Question 1

What is the internal rate of return for a project that has a net investment of $370,000 and net cash flows of $60,000 in year 1, $75,000 in year 2, and $85,000 in years 3 through 8?
A)15.5%
B)13.6%
C)17.4%
D)none of these are correct

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. Using the given cash flows, the IRR is calculated to be approximately 13.6%.

Question 2

G-III Apparel is considering increasing the size of a warehouse.The cost of the expansion is $825,000 and the increase in inventories and accounts payable will be $410,000 and $360,000 respectively.G-III expects that the expansion will increase net cash flows by $150,000 a year for the next 5 years and $200,000 a year for years 6-12.G-III has a 14% cost of capital and a marginal tax rate of 35%.What is the NPV of the warehouse expansion?
A)-$3,450
B)$60,050
C)$10,050
D)-$338,570

Accepted Answer

NPV = -$825,000 - $410,000 + $360,000 + $150,000(3.433) + $200,000(5.216 - 3.433) + $50,000(0.270)
= $10,050

Question 3

ZPS Models is considering a project that has a NINV of $564,000 and generates net cash flows of $105,000 per year for 10 years.What is the NPV of this project if ZPS has a cost of capital of 12.45%?
A)$47,625
B)$18,503
C)$17,490
D)none of these

Accepted Answer

NPV = -$564,000 + $582,503 = $18,503 (by calculator)

Question 4

Red Lake Mines, Inc.is considering adoption of a new project requiring a net investment of $10 million.The project is expected to generate 5 years of net cash inflows of $5 million per year.In the project's sixth, and final year, it is expected to have a net cash outflow of $1 million.What is the project's net present value, using a discount rate of 12 percent?
A)about $8.52 million
B)about $8.00 million
C)about $7.52 million
D)none of these

Accepted Answer

NPV = -$10 + $5(3.605) - $1(0.507) = 7.52, or $7.5 million

Question 5

Calculate the net present value for an investment project with the following cash flows using a 12 percent cost of capital:
$$\begin{array} { l c c c c } 
\text { Year } & 0 & 1 & 2 & 3 \
\text { Net Cash Flow } & - \$ 100,000 & \$ 80,000 & \$ 80,000 & - \$ 30,000
\end{array}$$
A) $56,560 -$100,000 $80,000 $80,000 -$30,000
B) $30,000
C) $13,840
D) cannot be determined with information given

Accepted Answer

The NPV is calculated as: NPV = -100,000 + (80,000 / 1.12) + (80,000 / 1.12^2) + (-30,000 / 1.12^3) = $13,840.

Question 6

Rollerblade, a manufacturer of skating gear, plans to expand its operation in Brighton, England.The expansion will cost $18.5 million and is expected to generate annual net cash flows of 2.2 million pounds for a period of 15 years and nothing thereafter.The cost of capital for the project is 16%.Using the spot exchange rate of $1.60 per British pound, compute the net present value of the expansion project.
A)-$6.235 million
B)$2.458 million
C)$1.124 million
D)-$10.83 million

Accepted Answer

PVNCF = £2.2(PVIFA₀.₁₆,₁₅) = £12.265 pounds
PVNCFh = £12.265($1.60/£) = $19.624
NPV = $19.624 - $18.5 = $1.124 (million)

Question 7

What is the internal rate of return for a project that has a net investment of $169,165 and net cash flows of $25,000 in the first year and 40,000 in years 2-7?
A)2.5%
B)13%
C)12%
D)13.5%

Accepted Answer

IRR = 12% (calculator)

Question 8

Ecogen is considering the purchase of some new equipment that will cost $340,000 installed.The equipment will produce a product that must be FDA approved and this will require at least a year.Net cash flow in Year 1 will be a negative $110,000 but is expected to be a positive $50,000 in Year 2.Net cash flows will be $150,000, $240,000, and $330,000 in the next 3 years.At the end of 5 years the equipment and the product will be obsolete.If the firm's marginal tax rate is 40% and their costs of capital is 15%, should they invest in the new equipment?
A)Yes, NPV = $2,090
B)Yes, NPV = $12,390
C)No, NPV = -$63,210
D)No, NPV = -$12,210

Accepted Answer

NPV = -$340,000 - $110,000(0.870) + $50,000(0.756) + $150,000(0.658) +
$240,000(0.572) + $330,000(0.497) = $2,090

Question 9

What is the net present value of a project that has a net investment of $148,000 and net cash flows of $25,000 in the first year, $45,000 in years 2-7 and a negative net cash flow of $27,000 in year 8? Assume the cost of capital is 11 percent.
A)$34,302
B)$74,847
C)$57,738
D)-$2,238

Accepted Answer

NPV = $25,000(0.901) + $45,000(4.712 - 0.901) - $27,000(0.434) - $148,000
= $22,525 + $171,495 - $11,718 - $148,000 = $34,302

Question 10

Zimmer, a manufacturer of modular rooms, plans to expand its operation in Landshut, Germany.The expansion will cost $14.5 million and is expected to generate annual net cash flows of DM4.5 million for a period of 12 years and then the operation will be sold for DM2 million.The cost of capital for the project is 14%.Using the spot exchange rate of $0.60 per DM, compute the NPV of this expansion project.
A)$0.78 million
B)$1.03 million
C)$2.58 million
D)$11.39 million

Accepted Answer

PVNCF = DM4.5(5.660) + DM2(0.208) = DM25.886 million PVNCFh = DM25.886($0.60/DM) = $15.5316
NPV = $15.5316 - $14.5 = $1.0316 (million)

Question 11

What is the internal rate of return for a project that has a net investment of $60,000 and the following net cash flows: Year 1 = $15,000;Year 2 = $20,000;Year 3 = $25,000;Year 4 = $30,000?
A)17.3%
B)16.7%
C)15.7%
D)16.3%

Accepted Answer

IRR = 16.3% (calculator)

Question 12

Decode Genetics purchased lab equipment for $600,000 that will generate net cash flows of $130,000 per year for 10 years.What is the IRR for this project?
A)16.76%
B)17.26%
C)18.13%
D)17.76%

Accepted Answer

IRR = 17.26 (by calculator)

Question 13

What is the NPV of a project that required a net investment of $500,00 and produced net cash flows of $150,000 per year for 5 years and $110,000 for the next 5 years? Assume the cost of capital is 14%.
A)$211,080
B)$392,580
C)$588,710
D)$160,920

Accepted Answer

NPV = -500,000 + 150,000(3.433) + 110,000(5.216 - 3.433)
= 211,080

Question 14

Consider a capital expenditure project that has forecasted revenues equal to $32,000 per year;cash expenses are estimated to be $29,000 per year.The cost of the project equipment is $23,000, and the equipment's estimated salvage value at the end of the project is $9,000.The equipment's $23,000 cost will be depreciated on a straight-line basis to $0 over a 10-year estimated economic life.Assume that the project requires an initial $7,000 working capital investment.The company's marginal tax rate is 30%.Calculate the project's net present value using a 12% discount rate.
A)about -$10,610
B)about -$12,530
C)about -$9,954
D)about +$9,462

Accepted Answer

NINV = $23,000 + $7,000 = $30,000
NCF₁₋₉ = ($32,000 - $29,000 - $2,300)(1 - 0.3) + $2,300 = $2,790
NCF₁₀ = $2,790 + $7,000 + 9,000(0.7) = $16,090
NPV = -$9,954 (using calculator)

Question 15

Kinetics is considering a project that has a NINV of $874,000 and generates net cash flows of $170,000 per year for 12 years.What is the NPV of this project if Kinetics cost of capital is 14%?
A)$252,760
B)$110,840
C)$88,200
D)$47,570

Accepted Answer

NPV = -$874,000 + $170,000(5.660) = $88,200

Question 16

Road Hawk Inc.is adding a new production line that will cost $720,000.The line will be depreciated on a straight- line basis over a 7-year period and will generate net cash flows of $160,000 in each of the 7 years.At the end of the project, it is expected the line can be sold as scrap for $10,000.If the firm's marginal tax rate is 40% and its required rate of return is 14 percent, what is the net present value of this project?
A)$70,091
B)-$27,920
C)$64,091
D)-$31,520

Accepted Answer

NPV = -$720,000 + $160,000(4.288) + $10,000(0.6)(0.400) = -$31,520

Question 17

Hydroponics is considering adding another greenhouse that would cost $95,000 and generate $20,000 in annual net cash flows over its 8 year expected life.The greenhouse would be depreciated on a straight-line basis to zero and the salvage value is also expected to be zero.If the firm has a marginal tax rate of 40 percent, what is this project's internal rate of return?
A)between 20 and 24%
B)between 13 and 14%
C)between 28 and 32%
D)between 7 and 8%

Accepted Answer

PVIFAᵣ,₈ = $95,000/$20,000 = 4.75, which is between 13 and 14 percent in Table IV

Question 18

Using the profitability index, which of the following projects should be accepted?
$$\begin{array} { l l l } 
\text { Praject } M : & \text { NPV } = \$ 60,000 & \text { NINV } = \$ 200,000 \
\text { Praject } N : & N P V = \$ 10,000 & \text { NINV } = \$ 30,000 \
\text { Praject } 0 : & N P V = \$ 2,000 & \text { NINV } = \$ 5,000
\end{array}$$
A) Project M NPV = $2,000 NINV = $5,000
B) Project N
C) Project O
D) All projects should be accepted

Accepted Answer

The profitability index is calculated by dividing the NPV by the NINV. The higher the profitability index, the more profitable the project. In this case, Project M has the highest profitability index, followed by Project N and then Project O. Therefore, all projects should be accepted.

Question 19

A project requires a net investment of $100,000.At the firm's cost of capital of 10%, the project's profitability index is 1.15.Determine the net present value of the project.
A)$15,000
B)$215,000
C)$115,000
D)none of these/cannot be determined

Accepted Answer

PI = PV of NCF/NINV
1.15 = PV of NCF/$100,000
PV of NCF = $115,000
NPV = PV of NCF - NINV
= $115,000 - $100,000 = $15,000

Question 20

Calculate the profitability index for a project that has a net present value equal to -$10,000.The project's net investment is $20,000, and the firm has a 40 percent marginal tax rate.
A)-0.5
B)0
C)0.8
D)None of these

Accepted Answer

PI = $10,000/$20,000 = 0.5

Quiz 10: Capital Budgeting: Decision Criteria and Real Option Considerations

What is the internal rate of return for a project that has a net investment of $370,000 and net cash flows of $60,000 in year 1, $75,000 in year 2, and $85,000 in years 3 through 8?

ZPS Models is considering a project that has a NINV of $564,000 and generates net cash flows of $105,000 per year for 10 years.What is the NPV of this project if ZPS has a cost of capital of 12.45%?

Calculate the net present value for an investment project with the following cash flows using a 12 percent cost of capital: $\begin{array} { l c c c c } \text { Year } & 0 & 1 & 2 & 3 \\\text { Net Cash Flow } & - \$ 100,000 & \$ 80,000 & \$ 80,000 & - \$ 30,000\end{array}$

What is the internal rate of return for a project that has a net investment of $169,165 and net cash flows of $25,000 in the first year and 40,000 in years 2-7?

What is the net present value of a project that has a net investment of $148,000 and net cash flows of $25,000 in the first year, $45,000 in years 2-7 and a negative net cash flow of $27,000 in year 8? Assume the cost of capital is 11 percent.

What is the internal rate of return for a project that has a net investment of $60,000 and the following net cash flows: Year 1 = $15,000;Year 2 = $20,000;Year 3 = $25,000;Year 4 = $30,000?

Decode Genetics purchased lab equipment for $600,000 that will generate net cash flows of $130,000 per year for 10 years.What is the IRR for this project?

What is the NPV of a project that required a net investment of $500,00 and produced net cash flows of $150,000 per year for 5 years and $110,000 for the next 5 years? Assume the cost of capital is 14%.

Kinetics is considering a project that has a NINV of $874,000 and generates net cash flows of $170,000 per year for 12 years.What is the NPV of this project if Kinetics cost of capital is 14%?

A project requires a net investment of $100,000.At the firm's cost of capital of 10%, the project's profitability index is 1.15.Determine the net present value of the project.

Calculate the profitability index for a project that has a net present value equal to -$10,000.The project's net investment is $20,000, and the firm has a 40 percent marginal tax rate.