Question 1

Jack is considering adding toys to his general store. He estimates that the cost of inventory will be $4,200. The remodeling and shelving costs are estimated at $1,500. Toy sales are expected to produce net cash inflows of $1,200,$1,500,$1,600,and $1,750 over the next four years,respectively. Should Jack add toys to his store if he assigns a three-year payback period to this project?

Accepted Answer

The total initial investment is $4,200 + $1,500 = $5,700. The cumulative cash inflows over the first three years are $1,200 + $1,500 + $1,600 = $4,300, which is less than the initial investment. By the end of the fourth year, the cumulative cash inflows are $4,300 + $1,750 = $6,050, which exceeds the initial investment. Therefore, the payback period is between 3 and 4 years, specifically 3.80 years, which exceeds the three-year payback period Jack requires.

Question 2

You are considering two independent projects both of which have been assigned a discount rate of 8%. Based on the profitability index,what is your recommendation concerning these projects?

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Question 3

You are analyzing two mutually exclusive projects and have developed the following information. What is the incremental IRR?

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Question 4

What is the internal rate of return on an investment with the following cash flows?

Accepted Answer

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Question 5

What is the net present value of a project with the following cash flows and a required return of 12%?

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Question 6

You are considering an investment with the following cash flows. If the required rate of return for this investment is 13.5%,should you accept it based solely on the internal rate of return rule? Why or why not?

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Question 7

Homer is considering a project which will produce cash inflows of $950 a year for 4 years. The project has a 9% required rate of return and an initial cost of $2,900. What is the discounted payback period?

Accepted Answer

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Question 8

An investment has the following cash flows. Should the project be accepted if it has been assigned a required return of 9.5%? Why or why not?

Accepted Answer

We need to calculate the internal rate of return (IRR) of the cash flows and compare it to the required return of 9.5%. Using a financial calculator or spreadsheet, we get an IRR of 9.89%. This exceeds the required return by about 0.39%, which means that the project should be accepted. Choice A is the correct answer.

Question 9

You are considering a project with an initial cost of $4,300. What is the payback period for this project if the cash inflows are $550,$970,$2,600,and $500 a year over the next four years?

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Question 10

You would like to invest in the following project. Camille,your 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 10% discount rate to all cash flows. Based on these criteria,you should:

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Question 11

A project has an initial cost of $2,100. The cash inflows are $0,$500,$900,and $700 over the next four years,respectively. What is the payback period?

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Question 12

You are considering two mutually exclusive projects with the following cash flows. Will your choice between the two projects differ if the required rate of return is 8% rather than 11%? If so,what should you do?

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Question 13

A project will produce cash inflows of $1,750 a year for four years. The project initially costs $10,600 to get started. In year five,the project will be closed and as a result should produce a cash inflow of $8,500. What is the net present value of this project if the required rate of return is 13.75%?

Accepted Answer

To calculate the net present value (NPV), we need to find the present value of all the cash inflows and outflows of the project using a discount rate of 13.75%.

Year 0: -$10,600 (initial cost)
Year 1: $1,750 ÷ (1+0.1375) = $1,537.39
Year 2: $1,750 ÷ (1+0.1375)² = $1,350.70
Year 3: $1,750 ÷ (1+0.1375)³ = $1,178.19
Year 4: $1,750 ÷ (1+0.1375)⁴ = $1,018.06
Year 5: $8,500 ÷ (1+0.1375)⁵ = $4,145.09

NPV = Present value of cash inflows - Present value of cash outflows
NPV = $1,537.39 + $1,350.70 + $1,178.19 + $1,018.06 + $4,145.09 - $10,600
NPV = -$935.56

Therefore, the net present value of this project is -$935.56, which means the project is not worth pursuing as it will result in a loss. Option B is the correct answer.

Question 14

You are considering two independent projects with the following cash flows. The required return for both projects is 10%. Given this information,which one of the following statements is correct?

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Question 15

Ginny Trueblood is considering an investment which will cost her $120,000. The investment produces no cash flows for the first year. In the second year the cash inflow is $35,000. This inflow will increase to $55,000 and then $75,000 for the following two years before ceasing permanently. Ginny requires a 10% rate of return and has a required discounted payback period of three years. Ginny should _______ this project because the discounted payback period is ______.

Accepted Answer

The discounted payback period is 3.97 years, which exceeds Ginny's required payback period of three years, so she should reject the project.

Question 16

A project has an initial cost of $8,600 and produces cash inflows of $3,200,$4,900,and $1,500 over the next three years,respectively. What is the discounted payback period if the required rate of return is 8%?

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Question 17

It will cost $3,000 to acquire a small ice cream cart. Cart sales are expected to be $1,400 a year for three years. After the three years,the cart is expected to be worthless as that is the expected remaining life of the cooling system. What is the payback period of the ice cream cart?

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Question 18

What is the profitability index for an investment with the following cash flows given a 9% required return?

Accepted Answer

To calculate the profitability index, we divide the present value of cash inflows by the initial investment. Using a financial calculator, spreadsheet or PV tables, the present value of the cash flows is $10,918.09, and the initial investment is $10,700. Therefore, the profitability index is $10,918.09/$10,700 = 1.02. The best choice is D, as it has the highest profitability index, indicating that the investment will generate a return higher than the required rate of 9%.

Question 19

Based on the profitability index (PI) rule,should a project with the following cash flows be accepted if the discount rate is 8%? Why or why not?

Accepted Answer

The profitability index (PI) is calculated by dividing the present value of future cash flows by the initial investment. 
Based on the table, the present value of the future cash flows is $3,201, and the initial investment is $3,225. Therefore, the PI is 3,201/3,225 or 0.992.
Since the PI is less than 1, it means that the project's present value of future cash flows is less than the initial investment. Therefore, the project should not be accepted. 
Choice E is the correct answer because it correctly identifies the PI and concludes that the project should not be accepted.

Question 20

What is the net present value of a project that has an initial cash outflow of $12,670 and the following cash inflows? The required return is 11.5%.

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Quiz 5: Net Present Value and Other Investment Rules

You are considering two independent projects both of which have been assigned a discount rate of 8%. Based on the profitability index,what is your recommendation concerning these projects?

You are analyzing two mutually exclusive projects and have developed the following information. What is the incremental IRR?

What is the internal rate of return on an investment with the following cash flows?

What is the net present value of a project with the following cash flows and a required return of 12%?

You are considering an investment with the following cash flows. If the required rate of return for this investment is 13.5%,should you accept it based solely on the internal rate of return rule? Why or why not?

Homer is considering a project which will produce cash inflows of $950 a year for 4 years. The project has a 9% required rate of return and an initial cost of $2,900. What is the discounted payback period?

An investment has the following cash flows. Should the project be accepted if it has been assigned a required return of 9.5%? Why or why not?

You are considering a project with an initial cost of $4,300. What is the payback period for this project if the cash inflows are $550,$970,$2,600,and $500 a year over the next four years?

You would like to invest in the following project. Camille,your 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 10% discount rate to all cash flows. Based on these criteria,you should:

A project has an initial cost of $2,100. The cash inflows are $0,$500,$900,and $700 over the next four years,respectively. What is the payback period?

You are considering two mutually exclusive projects with the following cash flows. Will your choice between the two projects differ if the required rate of return is 8% rather than 11%? If so,what should you do?

You are considering two independent projects with the following cash flows. The required return for both projects is 10%. Given this information,which one of the following statements is correct?

A project has an initial cost of $8,600 and produces cash inflows of $3,200,$4,900,and $1,500 over the next three years,respectively. What is the discounted payback period if the required rate of return is 8%?

It will cost $3,000 to acquire a small ice cream cart. Cart sales are expected to be $1,400 a year for three years. After the three years,the cart is expected to be worthless as that is the expected remaining life of the cooling system. What is the payback period of the ice cream cart?

What is the profitability index for an investment with the following cash flows given a 9% required return?

Based on the profitability index (PI) rule,should a project with the following cash flows be accepted if the discount rate is 8%? Why or why not?

What is the net present value of a project that has an initial cash outflow of $12,670 and the following cash inflows? The required return is 11.5%.