Question 1

Mutually exclusive projects are best defined as competing projects which:
A)would commence on the same day.
B)have the same initial start-up costs.
C)both require the total use of the same limited resource.
D)both have negative cash outflows at time zero.
E)have the same life span.

Accepted Answer

Mutually exclusive projects are those where selecting one project means the other project cannot be pursued. This is usually because they require the total use of the same limited resource. Thus, choice C is the best option as it reflects this definition. The other choices may partially overlap with the concept of mutually exclusive projects, but they are not as accurate or complete.

Question 2

The final decision on which one of two mutually exclusive projects to accept ultimately depends upon which one of the following?
A)initial cost of each project
B)timing of the cash inflows
C)total cash inflows of each project
D)required rate of return
E)length of each project's life

Accepted Answer

The final decision on mutually exclusive projects depends on the required rate of return, as it is used to discount future cash flows to determine the net present value (NPV) of each project. The project with the higher NPV, given the required rate of return, is typically chosen.

Question 3

Kristi wants to start training her most junior assistant,Amy,in the art of project analysis.Amy has just started college and has no experience or background in business finance.To get her started,Kristi is going to assign the responsibility for all projects that have initial costs less than $1,000 to Amy to analyze.Which method is Kristi most apt to ask Amy to use in making her initial decisions?
A)discounted payback
B)profitability index
C)internal rate of return
D)payback
E)average accounting return

Accepted Answer

Since the projects have initial costs less than $1,000, it is likely that Kristi wants Amy to focus on more simple and straightforward analyses. The payback method is the easiest and most commonly used method for small projects that have a short payback period, which is likely the case for projects with a low initial cost. It is also a good method to start with for someone who is new to business finance.

Question 4

You are considering the following two mutually exclusive projects.The required rate of return is 14.6 percent for project A and 13.8 percent for project B.Which project should you accept and why?  
A) project A; because it has the higher required rate of return
B) project A; because its NPV is about $4,900 more than the NPV of project B
C) project B; because it has the largest total cash inflow
D) project B; because it has the largest cash inflow in year one
E) project B; because it has the lower required return

Accepted Answer

The decision should be based on the NPV of each project. Project A has a higher required rate of return, indicating it is riskier, but it has a higher NPV of approximately $4,900 compared to project B. Therefore, project A should be accepted over project B. The total cash inflow or the cash inflow in year one is not sufficient to make a decision between these two mutually exclusive projects.

Question 5

You are considering a project with conventional cash flows and the following characteristics:  Which of the following statements is correct given this information?
I.The discount rate used in computing the net present value was less than 11.63 percent.
II.The discounted payback period must be more than 2.98 years.
III.The discount rate used in the computation of the profitability ratio was 11.63 percent.
IV.This project should be accepted as the internal rate of return exceeds the required return.
A)I and II only
B)III and IV only
C)I, II, and IV only
D)II, III, and IV only
E)I, II, III, and IV

Accepted Answer

I. The statement is correct as if the discount rate used in computing the net present value was equal to or greater than 11.63 percent, the NPV would have been negative.
II. The statement is correct as the discounted payback period is the time taken for the discounted cash inflows to equal the initial investment, and in this case, it would be more than 2.98 years.
III. The statement is correct as the profitability ratio is calculated as the present value of cash inflows divided by the initial investment, and in this case, the discount rate used in the computation of the ratio was 11.63 percent.
IV. The statement is incorrect as the question does not provide information on the required return or hurdle rate. Therefore, it cannot be determined whether the project's IRR exceeds the required return or not.

Question 6

Which of the following are definite indicators of an accept decision for an independent project with conventional cash flows?
I.positive net present value
II.profitability index greater than zero
III.internal rate of return greater than the required rate
IV.positive internal rate of return
A)I and III only
B)II and IV only
C)I, II, and III only
D)II, III, and IV only
E)I, II, III, and IV

Accepted Answer

A positive net present value (NPV) and an internal rate of return (IRR) greater than the required rate are definite indicators of an accept decision for an independent project with conventional cash flows. A profitability index greater than one (not zero) is also an indicator, and a positive IRR alone is not sufficient without comparison to the required rate.

Question 7

A project will produce cash inflows of $2,800 a year for 4 years with a final cash inflow of $5,700 in year 5.The project's initial cost is $9,500.What is the net present value of this project if the required rate of return is 16 percent?
A)-$311.02
B)$1,048.75
C)$4,650.11
D)$9,188.98
E)$11,168.02

Accepted Answer

The net present value (NPV) is calculated by discounting the future cash inflows at the required rate of return and subtracting the initial investment. The NPV is $1,048.75 when calculated with a 16% discount rate.

Question 8

Which two methods of project analysis were the most widely used by CEO's as of 1999?
A)net present value and payback
B)internal rate of return and payback
C)net present value and average accounting return
D)internal rate of return and net present value
E)payback and average accounting return

Accepted Answer

According to the question, the two methods of project analysis that were most widely used by CEOs as of 1999 were asked. As per the given options, the combination of internal rate of return (IRR) and net present value (NPV) is the best choice. Both IRR and NPV are popular methods of capital budgeting and widely used by businesses to evaluate investment opportunities. While NPV calculates the total value of cash flows generated by a project by discounting all future cash flows to their present value using the required rate of return, IRR calculates the rate of return that equates the present value of future cash flows with the initial investment. Both methods help companies to choose the most profitable projects and provide a basis for decision-making. Thus, the correct answer is D.

Question 9

Which one of the following is the best example of two mutually exclusive projects?
A)building a retail store that is attached to a wholesale outlet
B)producing both plastic forks and spoons on the same assembly line at the same time
C)using an empty warehouse to store both raw materials and finished goods
D)promoting two products during the same television commercial
E)waiting until a machine finishes molding Product A before being able to mold Product B

Accepted Answer

Mutually exclusive projects are those where the choice of one project prevents the undertaking of another. In option E, the machine can only mold one product at a time, meaning if it is used for Product A, it cannot simultaneously be used for Product B, making them mutually exclusive.

Question 10

Which one of the following statements would generally be considered as accurate given independent projects with conventional cash flows?
A)The internal rate of return decision may contradict the net present value decision.
B)Business practice dictates that independent projects should have three distinct accept indicators before a project is actually implemented.
C)The payback decision rule could override the net present value decision rule should cash availability be limited.
D)The profitability index rule cannot be applied in this situation.
E)The projects cannot be accepted unless the average accounting return decision ruling is positive.

Accepted Answer

The answer of Which one of the following statements would...

Question 11

When the present value of the cash inflows exceeds the initial cost of a project,then the project should be:
A)accepted because the internal rate of return is positive.
B)accepted because the profitability index is greater than 1.
C)accepted because the profitability index is negative.
D)rejected because the internal rate of return is negative.
E)rejected because the net present value is negative.

Accepted Answer

The profitability index (PI) measures the present value of the future cash inflows of a project relative to the initial cost of the project. If the PI is greater than 1, it means the project's present value of cash inflows exceeds the initial cost and the project should be accepted. Therefore, option B is the correct answer. Options A, C, D, and E are all incorrect because they offer irrelevant information or incorrect reasoning.

Question 12

In actual practice,managers frequently use the:
I.average accounting return method because the information is so readily available.
II.internal rate of return because the results are easy to communicate and understand.
III.discounted payback because of its simplicity.
IV.net present value because it is considered by many to be the best method of analysis.
A)I and III only
B)II and III only
C)I, II, and IV only
D)II, III, and IV only
E)I, II, III, and IV

Accepted Answer

Managers often use the average accounting return method due to the availability of information, the internal rate of return for its ease of communication and understanding, and the net present value as it is widely regarded as the best method of analysis.

Question 13

What is the net present value of a project that has an initial cash outflow of $34,900 and the following cash inflows? The required return is 15.35 percent. 
A)-$3,383.25
B)-$2,784.62
C)-$2,481.53
D)$52,311.08
E)$66,416.75

Accepted Answer

The answer of What is the net present value of...

Question 14

Roger's Meat Market is considering two independent projects.The profitability index decision rule indicates that both projects should be accepted.This result most likely does which one of the following?
A)conflicts with the results of the net present value decision rule
B)assumes the firm has sufficient funds to undertake both projects
C)agrees with the decision that would also apply if the projects were mutually exclusive
D)bases the accept/reject decision on the same variables as the average accounting return
E)fails to provide useful information as the firm must reject at least one of the projects

Accepted Answer

The profitability index decision rule assumes that the firm has sufficient funds to undertake all projects that have a profitability index greater than 1. This implies that if both projects are considered acceptable according to this rule, it is assumed the firm has the necessary funds to invest in both.

Question 15

Isaac has analyzed two mutually exclusive projects of similar size and has compiled the following information based on his analysis.Both projects have 3- year lives.  Isaac has been asked for his best recommendation given this information.His recommendation should be to accept:
A)both projects.
B)project B because it has the shortest payback period.
C)project B and reject project A based on their net present values.
D)project A and reject project B based on their average accounting returns.
E)neither project.

Accepted Answer

Isaac has analyzed both projects based on their net present values (NPV) and found that project B has a higher NPV than project A. This means that project B has a higher value in today's dollars than project A. If Isaac recommends accepting project B and rejecting project A, the company would be able to maximize its value. Therefore, the best choice would be to accept project B and reject project A based on their net present values.

Question 16

Southern Chicken is considering two projects.Project A consists of creating an outdoor eating area on the unused portion of the restaurant's property.Project B would use that outdoor space for creating a drive-thru service window.When trying to decide which project to accept,the firm should rely most heavily on which one of the following analytical methods?
A)profitability index
B)internal rate of return
C)payback
D)net present value
E)accounting rate of return

Accepted Answer

The most appropriate analytical method to use in this scenario is the net present value (NPV) method. This is because it takes into account the time value of money and measures the present value of future cash flows that each project generates. The project with a higher NPV will provide the most value to the firm. The profitability index, internal rate of return, payback, and accounting rate of return do not factor in the time value of money and are not as comprehensive as the NPV method.

Question 17

Which one of the following methods of analysis provides the best information on the cost-benefit aspects of a project?
A)net present value
B)payback
C)internal rate of return
D)average accounting return
E)profitability index

Accepted Answer

The answer of Which one of the following methods of...

Question 18

Which two methods of project analysis are the most biased towards short-term projects?
A)net present value and internal rate of return
B)internal rate of return and profitability index
C)payback and discounted payback
D)net present value and discounted payback
E)discounted payback and profitability index

Accepted Answer

Payback and discounted payback are the two methods of project analysis that are biased towards short-term projects. This is because they only consider the time taken to recoup the initial investment, without considering the cash flows beyond that point. Other methods such as net present value and internal rate of return take into account the entire life cycle of the project, and thus are less biased towards short-term projects.

Question 19

Western Beef Exporters is considering a project that has an NPV of $32,600,an IRR of 15.1 percent,and a payback period of 3.2 years.The required return is 14.5 percent and the required payback period is 3.0 years.Which one of the following statements correctly applies to this project?
A)The net present value indicates accept while the internal rate of return indicates reject.
B)Payback indicates acceptance.
C)The payback decision rule could override the accept decision indicated by the net present value.
D)The payback rule will automatically be ignored since both the net present value and the internal rate of return indicate an accept decision.
E)The net present value decision rule is the only rule that matters when making the final decision.

Accepted Answer

The NPV indicates that the project is acceptable, but the IRR exceeds the required rate of return. However, the payback period is longer than the required period. The payback rule may override the accept decision indicated by the NPV because the company may want to recover its investment within the desired timeframe of 3 years. Therefore, the payback period is a relevant factor to consider in addition to the NPV and IRR when making the final decision.

Question 20

What is the net present value of a project with the following cash flows if the required rate of return is 9 percent? 
A)-$1,574.41
B)-$1,208.19
C)$5,904.65
D)$6,029.09
E)$6,311.16

Accepted Answer

The answer of What is the net present value of...

Quiz 9: Net Present Value and Other Investment Criteria

Mutually exclusive projects are best defined as competing projects which:

The final decision on which one of two mutually exclusive projects to accept ultimately depends upon which one of the following?

You are considering the following two mutually exclusive projects.The required rate of return is 14.6 percent for project A and 13.8 percent for project B.Which project should you accept and why?

Which of the following are definite indicators of an accept decision for an independent project with conventional cash flows? I.positive net present value II.profitability index greater than zero III.internal rate of return greater than the required rate IV.positive internal rate of return

A project will produce cash inflows of $2,800 a year for 4 years with a final cash inflow of $5,700 in year 5.The project's initial cost is $9,500.What is the net present value of this project if the required rate of return is 16 percent?

Which two methods of project analysis were the most widely used by CEO's as of 1999?

Which one of the following is the best example of two mutually exclusive projects?

Which one of the following statements would generally be considered as accurate given independent projects with conventional cash flows?

When the present value of the cash inflows exceeds the initial cost of a project,then the project should be:

What is the net present value of a project that has an initial cash outflow of $34,900 and the following cash inflows? The required return is 15.35 percent.

Roger's Meat Market is considering two independent projects.The profitability index decision rule indicates that both projects should be accepted.This result most likely does which one of the following?

Isaac has analyzed two mutually exclusive projects of similar size and has compiled the following information based on his analysis.Both projects have 3- year lives. Isaac has been asked for his best recommendation given this information.His recommendation should be to accept:

Which one of the following methods of analysis provides the best information on the cost-benefit aspects of a project?

Which two methods of project analysis are the most biased towards short-term projects?

Western Beef Exporters is considering a project that has an NPV of $32,600,an IRR of 15.1 percent,and a payback period of 3.2 years.The required return is 14.5 percent and the required payback period is 3.0 years.Which one of the following statements correctly applies to this project?

What is the net present value of a project with the following cash flows if the required rate of return is 9 percent?