Question 1

A project has an initial cost of $16,780 and a 3-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 $3,320,$3,080,and $1,700 for Years 1 to 3,respectively.What is the average accounting return?

Accepted Answer

AAR = [($3,320 + $3,080 + $1,700)/ 3] / ($16,780 / 2)= 0.3218,or 32.18%

Question 2

A project requires an initial investment of $59,600 and will produce cash inflows of $21,200,$44,500,and $11,700 over the next 3 years,respectively.What is the project's NPV at a required return of 16 percent?

Accepted Answer

NPV = -$59,600 + $21,200 / 1.16 + $44,500 / 1.16² + $11,700 / 1.16³ = -$757.69

Question 3

A project has an initial cash outflow of $22,400 and cash inflows of $13,400 a year for Years 1 and 2 and a final cash inflow in Year 6 of $7,500.The required return is 15.5 percent.What is the net present value?

Accepted Answer

NPV = -$22,400 + $13,400 / 1.155 + $13,400 / 1.155² + $7,500 / 1.155⁶ = $2,405.66

Question 4

A project produces annual net income of $10,500,$15,700,and $16,200 over its 3-year life and requires an initial investment in fixed assets of $210,000.The book value of these assets will be $140,007,$46,662,and $15,561 at the end of Years 1 to 3,respectively.What is the average accounting rate of return if the required discount rate is 14.5 percent?

Accepted Answer

Average net income = ($10,500 + $15,700 + $16,200)/ 3 = $14,133.33
Average book value = ($210,000 + $140,007 + $46,662 + $15,561)/ 4 = $103,057.50
AAR = $14,133.33 / $103,057.50 = 0.1371,or 13.71%

Question 5

Toy Town is considering a new toy with initial costs of $35,900.This toy is expected to produce cash flows of $52,500 in Year 1,$11,300 in Year 2,and nothing thereafter.The discount rate assigned to the toy is 18.7 percent.What is the IRR?

Accepted Answer

NPV = $0 = -$35,900 + $52,500 / (1 + IRR)+ $11,300 / (1 + IRR)² IRR = 65.28%

Question 6

Motor Sales is considering a project that costs $15,900 will produce cash inflows of $5,500 a year for 4 years.The project has a required rate of return of 11.25 percent.What is the discounted payback period?

Accepted Answer

Discounted Year 1 cash flow = $5,500 / 1.1125 = $4,943.82 Discounted Year 2 cash flow = $5,500 / 1.1125² = $4,443.88 Discounted Year 3 cash flow = $5,500 / 1.1125³ = $3,994.50 Discounted Year 4 cash flow = $5,500 / 1.1125⁴ = $3,590.56 Discounted payback period = 3 + ($15,900 - $4,943.82 - $4,443.88 - $3,994.50)/ $3,590.56 = 3.70 years

Question 7

A project has an initial cost of $12,300 and produces cash inflows of $5,200,$5,300,and $4,800 over Years 1 to 3,respectively.What is the discounted payback period if the required rate of return is 12 percent?

Accepted Answer

Discounted Year 1 cash flow = $5,200 / 1.12 = $4,642.86 Discounted Year 2 cash flow = $5,300 / 1.12² = $4,225.13 Discounted Year 3 cash flow = $4,800 / 1.12³ = $3,416.55 Total discounted cash flows Years 1 to 3 = $4,642.86 + $4,225.13 + $3,416.55 = $12,284.54 The project never pays back on a discounted basis.

Question 8

A project initially costs $40,500 and will not produce any cash flows for the first 2 years.Starting in Year 3,it will produce cash flows of $34,500 a year for 2 years.In Year 6,the project will end and should produce a final cash inflow of $12,000.What is the net present value of this project if the required rate of return is 18.5 percent?

Accepted Answer

NPV = -$40,500 + $34,500 / 1.1853 + $34,500 / 1.185⁴ + $12,000 / 1.185⁶ = $2,063.19

Question 9

What is the internal rate of return on an investment that has an initial cost of $63,100 and projected cash inflows of $18,700,$38,600,and $34,100 for Years 1 to 3,respectively?

Accepted Answer

NPV = $0 = -$63,100 + $18,700 / (1 + IRR)+ $38,600 / (1 + IRR)² + $34,100 / (1 + IRR)³ IRR = 19.10%

Question 10

You are considering a project with an initial cost of $13,000.What is the payback period for this project if the annual cash inflows are $3,450,$5,970,$2,100,and $1,400 for Years 1 to 4,respectively?

Accepted Answer

Payback period = Never.The total cash inflows are less than the initial cost.

Question 11

A 5-year project requires $65,000 of fixed assets that will be depreciated using straight-line depreciation to a zero book value over the life of the project.If the firm requires a minimum average accounting return of 11.65 percent,what must be the minimum average net income for the project to be accepted?

Accepted Answer

AAR = .1165 = Average net income / ($65,000 + 0)/ 2
Average net income = $3,786.25

Question 12

You are considering two independent projects.The required rate of return is 13.75 percent for Project A and 14.25 percent for Project B.Project A has an initial cost of $51,400 and cash inflows of $21,400,$24,900,and $22,200 for Years 1 to 3,respectively.Project B has an initial cost of $38,300 and cash inflows of $23,000 a year for 2 years.Which project(s),if either,should you accept?

Accepted Answer

NPV_A= -$51,400 + $21,400 / 1.1375 + $24,900 / 1.1375² + $22,200 / 1.1375³ = $1,740.62;Accept NPV_B = -$38,300 + $23,000 / 1.1425 + $23,000 / 1.1425² = -$548.32;Reject

Question 13

The Depot is considering a project with an initial cost for fixed assets of $279,900 and annual sales of $284,000 for four years.The profit margin is 6.72 percent,and the tax rate is 34 percent.The fixed assets will be depreciated straight-line over the life of the project to a zero book value.The required average accounting rate of return is 14.5 percent.Should this project be accepted or rejected? What is the AAR?

Accepted Answer

AAR = (0.0672 × $284,000)/ [($279,000 + 0)/ 2] = 0.1368,or 13.68%;Reject

Question 14

It will cost $28,900 to acquire a small ice cream cart.Cart sales are expected to be $10,500 a year for 3 years.After the 3 years,the cart is expected to be worthless.What is the payback period?

Accepted Answer

Payback period = $28,900 / $10,500 = 2.75 years

Question 15

Rodriquez's Hot Rods is considering a new project with an initial cost of $54,780 and a discount rate of 14 percent.The project is expected to have cash inflows of $27,000 a year for 3 years.What is the discounted payback period?

Accepted Answer

Discounted Year 1 cash flow = $27,000 / 1.14 = $23,684.21 Discounted Year 2 cash flow = $27,000 / 1.14² = $20,775.62 Discounted Year 3 cash flow = $27,000 / 1.14³ = $18,224.23 Discounted payback period = 2 + ($54,780 - $23,684.21 - $20,775.62)/ $18,224.23 = 2.57 years

Question 16

A new project has an initial cost of $125,000 and cash flows of $33,300,$78,700,and $69,500 for Years 1 to 3,respectively.What is the net present value (NPV)of this project if the discount rate is 19.3 percent? What is the NPV if the discount rate is 12.7 percent?

Accepted Answer

NPV_19.5% = -$125,000 + $33,300 / 1.193 + $78,700 / 1.193² + $69,500 / 1.193³ = -$859.11 NPV_12% = -$125,000 + $33,300 / 1.127 + $78,700 / 1.127² + $69,500 / 1.127³ = $15,062.34

Question 17

Janice is considering an investment costing $65,500 with cash flows of $48,700 in Year 2,$36,500 in Year 3,and $19,900 in Year 4.The discount rate is 11 percent,and the required discounted payback period is 3 years.Should this project be accepted or rejected? What is the discounted payback period?

Accepted Answer

Discounted cash flow Year 1 = $0 Discounted cash flow Year 2 = $48,700 / 1.11² = $39,526.01 Discounted cash flow Year 3 = $36,500 / 1.11³ = $26,688.49 Discounted cash flow Year 4 = $19,900 / 1.11⁴ = $13,108.75 Discounted payback period = 2 + ($65,500 - 0 - $39,526.01)/ $26,688.49)= 2.97 years;Accept

Question 18

Leo is considering adding a deli to his general store.The remodelling expenses and shelving costs are estimated at $27,500.Deli sales are expected to produce net cash inflows of $7,300,$8,600,$9,700,and $9,750 for Years 1 to 4,respectively.Leo has a firm 3-year payback requirement.Should he add the deli?

Accepted Answer

Payback period = 3 + ($27,500 - $7,300 - $8,600 - $9,700)/ $9,750 = 3.19 years;Reject;The deli should not be added.

Question 19

Baxter's Market is considering opening a new location with an initial cost of $139,200.This location is expected to generate cash flows of $22,400,$61,500,$37,800,and $21,000 in Years 1 to 4,respectively.What is the payback period?

Accepted Answer

Payback period = 3 + ($139,200 - $22,400 - $61,500 - $37,800)/ $21,000 = 3.83 years

Question 20

Webster's wants to introduce a new product that has a start-up cost of $7,800.The product has a 2-year life and will provide cash flows of $6,700 in Year 1 and $4,300 in Year 2.The required rate of return is 14 percent.Should the product be introduced? Why or why not?

Accepted Answer

NPV = -$7,800 + $6,700 / 1.14 + $4,300 / 1.14² = $1,385.90 0 = -$7,800 + $6,700 / (1 + IRR)+ $4,300 / (1 + IRR)² IRR = 28.72%

Quiz 7: Net Present Value AMCQ Other Investment Rules