Question 1

The projected cash flows for two mutually exclusive projects are as follows:  If the cost of capital is 10%, the decidedly more favorable project is:

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Question 2

The future cash flows of a stand-alone capital project are as follows:  The internal rate of return for this project is approximately:

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Question 3

Williamson Inc. is considering a project with the following cash flows. Calculate the payback period of the project.

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Question 4

The future cash flows of a stand-alone capital project follow:  With the project's approximate IRR?

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Question 5

A stand-alone capital project has the following cash flows.  What is its NPV if the cost of capital is 10%?

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Question 6

The future cash flows of a stand-alone capital project are:  If the firm's cost of capital is 12%, which of the following statements is true?

Accepted Answer

To calculate the NPV, we discount each cash flow using the cost of capital of 12% and sum them up. The NPV is positive when the present value of cash inflows is greater than the present value of cash outflows. In this case, the NPV is positive at a discount rate of 12%, indicating that the project has value for the firm.

To determine the internal rate of return (IRR), we calculate the discount rate that makes the NPV equal to zero. Using the cash flows provided, we find that the IRR is approximately 18.5%.

Therefore, statement C is true, as the NPV is > $0 and the IRR is approximately 18.5%.

Question 7

You are considering the following 2 mutually exclusive projects. Using the equivalent annual annuity method and a cost of capital of 10%, which project should be selected? (Round to nearest $)

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Question 8

A project is expected to last ten years with an initial cost of $10,000.00. Assuming the present value payback method produces a value of 7.25 years and there are no additional costs beyond the initial cost, the PI is ____.

Accepted Answer

Since the present value payback period (PVPB) is less than 10 years, the net present value (NPV) should be positive for the PI to be greater than 1. Since there are no additional costs beyond the initial cost, the PI will be greater than 1. Therefore, option B is the correct answer.

Question 9

What is the internal rate of return of a project that has an initial outlay of $150,000 and net cash flows of $40,000 for 5 years?

Accepted Answer

The internal rate of return (IRR) is the discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. In this case, without calculating the exact IRR, we can estimate it based on the given information. The project has an initial outlay of $150,000 and generates $40,000 annually for 5 years. The total cash inflow is $200,000 ($40,000 x 5), which is more than the initial investment. The IRR must be positive and is likely to be in the lower range since the total inflow does not vastly exceed the outlay. Among the given options, "Between 10% and 11%" is a reasonable estimate for the IRR, considering the size of the inflows relative to the initial outlay.

Question 10

What is the IRR of a project requiring a $1000 investment which yields cash inflows of $700, $700, and $2000, in years 1, 2 and 3 respectively. The cost of capital is 12%. (Round to nearest %)

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Question 11

The following projects are all characterized by a single initial cash outflow (the initial investment)followed by a series of cash inflows. Rank them based on profitability index.

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Question 12

A project having a payback period of 4.73 years implies ____.

Accepted Answer

The payback period only tells us the amount of time it takes to recover the initial investment. It does not give us any information about the NPV. Therefore, we cannot determine anything about the NPV based solely on the payback period.

Question 13

Calculate the NPV of a project requiring a $3,000 investment followed by an outflow of $500 in Year 1, and inflows of $1,000 in Year 2 and $4,000 in Year 3. The cost of capital is 12%. (Round to nearest $)

Accepted Answer

The NPV (Net Present Value) is calculated using the formula: NPV = ∑ [(Ct) / (1 + r)^t] - C0, where Ct is the cash flow at time t, r is the discount rate (cost of capital), and C0 is the initial investment. For this project: Year 0: -$3,000 (initial investment) Year 1: -$500 Year 2: +$1,000 Year 3: +$4,000 With a discount rate of 12%: NPV = -3,000 + (-500 / (1 + 0.12)^1) + (1,000 / (1 + 0.12)^2) + (4,000 / (1 + 0.12)^3) = -3,000 - 446.43 + 797.19 + 2,846.72 = $197.48, rounded to $198.

Question 14

Frazier Fudge, Inc. is considering 2 mutually exclusive projects with the following cash flows. Which project should be accepted? Assume a cost of capital of 10%.

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Question 15

The projected cash flows for two mutually exclusive projects are as follows:  If the firm's cost of capital is 10% and the equivalent annual annuity method is used to eliminate the disparity between the projects' lives, which project should be undertaken?

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Question 16

A stand-alone capital project has the following projected cash flows:  If the firm's cost of capital is 14%, which of the following statements is true?

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Question 17

What is the Equivalent Annual Annuity (EAA)of a project that has an initial outlay of $2,500 followed by cash inflows of $1,000, $3,000 and $5,000 in years 1, 2 & 3 respectively? Assume a cost of capital of 11%. (Round to nearest $)

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Question 18

Capital budgeting analysis of mutually exclusive projects A and B yields the following:  Management should choose:

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Question 19

You are considering the following two mutually exclusive projects. Using the replacement chain approach and a cost of capital of 10%, calculate the NPV of Project A. (Round to nearest $)

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Question 20

Project A has annual cash flows of $200.00 for the next three years. Project B has annual cash flows of $100.00 for the next three years and then annual cash flows of $500.00 for the following four years. Assuming both projects have an initial cost of $500.00, which project is better based on the payback period criteria?

Accepted Answer

Payback period is the amount of time it takes for a project to recoup its initial investment. In this case, both projects have an initial cost of $500.00.

Project A has annual cash flows of $200.00 for the next three years, so it would take 2.5 years to recoup the initial investment (i.e. $500.00/$200.00).

Project B has annual cash flows of $100.00 for the next three years and then annual cash flows of $500.00 for the following four years. This means it would take 1.5 years to recoup the initial investment on the first set of cash flows (i.e. $500.00/$300.00) and an additional 1.4 years to recoup the investment on the second set of cash flows (i.e. $200.00/$500.00). Therefore, the total payback period for Project B is 2.9 years.

Since Project A has a shorter payback period than Project B, it is the better choice based on the payback period criteria.

Quiz 10: Capital Budgeting

The projected cash flows for two mutually exclusive projects are as follows: If the cost of capital is 10%, the decidedly more favorable project is:

The future cash flows of a stand-alone capital project are as follows: The internal rate of return for this project is approximately:

Williamson Inc. is considering a project with the following cash flows. Calculate the payback period of the project.

The future cash flows of a stand-alone capital project follow: With the project's approximate IRR?

A stand-alone capital project has the following cash flows. What is its NPV if the cost of capital is 10%?

The future cash flows of a stand-alone capital project are: If the firm's cost of capital is 12%, which of the following statements is true?

You are considering the following 2 mutually exclusive projects. Using the equivalent annual annuity method and a cost of capital of 10%, which project should be selected? (Round to nearest $)

A project is expected to last ten years with an initial cost of $10,000.00. Assuming the present value payback method produces a value of 7.25 years and there are no additional costs beyond the initial cost, the PI is ____.

What is the internal rate of return of a project that has an initial outlay of $150,000 and net cash flows of $40,000 for 5 years?

What is the IRR of a project requiring a $1000 investment which yields cash inflows of $700, $700, and $2000, in years 1, 2 and 3 respectively. The cost of capital is 12%. (Round to nearest %)

The following projects are all characterized by a single initial cash outflow (the initial investment) followed by a series of cash inflows. Rank them based on profitability index.

A project having a payback period of 4.73 years implies ____.

Calculate the NPV of a project requiring a $3,000 investment followed by an outflow of $500 in Year 1, and inflows of $1,000 in Year 2 and $4,000 in Year 3. The cost of capital is 12%. (Round to nearest $)

Frazier Fudge, Inc. is considering 2 mutually exclusive projects with the following cash flows. Which project should be accepted? Assume a cost of capital of 10%.

The projected cash flows for two mutually exclusive projects are as follows: If the firm's cost of capital is 10% and the equivalent annual annuity method is used to eliminate the disparity between the projects' lives, which project should be undertaken?

A stand-alone capital project has the following projected cash flows: If the firm's cost of capital is 14%, which of the following statements is true?

What is the Equivalent Annual Annuity (EAA) of a project that has an initial outlay of $2,500 followed by cash inflows of $1,000, $3,000 and $5,000 in years 1, 2 & 3 respectively? Assume a cost of capital of 11%. (Round to nearest $)

Capital budgeting analysis of mutually exclusive projects A and B yields the following: Management should choose:

You are considering the following two mutually exclusive projects. Using the replacement chain approach and a cost of capital of 10%, calculate the NPV of Project A. (Round to nearest $)