meaning it meets the discounted payback period requirement. Therefore, Project B should be accepted.

Question 4

The Green Fiddle is considering a project with sales of $86,800 a year for the next four years. The profit margin is 6 percent, the project cost is $97,500, and depreciation is straight-line to a zero book value over the life of the project. The required accounting return is 10.8 percent. This project should be ________ because the AAR is ________ percent.
A) rejected; 11.03
B) accepted; 10.68
C) rejected; 11.16
D) accepted; 11.03
E) rejected; 10.68

Accepted Answer

The answer of The Green Fiddle is considering a project...

Question 5

A project has an initial cost of $18,400 and expected cash inflows of $7,200, $8,900, and $7,500 over Years 1 to 3, respectively. What is the discounted payback period if the required rate of return is 11.2 percent?
A) 2.31 years
B) 2.45 years
C) 2.55 years
D) 2.87 years
E) Never

Accepted Answer

The answer of A project has an initial cost of...

Question 6

Project A has a required return on 9.2 percent and cash flows of −$87,000, $32,600, $35,900, and $43,400 for Years 0 to 3, respectively. Project B has a required return of 12.7 percent and cash flows of −$85,000, $14,700, $21,200, and $89,800 for Years 0 to 3, respectively. Which project(s) should you accept based on net present value if the projects are mutually exclusive?
A) Accept Project A and reject Project B
B) Reject Project A and accept Project B
C) Accept both projects
D) Reject both projects
E) Accept either one, but not both

Accepted Answer

To determine which project to accept, we need to calculate the net present value (NPV) of each project using their respective required return rates.

For Project A:
NPV = -$87,000/(1+0.092)^0 + $32,600/(1+0.092)^1 + $35,900/(1+0.092)^2 + $43,400/(1+0.092)^3
NPV = -$87,000 + $29,879.46 + $29,168.66 + $31,329.07
NPV = $3,377.19

For Project B:
NPV = -$85,000/(1+0.127)^0 + $14,700/(1+0.127)^1 + $21,200/(1+0.127)^2 + $89,800/(1+0.127)^3
NPV = -$85,000 + $12,991.15 + $16,553.40 + $60,422.16
NPV = $4,966.71

Since Project B has a higher NPV than Project A, we should accept Project B and reject Project A. Therefore, the correct answer is B.

Question 7

An investment project costs $10,200 and has annual cash flows of $6,500 for 3 years. If the discount rate is 13 percent, what is the discounted payback period?
A) 2.87 years
B) 1.87 years
C) 1.61 years
D) 2.61 years
E) Never

Accepted Answer

The answer of An investment project costs $10,200 and has...

Question 8

A project produces annual net income amounts of $8,200, $17,800, and $20,900 over its 3-year life. The initial cost is $198,900, which is depreciated straight-line to a zero book value over three years. What is the average accounting rate of return if the required discount rate is 14.5 percent?
A) 15.72 percent
B) 16.67 percent
C) 18.98 percent
D) 17.25 percent
E) 16.84 percent

Accepted Answer

The average accounting rate of return is calculated by dividing the average annual net income by the initial cost of the project. The average annual net income is the sum of the net income amounts over the life of the project divided by the number of years in the project. The initial cost of the project is the amount of money invested in the project at the beginning. In this case, the average annual net income is ($8,200 + $17,800 + $20,900) / 3 = $15,633.33. The initial cost of the project is $198,900. Therefore, the average accounting rate of return is $15,633.33 / $198,900 = 0.0786, or 7.86%.

Question 9

A project has an initial cost of $7,900 and cash inflows of $2,100, $3,140, $3,800, and $4,500 a year over the next four years, respectively. What is the payback period?
A) 2.70 years
B) 3.28 years
C) 3.36 years
D) 3.70 years
E) 2.28 years

Accepted Answer

The payback period is the time it takes for the project to recover its initial costs. Here, the cash inflows over the years are $2,100, $3,140, $3,800, and $4,500. Adding these cumulatively: Year 1: $2,100, Year 2: $2,100 + $3,140 = $5,240, Year 3: $5,240 + $3,800 = $9,040. The initial cost of $7,900 is recovered between Year 2 and Year 3. To find the exact time, calculate the remaining amount to be recovered after Year 2 ($7,900 - $5,240 = $2,660) and divide by the Year 3 inflow ($2,660 / $3,800). This gives approximately 0.70 years. Therefore, the payback period is 2 years + 0.70 years = 2.70 years.

Question 10

An investment project provides cash flows of $1,562 per year for 10 years. If the initial cost is $8,720, what is the payback period?
A) 7.36 years
B) 5.28 years
C) 5.58 years
D) 8.13 years
E) Never

Accepted Answer

To calculate payback period, we divide the initial investment by the annual cash flows until the initial investment is recovered.

Initial Investment = $8,720
Annual Cash Flow = $1,562

Payback Period = Initial Investment / Annual Cash Flow

Payback Period = $8,720 / $1,562

Payback Period = 5.58 years

Therefore, the best choice is (C): 5.58 years.

Question 11

JJ's is reviewing a project with a required discount rate of 15.2 percent and an initial cost of $309,000. The cash inflows are $47,000, $198,000, and $226,000 for Years 2 to 4, respectively. Should the project be accepted based on discounted payback if the required payback period is 2.5 years?
A) Accept; The discounted payback period is 2.18 years.
B) Accept; The discounted payback period is 2.32 years.
C) Accept; The discounted payback period is 2.98 years.
D) Reject; The discounted payback period is 3.87 years.
E) Reject; The project never pays back on a discounted basis.

Accepted Answer

The discounted cash flows do not recover the initial investment within the required 2.5 years, thus the project never pays back on a discounted basis.

Question 12

A project has average net income of $6,250 a year over its 6-year life. The initial cost of the project is $98,400 which will be depreciated using straight-line depreciation to a book value of zero over the life of the project. The firm set a minimum average accounting return of 12.5 percent. The firm should ________ the project because the AAR is ________ percent.
A) accept; 12.52
B) accept; 12.46
C) accept; 12.70
D) reject; 12.46
E) reject; 12.70

Accepted Answer

The answer of A project has average net income of...

Question 13

A project has an initial cost of $384,200 and cash inflows of $187,636, $93,496, $103,802, and $92,556, for Years 1 to 4, respectively. What is the NPV of this project if the discount rate is infinite?
A) $384,200
B) −$93,290
C) $93,290
D) $128,415
E) −$384,200

Accepted Answer

When the discount rate is infinite, the NPV formula becomes:
NPV = Initial Cost + Cash Inflows / (1 + infinity)^n

Since any number divided by infinity approaches zero, the NPV would be:
NPV = $384,200 + ($187,636 + $93,496 + $103,802 + $92,556) / 0

NPV = $384,200 - infinity

Since infinity is not a finite number, the NPV is undefined. However, it is clear that the project is not profitable and has a negative net present value. Therefore, the best choice is E, which represents a negative NPV of $384,200.

Question 14

Scott is considering a project that will produce cash inflows of $2,900 a year for 3 years. The required rate of return is 15.4 percent and the initial cost is $6,800. What is the discounted payback period?
A) Never
B) .91 years
C) .26 years
D) 1.28 years
E) 1.39 years

Accepted Answer

The discounted payback period is the time it takes for the present value of cash inflows to equal the initial investment. In this case, the present value of the cash inflows over 3 years at a 15.4% discount rate does not cover the initial cost of $6,800, so the project never pays back.

Question 15

A project has an initial cost of $6,900. The cash inflows are $850, $2,400, $3,100, and $4,100 over the next four years, respectively. What is the payback period?
A) 3.73 years 
B) 2.51 years
C) 3.13 years 
D) 3.51 years
E) 3.94 years

Accepted Answer

To find the payback period, we need to calculate the cumulative cash inflows until they equal the initial cost of the project.
Year 1: $850
Year 2: $850 + $2,400 = $3,250
Year 3: $3,250 + $3,100 = $6,350
Year 4: $6,350 + $4,100 = $10,450

The payback period is the time it takes to reach the initial cost, which is in year 3, but not fully. So, we calculate the remaining amount to be paid back in the fourth year, which is $6,900 - $6,350 = $550. This is paid back in year 4, so the payback period is 3 + ($550/$4,100) = 3.13 years. Therefore, the best choice is C.

Question 16

Project A has cash flows of -$74,900, $18,400, $26,300, and $57,100 for Years 0 to 3, respectively. Project B has cash flows of -$79,000, $18,400, $22,700, and $51,500 for Years 0 to 3, respectively. Both projects are independent, have multiple noncash expenses, and use straight-line depreciation to a zero balance over the project's life. Neither project has any salvage value. Both projects have a required accounting return of 11.5 percent. Should you accept or reject these projects based on the average accounting return?
A) Accept Project A and reject Project B
B) Reject Project A and accept Project B
C) Accept both projects
D) Reject both projects
E) The AAR cannot be computed.

Accepted Answer

The answer of Project A has cash flows of -$74,900,...

Question 17

Alicia is considering adding toys to her gift shop. She estimates the cost of new inventory will be $9,500 and remodeling expenses will be $850. Toy sales are expected to produce net cash inflows of $1,300, $4,900, $4,400, and $4,100 over the next four years, respectively. Should Alicia add toys to her store if she assigns a 3-year payback period to this project? Why or why not?
A) No; The payback period is 3.94 years.
B) No; The payback period is 2.94 years.
C) Yes; The payback period is 3.94 years.
D) Yes; The payback period is 3.09 years.
E) Yes; The payback period is 2.94 years.

Accepted Answer

The answer of Alicia is considering adding toys to her...

Question 18

Assume an investment has cash flows of −$39,700, $21,750, $18,500, and $12,500 for Years 0 to 3, respectively. What is the NPV if the required return is 12.9 percent? Should the project be accepted or rejected?
A) $1,684.22; reject
B) $2,764.89; accept
C) $2,264.95; reject
D) $1,684.22; accept
E) $2,764.89; reject

Accepted Answer

The NPV is calculated by discounting each cash flow at the required return rate of 12.9% and summing them. The NPV is $2,764.89, which is positive, indicating the project should be accepted.

Question 19

A project has cash flows of -$108,000, $52,800, $53,200, and $83,100 for Years 0 to 3, respectively. The required payback period is two years. Based on the payback period of ________ years for this project, you should ________ the project.
A) 1.98; accept
B) 1.79; accept
C) 2.46; accept
D) 2.02; reject
E) 2.29; reject

Accepted Answer

To calculate the payback period, we calculate the cumulative cash flows until they exceed the initial investment of $108,000: 
Year 0: -$108,000
Year 1: -$108,000 + $52,800 = -$55,200
Year 2: -$108,000 + $52,800 + $53,200 = -$2,000
Year 3: -$108,000 + $52,800 + $53,200 + $83,100 = $81,100
The payback period is between Year 2 and Year 3, which means it is 2 + ($2,000/$83,100) = 2.024 years. Since this is greater than the required payback period of 2 years, the project should be rejected. Therefore, the best choice is option D.

Question 20

You are considering two mutually exclusive projects. Project A has cash flows of −$72,000, $21,400, $22,900, and $56,300 for Years 0 to 3, respectively. Project B has cash flows of −$81,000, $20,100, $22,200, and $74,800 for Years 0 to 3, respectively. Both projects have a required 2.5-year payback period. Should you accept or reject these projects based on payback analysis?
A) Accept Project A and reject Project B
B) Reject Project A and accept Project B
C) Accept both Projects A and B
D) Reject both Projects A and B
E) You cannot apply the payback method to these projects.

Accepted Answer

Project A pays back in 3 years, within the required 2.5-year period, while Project B does not pay back within the required period.

Quiz 9: Net Present Value and Other Investment Criteria

It will cost $9,600 to acquire an ice cream cart that is expected to produce cash inflows of $3,600 a year for three years. After the three years, the cart is expected to be worthless. What is the payback period?

A project has an initial cost of $18,400 and expected cash inflows of $7,200, $8,900, and $7,500 over Years 1 to 3, respectively. What is the discounted payback period if the required rate of return is 11.2 percent?

An investment project costs $10,200 and has annual cash flows of $6,500 for 3 years. If the discount rate is 13 percent, what is the discounted payback period?

A project produces annual net income amounts of $8,200, $17,800, and $20,900 over its 3-year life. The initial cost is $198,900, which is depreciated straight-line to a zero book value over three years. What is the average accounting rate of return if the required discount rate is 14.5 percent?

A project has an initial cost of $7,900 and cash inflows of $2,100, $3,140, $3,800, and $4,500 a year over the next four years, respectively. What is the payback period?

An investment project provides cash flows of $1,562 per year for 10 years. If the initial cost is $8,720, what is the payback period?

JJ's is reviewing a project with a required discount rate of 15.2 percent and an initial cost of $309,000. The cash inflows are $47,000, $198,000, and $226,000 for Years 2 to 4, respectively. Should the project be accepted based on discounted payback if the required payback period is 2.5 years?

A project has an initial cost of $384,200 and cash inflows of $187,636, $93,496, $103,802, and $92,556, for Years 1 to 4, respectively. What is the NPV of this project if the discount rate is infinite?

Scott is considering a project that will produce cash inflows of $2,900 a year for 3 years. The required rate of return is 15.4 percent and the initial cost is $6,800. What is the discounted payback period?

A project has an initial cost of $6,900. The cash inflows are $850, $2,400, $3,100, and $4,100 over the next four years, respectively. What is the payback period?

Assume an investment has cash flows of −$39,700, $21,750, $18,500, and $12,500 for Years 0 to 3, respectively. What is the NPV if the required return is 12.9 percent? Should the project be accepted or rejected?

A project has cash flows of -$108,000, $52,800, $53,200, and $83,100 for Years 0 to 3, respectively. The required payback period is two years. Based on the payback period of years for this project, you should the project.