Question 1

Project A has an initial cost of $16,400 and cash flows of $5,100,$6,800,and $6,900 for Years 1 to 3,respectively.Project B has an initial cost of $21,200 and cash flows of $8,300,$7,900,and $7,700 for Years 1 to 3,respectively.What is the incremental IRR_B-A? A)2)89% B)4)07% C)5)91% D)6)75% E)7)90%

Accepted Answer

Incremental cash flows: Time 0: -$21,200 - (-$16,400)= -$4,800 Year 1: $8,300 - $5,100 = $3,200 Year 2: $7,900 - $6,800 = $1,100 Year 3: $7,700 - $6,900 = $800 Incremental IRR_B-A = -$4,800 + $3,200 / (1 + IRR)+ $1,100 / (1 + IRR)² + $800 / (1 + IRR)³ IRR = 0.0407,or 4.07%

Question 2

A project has an initial cost of $51,900 and cash flows of $18,700,$56,500,and -$9,100 for Years 1 to 3,respectively.If the required rate of return for this investment is 17 percent,should you accept it based solely on the internal rate of return rule? Why or why not?
A)Yes,because the IRR exceeds the required return.
B)Yes,because the IRR is a positive rate of return.
C)You cannot apply the IRR rule in this case because there are multiple IRRs.
D)No,because the IRR is a negative rate of return.
E)No,because the IRR is less than the required return.

Accepted Answer

Since the cash flow in Year 3 is a negative value,there are multiple IRRs.Thus,the IRR rule does not apply.

Question 3

A project is expected to have annual cash flows of $36,800,$24,600,and -$9,200 for Years 1 to 3,respectively.The initial cash outlay is $44,500 and the discount rate is 11 percent.What is the modified IRR?
A)14.66%
B)13.22%
C)12.73%
D)18.67%
E)15.70%

Accepted Answer

Modified Year 2 cash flow = $24,600 + (-$9,200)/ 1.11 = $16,311.71 $0 = -$44,500 + $36,800 / (1 + MIRR)+ $16,311.71 / (1 + MIRR)² MIRR = 0.1466,or 14.66%

Question 4

You are considering two independent projects that have a required return of 15 percent.Project A has an initial cost of $198,700 and cash inflows of $67,200,$109,600,and $88,700 for Years 1 to 3,respectively.Project B has an initial cost of $102,000 and cash inflows of $37,600 and $91,200 for Years 1 and 2,respectively.Given this information,which one of the following statements is correct based on the NPV and IRR methods of analysis?
A)You should accept both projects.
B)You should accept Project A and reject Project B.
C)You should accept Project B and reject Project A.
D)NPV indicates accept Project A while IRR indicates accepting Project B.
E)You should reject both projects.

Accepted Answer

NPV_A = -$198,700 + $67,200 / 1.15 + $109,600 / 1.152 + $88,700 / 1.15³ NPV_A = $929.82;Accept $0 = -$198,700 + $67,200 / (1 + IRR)+ $109,600 / (1 + IRR)² + $88,700 / (1 + IRR)³ IRR = 15.27%;Accept NPV_B = -$102,000 + $37,600 / 1.15 + $91,200 / 1.15² = -$2,111.35 NPV_B = -$344.05;Reject $0 = -$102,000 + $37,600 / (1 + IRR)+ $91,200 / (1 + IRR)² IRR = 14.77%;Reject

Question 5

Project Q has an initial cost of $257,412 and projected cash flows of $123,300 in Year 1 and $180,300 in Year 2.Project R has an initial cost of $345,000 and projected cash flows of $184,500 in Year 1 and $230,600 in Year 2.The discount rate is 12.2 percent and the projects are independent.Which project(s),if either,should be accepted based on its profitability index value?
A)Accept both Project Q and R
B)Reject both Project Q and R
C)Accept Project Q and reject Project R
D)Accept Project R and reject Project Q
E)Accept either Project R or Project Q,but not both

Accepted Answer

PI_Q = ($123,300 / 1.122 + $180,300 / 1.122²)/ $257,412 = .98;Reject PI_R = ($184,500 / 1.122 + $230,600 / 1.122²)/ $345,000 = 1.01;Accept

Question 6

Dorian International has $75,000 that it can invest for 2.5 years.After that,the funds are needed to repay an outstanding bond issue.The company has two potential projects that are within the funding limit.Project A has an initial cost of $40,000 and cash flows of $24,000 a year for 2 years.Project B has an initial cost of $75,000 and cash flows of $27,000 a year for 4 years.If the required rate of return on both projects is 12 percent,what is your recommendation?
A)Accept Project A and reject Project B
B)Reject Project A and accept Project B
C)Accept either Project A or Project B,but not both
D)Reject both projects
E)Accept both projects

Accepted Answer

Because the company must have the funds returned within 2.5 years,any project that can be accepted must pay back within 2.5 years and also have a positive NPV. Payback_A = 1 + ($40,000 - $24,000)/ $24,000 = 1.67 years;Project A meets the payback requirement. Payback_B = 2 + ($75,000 - $27,000 - $27,000)/ $27,000 = 2.78 years;Project B must be rejected because it does not meet the mandatory payback period of 2.5 years. NPV_A = -$40,000 + $24,000 / 1.12 + $24,000 / 1.12 = $561.22;Project A passes the NPV test. Since Project A passes both the payback and the NPV tests,it should be accepted.Project B must be rejected because the company must recoup its investment in 2.5 years,and Project B will not do that.

Question 7

Miller's is considering a 2-year expansion project that will require $398,000 up front.The project will produce cash flows of $361,000 and $114,000 for Years 1 and 2,respectively.Based on the profitability index (PI)rule,should the project be accepted if the discount rate is 12 percent? Should it be accepted if the discount rate is 17 percent?
A)Yes;Yes,because the PI is 1.2
B)Yes;No,because the PI is 0.98
C)No;Yes,because the PI is 0.98
D)No;No,because the PI is 1.2
E)Yes;Yes,because the PI is 1.19

Accepted Answer

PI_12% = ($361,000 / 1.12 + $114,000 / 1.12²)/ $398,000 = 1.04;Accept PI_16% = ($361,000 / 1.17 + $114,000 / 1.17²)/ $398,000 = 0.98;Reject

Question 8

Turner Enterprises is analyzing a project that is expected to have annual cash flows of $46,400,$51,300 and -$15,200 for Years 1 to 3,respectively.The initial cash outlay is $65,900 and the discount rate is 12 percent.What is the modified IRR?
A)17.77%
B)18.13%
C)18.66%
D)17.04%
E)16.98%

Accepted Answer

Modified Year 2 cash flow = $51,300 + (-$15,200)/ 1.12 = $37,728.57 $0 = -$65,900 + $46,400 / (1 + MIRR)+ $37,728.57 / (1 + MIRR)² MIRR = .1866,or 18.66%

Question 9

Project Water has an initial cost of $598,900 and projected cash flows of $302,000,$264,000,and $250,000 for Years 1 to 3,respectively.Project Aqua has an initial cost of $512,200 and projected cash flows of $290,000,$214,000,and $220,000 for Years 1 to 3,respectively.What is the incremental IRR_A-B of these two mutually exclusive projects? A)8)67% B)6)93% C)2)75% D)11.06% E)4)37%

Accepted Answer

Incremental cash flows: Time 0: -$598,900 - (-$512,200)= -$86,700 Year 1: $302,000 - $290,000 = $12,000 Year 2: $264,000 - $214,000 = $50,000 Year 3: $250,000 - $220,000 = $30,000 Incremental IRR_A-B = -$86,700 + $12,000 / (1 + IRR)+ $50,000 / (1 + IRR)² + $30,000 / (1 + IRR)³ IRR = 0.0275,or 2.75%

Question 10

A project has an initial cost of $40,100 and anticipated cash flows of $10,200,$21,700,$15,600,and $7,800 for Years 1 to 4,respectively.What is the profitability index value if the required return is 12.6 percent?

A).92
B)1.05
C)0.99
D)1.01
E).96

Accepted Answer

PI = ($10,200 / 1.126 + $21,700 / 1.126² + $15,600 / 1.126³ + $7,800 / 1.1264)/ $40,100 = 1.05

Question 11

A new product has start-up costs of $389,200 and projected cash flows of $102,000,$187,500,and $245,000 for Years 1 to 3,respectively.What is the profitability index given a required return of 14 percent?
A)0)98
B)0)83
C)1)16
D)1)03
E)1)21

Accepted Answer

PI = ($102,000 / 1.14 + $187,500 / 1.14² + $245,000 / 1.14³)/ $389,200 = 1.03

Question 12

Project A has an initial cost of $211,400 and projected cash flows of $46,200,$64,900,and $135,800 for Years 1 to 3,respectively.Project B has an initial cost of $187,900 and projected cash flows of $43,200,$59,700,and $125,600 for Years 1 to 3,respectively.What is the incremental IRR_A-B of these two mutually exclusive projects? A)8)67% B)−6.93% C)11.06% D)−9.62% E)9)37%

Accepted Answer

Incremental cash flows: Time 0: -$211,400 - (-$187,900)= -$23,500 Year 1: $46,200 - $43,200 = $3,000 Year 2: $64,900 - $59,700 = $5,200 Year 3: $135,800 - $125,600 = $10,200 Incremental IRR_A-B = -$23,500 + $3,000 / (1 + IRR)+ $5,200 / (1 + IRR)² + $10,200 / (1 + IRR)³ IRR = -0.0962,or -9.62%

Question 13

Assume a project has an initial cost of $207,600 and cash flows of $62,100,$99,100,and $105,300 for Years 1 to 3,respectively.The required discount rate is 11 percent,the required payback period is 3 years,and the required AAR is 13 percent.Should this project be accepted based on the two most commonly used methods of analysis by large firms? Justify your answer.
A)Accept based on the positive NPV but reject based on the payback period.
B)Accept based on the positive NPV and an IRR that exceeds the required discount rate.
C)Reject based on the negative NPV and the long payback period.
D)Accept based on payback and an IRR that exceeds the required discount rate.
E)Reject based on the negative NPV and an IRR that is less than the required rate of return.

Accepted Answer

The two most commonly used methods are NPV and IRR. NPV = -$207,600 + $62,100 / 1.11 + $99,100 / 1.11² + $105,300 / 1.11³ = $5,772.18 0 = -$207,600 + $62,100 / (1 + IRR)+ $99,100 / (1 + IRR)+ $105,300 / (1 + IRR) IRR = 12.46%

Question 14

A project has an initial cost of $48,900 and cash flows of $31,300,-$11,600,and $40,300 for Years 1 to 3,respectively.The discount rate is 14 percent.What is the modified IRR?
A)11.68%
B)15.59%
C)10.59%
D)12.67%
E)14.92%

Accepted Answer

Modified Year 1 cash flow = $31,300 + (-$11,600)/ 1.14 = $21,124.56 $0 = -$48,900 + $21,124.56 / (1 + MIRR)+ $40,300 / (1 + MIRR)³ MIRR = 0.1059,or 10.59%

Question 15

The Walk-Up Window is considering two mutually exclusive projects.Project A has an initial cost of $64,230 and annual cash flows of $25,200 for three years.Project B has an initial cost of $45,400 and annual cash flows of $21,400,$21,900,and $10,200 for Years 1 to 3,respectively.What is the incremental IRR_A-B? Which project should be accepted if the discount rate is 9 percent? Which project should be accepted if the discount rate is 6 percent? A)6)65%;Project A;Project A B)6)65%;Project B;Project A C)7)21%;Project A;Project B D)7)21%;Project B: Project A E)6)65%;Project A;Project B

Accepted Answer

Incremental cash flows: Time 0: -$64,230 - (-$45,400)= -$18,830 Year 1: $25,200 - $21,400 = $3,800 Year 2: $25,200 - $21,900 = $3,300 Year 3: $25,200 - $10,200 = $15,000 Incremental IRR_A-B = -$18,830 + $3,800 / (1 + IRR)+ $3,300 / (1 + IRR)² + $15,000 / (1 + IRR)³ Incremental IRR_A-B = 0.0665,or 6.65% NPV_A = -$64,230 + $25,200 / 1.09 + $25,200 / 1.09² + $25,200 / 1.09³ = -$441.37 NPV_B = -$45,400 + $21,400 / 1.09 + $21,900 / 1.09² + $10,200 / 1.09³ = $542.09 NPV_A = -$64,230 + $25,200 / 1.06 + $25,200 / 1.06² + $25,200 / 1.06³ = $3,129.90 NPV_B = -$45,400 + $21,400 / 1.06 + $21,900 / 1.06² + $10,200 / 1.06³ = $2,843.72 At the 9 percent discount rate,accept Project B.At 6 percent,accept Project A.Project B is acceptable at rates exceeding the incremental IRR of 6.65 percent while Project A is acceptable at rates below the incremental IRR.

Question 16

A project has an initial cash inflow of $87,700 and cash flows of -$48,700 in Year 1 and -$57,200 in Year 2.The discount rate is 14 percent.Should this project be accepted or rejected based on IRR? Why?
A)Accepted,because this is a financing project and the IRR is less than the discount rate.
B)Rejected,because this is an investing project and the IRR is less than the discount rate.
C)Accepted,because this is a financing project and the IRR is greater than the discount rate.
D)Rejected,because this is an investing project and the IRR is greater than the discount rate.
E)Accepted,because the IRR equals the discount rate.

Accepted Answer

IRR = $87,700 + (-$48,700)/ (1 + IRR)+ (-$57,200)/ (1 + IRR)² IRR = 13.16% NPV = $87,700 + (-$48,700)/ 1.14 + (-$57,200)/ 1.14² NPV = $967.16 Because this is a financing-type project,the project should be accepted since the IRR of 13.16 percent is less than the discount rate of 14 percent.This is verified by the positive NPV at the 14 percent rate.

Question 17

You are considering two independent projects both of which have been assigned a discount rate of 12 percent.Project A costs $39,100 and produces cash flows of $15,900 a year for 3 years.Project B costs $22,900 and produces cash flows of $14,000 a year for 2 years.Based on the profitability index,what is your recommendation concerning these projects?
A)Accept both projects
B)Accept Project B because it has the lower PI
C)Accept Project A because it has the lower PI
D)Accept Project A and reject Project B
E)Reject Project A and accept Project B

Accepted Answer

PI_A = ($15,900 / 1.12 + $15,900 / 1.12² + $15,900 / 1.12³)/ $39,100 = .98;Reject PI_B = ($14,000 / 1.12 + $14,000 / 1.12²)/ $22,900 = 1.03;Accept

Question 18

A project has an initial cash inflow of $40,800 and a cash outflow of $44,900 in Year 1.The discount rate is 10 percent.Should this project be accepted or rejected based on IRR? Why?
A)Accepted,because the IRR is less than the discount rate.
B)Rejected,because the IRR is less than the discount rate.
C)Accepted,because the IRR is greater than the discount rate.
D)Rejected,because the IRR is greater than the discount rate.
E)Accepted,because the IRR equals the discount rate.

Accepted Answer

IRR = $40,800 + (-$44,900)/ (1 + IRR)
IRR = 10.05%
NPV = $40,800 + (-$44,900)/ 1.10
NPV = -$18.18
Because this is a financing-type project,the project should be rejected since the IRR of 10.05 percent is greater than the discount rate of 10 percent.This is verified by the negative NPV at the 10 percent discount rate.

Question 19

A proposed project has an initial cost of $200,000 and cash flows of -$13,200,$124,500,and $187,900 for Years 1 to 3,respectively.Victoria,the boss,insists that only projects that can return at least $1.10 in today's dollars for every $1 invested can be accepted.She also insists on applying a discount rate of 14 percent to all cash flows.Based on these criteria,the project should be
A)accepted because the PI is 0.89.
B)rejected because the PI exceeds 1.
C)accepted because the PI is 1.17.
D)rejected because the PI is 1.06.
E)rejected because the PI is 0.95.

Accepted Answer

The PI method should be used with a required value of 1.1,which is the return of $1.10 on each $1 invested. PI = (-$13,200 / 1.14 + $124,500 / 1.14² + $187,900 / 1.14³)/ $200,000 = 1.06;Reject

Question 20

Project I has an initial cash outflow of $18,300 and annual cash flows of $8,700 for Years 1 to 3.Project II has an initial cash outflow of $25,400 and annual cash flows of $10,500 for Years 1 to 3.These projects are mutually exclusive.The required rate of return is 11 percent.Based on the incremental NPV₍_{II - I)} which project(s)should be accepted and why? A)Project II;because the incremental NPV₍_{II - I)} is negative. B)Project I;because both the incremental NPV₍_{II - I)}and NPV_I are positive. C)Both Project I and II;because both project NPVs are positive. D)Project II;because it has the larger NPV. E)Project I;because the incremental NPV₍_{II - I)} is negative and NPV_I is positive.

Accepted Answer

Incremental cash flows: Time 0: -$25,400 - (-$18,300)= -$7,100 Years 1 to 3: $10,500 - $8,700 = $1,800 Incremental NPV₍_{II - I)} = -$7,100 + $1,800 / 1.11 + $1,800 / 1.11² + $1,800 / 1.11³ = -$2,701.31 NPV_I = -$18,300 + $8,700 / 1.11 + $8,700 / 1.11² + $8,700 / 1.11³ = $2,960.32

Quiz 7: Net Present Value AMCQ Other Investment Rules

Project A has an initial cost of $16,400 and cash flows of $5,100,$6,800,and $6,900 for Years 1 to 3,respectively.Project B has an initial cost of $21,200 and cash flows of $8,300,$7,900,and $7,700 for Years 1 to 3,respectively.What is the incremental IRRB-A?

A project has an initial cost of $51,900 and cash flows of $18,700,$56,500,and -$9,100 for Years 1 to 3,respectively.If the required rate of return for this investment is 17 percent,should you accept it based solely on the internal rate of return rule? Why or why not?

A project is expected to have annual cash flows of $36,800,$24,600,and -$9,200 for Years 1 to 3,respectively.The initial cash outlay is $44,500 and the discount rate is 11 percent.What is the modified IRR?

Turner Enterprises is analyzing a project that is expected to have annual cash flows of $46,400,$51,300 and -$15,200 for Years 1 to 3,respectively.The initial cash outlay is $65,900 and the discount rate is 12 percent.What is the modified IRR?

A project has an initial cost of $40,100 and anticipated cash flows of $10,200,$21,700,$15,600,and $7,800 for Years 1 to 4,respectively.What is the profitability index value if the required return is 12.6 percent?

A new product has start-up costs of $389,200 and projected cash flows of $102,000,$187,500,and $245,000 for Years 1 to 3,respectively.What is the profitability index given a required return of 14 percent?

A project has an initial cost of $48,900 and cash flows of $31,300,-$11,600,and $40,300 for Years 1 to 3,respectively.The discount rate is 14 percent.What is the modified IRR?

A project has an initial cash inflow of $87,700 and cash flows of -$48,700 in Year 1 and -$57,200 in Year 2.The discount rate is 14 percent.Should this project be accepted or rejected based on IRR? Why?

A project has an initial cash inflow of $40,800 and a cash outflow of $44,900 in Year 1.The discount rate is 10 percent.Should this project be accepted or rejected based on IRR? Why?

Project A has an initial cost of $16,400 and cash flows of $5,100,$6,800,and $6,900 for Years 1 to 3,respectively.Project B has an initial cost of $21,200 and cash flows of $8,300,$7,900,and $7,700 for Years 1 to 3,respectively.What is the incremental IRR_B-A?