Question 1

An investment with an initial cost of $15,000 produces cash flows of $5,000 annually for 5 years.At a discount rate of 10 percent,what is the discounted payback period?

Accepted Answer

The discounted payback period is the time it takes for the present value of cash flows to cover the initial investment. Calculating the present value of each cash flow at a 10% discount rate and summing them until they equal the initial investment gives approximately 3.75 years.

Question 2

A food cart costs $4,500 and is expected to return $1,750 a year for three years and then be worthless.What is the payback period for this cart?

Accepted Answer

The answer of A food cart costs $4,500 and is...

Question 3

An investment cost $10,000 with expected cash flows of $3,000 a year for 5 years.At what discount rate will the project's IRR equal its discount rate?

Accepted Answer

The Internal Rate of Return (IRR) is the discount rate at which the net present value (NPV) of all the cash flows (both positive and negative) from a project or investment equals zero. In this case, the IRR would be the rate that makes the present value of the $3,000 annual cash flows over 5 years equal to the initial investment of $10,000. The correct answer, 15.24 percent, is the rate that satisfies this condition.

Question 4

An investment costing $25 returns $27.50 at the end of one year with no risk.Given this,you know that the NPV:

Accepted Answer

The NPV of an investment is the present value of its expected cash flows minus the initial cost. In this case, the initial cost is $25, and the expected cash flow at the end of one year is $27.50. Assuming a discount rate of 10%, the present value of the cash flow is $25, which means the NPV is zero. Therefore, the correct answer is D, as the NPV is zero if the required rate of return is 10%.

Question 5

Consider an investment with an initial cost of $20,000 that expected to last for 5 years.The expected cash flows in Years 1 and 2 are $5,000 each,in Years 3 and 4 are $5,500 each,and the Year 5 cash flow is $1,000.Assume each annual cash flow is spread evenly over its respective year.What is the payback period?

Accepted Answer

The payback period is the time it takes for the cumulative cash flows to equal the initial investment. By the end of Year 3, the cumulative cash flow is $15,500. By the end of Year 4, it is $21,000. Therefore, the payback period is 3 years plus the fraction of Year 4 needed to recover the remaining $4,500 ($20,000 - $15,500), which is $4,500/$5,500 = 0.82 years. Thus, the payback period is 3.82 years.

Question 6

A project has an initial cost of $2,250.The cash inflows are $0,$500,$900,and $700 for Years 1 to 4,respectively.What is the payback period?

Accepted Answer

The answer of A project has an initial cost of...

Question 7

A project has an initial cost of $10,600 and produces cash inflows of $3,700,$4,900,and $2,500 for Years 1 to 3,respectively.What is the discounted payback period if the required rate of return is 7.5 percent?

Accepted Answer

The answer of A project has an initial cost of...

Question 8

Leslie is charged with determining which small projects should be funded.Along with this assignment,she has been granted the use of $15,000 for a maximum of two years on a discounted basis.She is considering three projects.Project A costs $7,500 and has cash flows of $4,000 a year for Years 1 to 3.Project B costs $8,000 and has cash flows of $3,000,$4,000,and $3,000 for Years 1 to 3,respectively.Project C costs $2,000 and has a cash inflow of $2,500 in Year 2.What decisions should she make regarding these projects if she assigns them a mandatory discount rate of 8.5 percent? Explain why.

Accepted Answer

Project C is the only one with a discounted payback period of less than two years, making it the most viable option under the given constraints. Projects A and B have longer payback periods when considering the 8.5 percent discount rate, making them less attractive given the two-year funding condition.

Question 9

An investment project has an initial cost of $382 and cash flows $105,$130,$150,and $150 for Years 1 to 4,respectively.The cost of capital is 9 percent.What is the discounted payback period?

Accepted Answer

The answer of An investment project has an initial cost...

Question 10

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 for Years 1 to 4,respectively?

Accepted Answer

The answer of You are considering a project with an...

Question 11

Sun Lee's is considering two mutually exclusive projects that have been assigned the same discount rate of 10.5 percent.Project A has an initial cost of $54,500,and should produce cash inflows of $16,400,$28,900,and $31,700 for Years 1 to 3,respectively.Project B has an initial cost of $79,400,and should produce cash inflows of $0,$48,300,and $42,100,for Years 1 to 3,respectively.What is the incremental IRR?

Accepted Answer

To calculate the incremental IRR, we need to calculate the cash flows of the difference between the two projects (i.e., Project B - Project A):
Year 1: -$54,500
Year 2: $48,900 ($48,300 - $16,400)
Year 3: $10,400 ($42,100 - $31,700)
Using a financial calculator or Excel, we can find that the incremental IRR is -15.40 percent. Since this is a negative rate of return, it means that Project A is the better choice. Therefore, the best choice is Project A.

Question 12

Bernstein's proposed project has an initial cost of $128,600 and cash flows of $64,500,$98,300,and −$15,500 for Years 1 to 3 respectively.If all negative cash flows are moved to Time 0 at a discount rate of 10 percent,what is the modified internal rate of return?

Accepted Answer

To calculate the modified internal rate of return, we need to move all negative cash flows to time 0.

Initial cost = -$128,600 
Year 1 cash flow = $64,500 
Year 2 cash flow = $98,300 
Year 3 cash flow = -$15,500

Moving year 3 cash flow to time 0: 
Year 3 cash flow / (1+0.10)^3 = -$11,864.46

Now, we can calculate the modified internal rate of return using the following formula:

NPV = 0 = -$128,600 + $64,500/(1+r) + $98,300/(1+r)^2 - $11,864.46/(1+r)^3

Using trial and error or Excel's IRR function, we get the modified internal rate of return to be 9.82%, which is option B.

Question 13

Homer is considering a project with cash inflows of $950 a year for Years 1 to 4,respectively.The project has a required discount rate of 11 percent and an initial cost of $2,100.What is the discounted payback period?

Accepted Answer

The answer of Homer is considering a project with cash...

Question 14

Project A has an initial cost of $75,000 and annual cash flows of $33,000 for three years.Project B costs $60,000 and has cash flows of $25,000,$30,000,and $25,000 for Years 1 to 3,respectively.Projects A and B are mutually exclusive.The incremental IRR is ________ and if the required rate is higher than the crossover rate then Project ________ should be accepted.

Accepted Answer

The answer of Project A has an initial cost of...

Question 15

You are considering two independent projects that have differing requirements.Project A has a required return of 12 percent compared to Project B's required return of 13.5 percent.Project A costs $75,000 and has cash flows of $21,000,$49,000,and $12,000 for Years 1 to 3,respectively.Project B has an initial cost of $70,000 and cash flows of $15,000,$18,000,and $41,000 for Years 1 to 3,respectively.Based on the NPV,you should:

Accepted Answer

The answer of You are considering two independent projects that...

Question 16

Lucie is reviewing a project with an initial cost of $38,700 and cash inflows of $9,800,$16,400,and $21,700 for Years 1 to 3,respectively.Should the project be accepted if it has been assigned a required return of 9.75 percent? Why or why not?

Accepted Answer

The IRR of the project is 10.09%, which exceeds the required return of 9.75%. Therefore, the project should be accepted.

Question 17

An investment project has an initial cost of $260 and cash flows $75,$105,$100,and $50 for Years 1 to 4,respectively.The cost of capital is 12 percent.What is the discounted payback period?

Accepted Answer

The answer of An investment project has an initial cost...

Question 18

Project A costs $84,500 and has cash flows of $32,300,$36,400,and $30,000 for Years 1 to 3,respectively.Project B has an initial cost of $79,000 and has cash flows of $30,000,$36,000,and $29,000 for Years 1 to 3,respectively.What is the incremental IRR of these two mutually exclusive projects?

Accepted Answer

The answer of Project A costs $84,500 and has cash...

Question 19

A project costing $218,000 has equal annual cash inflows over its 7-year life.If the discounted payback period is seven years and the discount rate is zero percent,what is the amount of the cash flow in each of the seven years?

Accepted Answer

Since the project has equal annual cash inflows over its 7-year life, the cash flow in each of the seven years must be the same. The discounted payback period is seven years, which means that it takes seven years for the discounted cash inflows to equal the initial investment. Since the discount rate is zero percent, the discounted cash inflows are the same as the undiscounted cash inflows. Therefore, the amount of cash flow in each of the seven years is $218,000 divided by 7, which equals $31,142.86 per year. Therefore, choice A is the correct answer.

Question 20

Jack is considering adding toys to his general store.He estimates the cost of toy inventory will be $4,200.The remodeling and shelving costs are estimated at $1,500.Toy sales are expected to produce net annual cash inflows of $1,200,$1,500,$1,600,and $1,750 over the next four years,respectively.Should Jack add toys to his merchandise if he requires a three-year payback period? Why or why not?

Accepted Answer

The total cost is $5,700 ($4,200 for inventory + $1,500 for remodeling). The cumulative cash inflows over three years are $4,300 ($1,200 + $1,500 + $1,600), which is less than the total cost. The payback period extends into the fourth year, making it 3.80 years, which exceeds the required three-year payback period.

Quiz 5: Net Present Value and Other Investment Rules

An investment with an initial cost of $15,000 produces cash flows of $5,000 annually for 5 years.At a discount rate of 10 percent,what is the discounted payback period?

A food cart costs $4,500 and is expected to return $1,750 a year for three years and then be worthless.What is the payback period for this cart?

An investment cost $10,000 with expected cash flows of $3,000 a year for 5 years.At what discount rate will the project's IRR equal its discount rate?

An investment costing $25 returns $27.50 at the end of one year with no risk.Given this,you know that the NPV:

A project has an initial cost of $2,250.The cash inflows are $0,$500,$900,and $700 for Years 1 to 4,respectively.What is the payback period?

A project has an initial cost of $10,600 and produces cash inflows of $3,700,$4,900,and $2,500 for Years 1 to 3,respectively.What is the discounted payback period if the required rate of return is 7.5 percent?

An investment project has an initial cost of $382 and cash flows $105,$130,$150,and $150 for Years 1 to 4,respectively.The cost of capital is 9 percent.What is the discounted payback period?

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 for Years 1 to 4,respectively?

Bernstein's proposed project has an initial cost of $128,600 and cash flows of $64,500,$98,300,and −$15,500 for Years 1 to 3 respectively.If all negative cash flows are moved to Time 0 at a discount rate of 10 percent,what is the modified internal rate of return?

Homer is considering a project with cash inflows of $950 a year for Years 1 to 4,respectively.The project has a required discount rate of 11 percent and an initial cost of $2,100.What is the discounted payback period?

Lucie is reviewing a project with an initial cost of $38,700 and cash inflows of $9,800,$16,400,and $21,700 for Years 1 to 3,respectively.Should the project be accepted if it has been assigned a required return of 9.75 percent? Why or why not?

An investment project has an initial cost of $260 and cash flows $75,$105,$100,and $50 for Years 1 to 4,respectively.The cost of capital is 12 percent.What is the discounted payback period?

Project A costs $84,500 and has cash flows of $32,300,$36,400,and $30,000 for Years 1 to 3,respectively.Project B has an initial cost of $79,000 and has cash flows of $30,000,$36,000,and $29,000 for Years 1 to 3,respectively.What is the incremental IRR of these two mutually exclusive projects?

A project costing $218,000 has equal annual cash inflows over its 7-year life.If the discounted payback period is seven years and the discount rate is zero percent,what is the amount of the cash flow in each of the seven years?