Question 1

WSU Inc.has various options for replacing a piece of manufacturing equipment.The present value of costs for option Ell is $84,000.Option Ell has a useful life of 5 years;annual operating costs were discounted at 9%.What is the equivalent annual cost?
A)$16,800
B)$21,595.77
C)$14,035.77
D)$18,312

Accepted Answer

To calculate the equivalent annual cost, we need to use the formula:
EAC = (Present Value of Costs) x (Discount Rate) / (1 - (1 + Discount Rate)^-Useful Life)
Plugging in the values we get:
EAC = 84000 x 0.09 / (1 - (1 + 0.09)^-5)
EAC = $21,595.77
Therefore, option B is the best choice as it has the lowest equivalent annual cost.

Question 2

A machine has a cost of $5,575,000.It will produce cash inflows of $1,825,000 (Year 1);$1,775,000 (Year 2);$1,630,000 (Year 3);$1,585,000 (Year 4);and $1,650,000 (Year 5).At a discount rate of 16.25%,the project should be:
A)accepted.
B)rejected.
C)discounted at a lower rate.
D)abandoned after the first year.

Accepted Answer

To determine if the project is worthwhile, we need to find the net present value (NPV) of the project using the given discount rate of 16.25%.

NPV = -Initial Cost + (Cash inflow Year 1 / (1+discount rate)^1) 
+ (Cash inflow Year 2 / (1+discount rate)^2) 
+ (Cash inflow Year 3 / (1+discount rate)^3) 
+ (Cash inflow Year 4 / (1+discount rate)^4)
+ (Cash inflow Year 5 / (1+discount rate)^5)

= -$5,575,000 + ($1,825,000 / 1.1625) 
+ ($1,775,000 / 1.1625^2) 
+ ($1,630,000 / 1.1625^3) 
+ ($1,585,000 / 1.1625^4) 
+ ($1,650,000 / 1.1625^5)

= -$5,575,000 + $1,566,838 + $1,411,291 + $1,232,651 + $1,089,603 + $1,044,796

= $1,770,178

Since the NPV is positive, the project would be accepted if there were no other factors or limitations to consider. However, the high discount rate of 16.25% suggests that other investment opportunities may offer higher returns and should be pursued instead. Therefore, the project should be rejected.

Question 3

The equivalent annual cost method is most appropriate in which of the following situations? In each case,assume that several mutually exclusive options are available.
A)Introducing a new product line
B)Adding another store to a chain of retail stores
C)Installation of federally mandated safety equipment
D)Equipment to reduce production costs

Accepted Answer

The equivalent annual cost method is most appropriate for comparing projects with different lifespans, such as mandatory safety equipment, to determine the most cost-effective option over time.

Question 4

Which of the following is the correct equation to solve for the net present value of a project. A)NPV = CF₀ + CF_1/(1 + k)¹+ CF_2/(1 + k)²+^...CFn_/(1 + k)ⁿ B)NPV = CF₀ + CF₁(1 + k)¹+ CF₂(1 + k)²+^...CFn(1 + k)ⁿ C)NPV = CF₀ - CF_1/(1 + k)¹ - CF_2/(1 + k)^2-...CFn_/(1 + k)ⁿ D)NPV = CF_1/(1 + k)¹+ CF_2/(1 + k)²+^...CFn_/(1 + k)ⁿ

Accepted Answer

The correct equation to solve for the net present value of a project is:NPV = CF0 + CF1/(1 + k)^1 + CF2/(1 + k)^2 + ... + CFn/(1 + k)^nwhere:CF0 is the initial cash flowCF1, CF2, ..., CFn are the cash flows in years 1, 2, ..., nk is the discount rate

Question 5

Project H requires an initial investment of $100,000 and the produces annual cash flows of $45,000 per year for each of the next 3 years.Project T also requires an initial investment of $100,000 and produces cash flows of $30,000 in year 1,$40,000 in year 2,and $70,000 in year 3.If the discount rate is 10% and the projects are not mutually exclusive:
A)Project H should be chosen.
B)Project T should be chosen.
C)H and T are equally attractive.
D)Both projects should be accepted.

Accepted Answer

Both projects should be accepted because the present value of Project H's cash flows at a discount rate of 10% is $111,231, while the present value of Project T's cash flows is $124,587. Therefore, the combined present value of both projects is $235,818, which is greater than the initial investment of $200,000. Accepting both projects is the best option because it maximizes the present value of the cash flows.

Question 6

Use the following to answer the following question(s).
The information below describes a project with an initial cash outlay of $10,000 and a required return of 12%.
 
-You have been asked to analyze a capital investment proposal.The project's cost is $2,775,000.Cash inflows are projected to be $925,000 in Year 1;$1,000,000 in Year 2;$1,000,000 in Year 3;$1,000,000 in Year 4;and $1,225,000 in Year 5.Assume that your firm discounts capital projects at 15.5%.What is the project's NPV?
A)$101,247
B)$285,106
C)$473,904
D)$582,380

Accepted Answer

The answer of Use the following to answer the following...

Question 7

Project Eh! requires an initial investment of $50,000,and has a net present value of $12,000.Project B requires an initial investment of $100,000,and has a net present value of $13,000.The projects are proposals for increasing revenue and are not mutually exclusive.The firm should accept:
A)project Eh!.
B)project B.
C)both projects.
D)neither project.

Accepted Answer

Both projects have positive net present values, so they are both worth investing in. Additionally, since the projects are not mutually exclusive, the firm can invest in both and increase their potential revenue even further.

Question 8

Use the following to answer the following question(s). The information below describes a project with an initial cash outlay of $10,000 and a required return of 12%. -Which of the following is a correct equation to solve for the NPV of the project that has an initial outlay of $30,000,followed by incremental cash inflows in the next 3 years of $15,000,$20,000,and $30,000? Assume a discount rate of 10%. A)NPV = - $30,000 + $15,000(1.10)¹ + $20,000(1.10)² + $30,000(1.10)³ B)NPV = - $30,000 + $15,000/(1.10)¹ + $20,000/(1.10)² + $30,000/(1.10)³ C)NPV = - $30,000 + $15,000/(1.01)^.10 + $20,000/(1.02)^.10+ $30,000/(1.03)^.10 D)NPV = - $30,000 + $15,000/(1.1)^.10 + $20,000(1.2)^.10 + $30,000(1.3)^.10

Accepted Answer

The correct equation to solve for the NPV of a project with incremental cash inflows is the sum of the discounted cash inflows minus the initial cash outlay. Using the given cash flows and a discount rate of 10%, the equation becomes:
NPV = -$30,000 + $15,000/(1.10)^1 + $20,000/(1.10)^2 + $30,000/(1.10)^3
Choice A is incorrect because it incorrectly includes an additional factor of (1.10) in the first cash inflow. 
Choice C is incorrect because it uses incorrect discount factors of 1.01, 1.02, and 1.03 instead of (1.10)^-1, (1.10)^-2, and (1.10)^-3. 
Choice D is incorrect because it incorrectly applies different factors in the discounting process for each cash inflow.

Question 9

Project H requires an initial investment of $100,000 and the produces annual cash flows of $45,000 per year for each of the next 3 years.Project T also requires an initial investment of $100,000 and produces cash flows of $30,000 in year 1,$40,000 in year 2,and $70,000 in year 3.If the discount rate increases from 10% to 16%:
A)Project T should be chosen.
B)Both projects should be rejected.
C)H and T are equally attractive.
D)The project rankings will change.

Accepted Answer

The answer of Project H requires an initial investment of...

Question 10

Artie's Soccer Ball Company is considering a project with the following cash flows:
Initial outlay = $750,000
Incremental after-tax cash flows from operations Years 1-4 = $250,000 per year
Compute the NPV of this project if the company's discount rate is 12%.
A)$9,337
B)$7,758
C)$4,337
D)$2,534

Accepted Answer

The NPV (Net Present Value) of the project can be calculated using the formula: NPV = $\sum \frac{C_t}{(1+r)^t} - C_0$, where $C_t$ is the cash flow at time $t$, $r$ is the discount rate, and $C_0$ is the initial investment. Here, $C_0 = $750,000$, $C_t = $250,000$ for $t = 1$ to $4$, and $r = 12\%$. Calculating the NPV: NPV = $\frac{250,000}{(1+0.12)^1} + \frac{250,000}{(1+0.12)^2} + \frac{250,000}{(1+0.12)^3} + \frac{250,000}{(1+0.12)^4} - 750,000$. This calculation results in an NPV of approximately $9,337, making option A correct.

Question 11

Which of the following is the correct equation to solve for the NPV of the project that has an initial outlay of $30,000,followed by three years of $20,000 in incremental cash inflow? Assume a discount rate of 10%. A)NPV = -30,000 + (3 × 20,000)/(1.10)³ B)NPV = -$30,000 + $20,000/(1.10)¹ + $20,000/(1.10)² + $20,000/(1.10)³ C)NPV = -$30,000 + $20,000/(1.01)^.10 + $20,000/(1.02)^.10+ $20,000/(1.03)^.10 D)NPV = -$30,000 + $20,000/(1.1)^.10 + $20,000(1.2)^.10 + $20,000(1.3)^.10

Accepted Answer

The correct equation to calculate NPV is to discount all the cash flows using the discount rate and then subtract the initial investment. Using this formula, the correct answer is option B as it discounts each cash inflow separately and then subtracts the initial investment. Option A is incorrect as it only discounts the total cash inflow for three years. Option C is incorrect as it is using different discount rates for each year. Option D is incorrect as it is using incorrect calculations for each year.

Question 12

Project EH! requires an initial investment of $50,000,and has a net present value of $12,000.Project BE requires an initial investment of $100,000,and has a net present value of $13,000.The projects are mutually exclusive.The firm should accept:
A)project EH!.
B)project BE.
C)both projects.
D)neither project.

Accepted Answer

Both projects have positive net present values, indicating that they will generate positive cash flows in excess of their required investments. However, since the projects are mutually exclusive, only one can be accepted. Project BE generates a higher net present value relative to its required investment amount than Project EH!, making it the better choice. Therefore, the firm should accept Project BE.

Question 13

Warchester Inc.is considering the purchase of copying equipment that will require an initial investment of $15,000 and $4,000 per year in annual operating costs over the equipment's estimated useful life of 5 years.The company will use a discount rate of 8.5%.What is the equivalent annual cost?
A)$4,000
B)$7,000
C)$6,152.51
D)$7,806.49

Accepted Answer

The answer of Warchester Inc.is considering the purchase of copying...

Question 14

Use the following to answer the following question(s).
The information below describes a project with an initial cash outlay of $10,000 and a required return of 12%.
 
-Which of the following statements is correct?
A)The project should be accepted since its NPV is $353.87.
B)The project should be rejected since its NPV is -$353.87.
C)The project should be accepted since it has a payback of less than four years.
D)The project should be rejected since its NPV is -$23.91.

Accepted Answer

The answer of Use the following to answer the following...

Question 15

Suppose you determine that the NPV of a project is $1,525,855.What does that mean?
A)In all cases,investing in this project would be better than investing in a project that has an NPV of $850,000.
B)The project would add value to the firm.
C)Under all conditions,the project's payback would be less than the profitability index.
D)Other investment criteria might need to be considered.

Accepted Answer

An NPV of $1,525,855 means that the project would add value to the firm. This is because the NPV represents the present value of the project's cash inflows minus the present value of its cash outflows. If the NPV is positive, it means that the project will generate more cash inflows than outflows, which adds value to the firm. Option A is incorrect because the comparison of NPVs with another project depends on their relative size and timing. Option C is incorrect because there is no direct relationship between NPV and payback period or profitability index. Option D is true, but it is too general to be the best choice. Other investment criteria such as IRR or PI could complement the NPV analysis.

Question 16

The present value of the total costs over a five year period for Project April is $50,000.The net present value of total costs over a 4 year period for Project October is $40,000.The company uses a discount rate of 9%.Which project should it choose and why?
A)April because it has a higher NPV.
B)April because is has a higher EAC.
C)October because it has a shorter life.
D)October because it has a lower EAC.

Accepted Answer

The Equivalent Annual Cost (EAC) is lower for Project October, making it more cost-effective over its lifespan.

Question 17

A machine has a cost of $5,375,000.It will produce cash inflows of $1,825,000 (Year 1);$1,775,000 (Year 2);$1,630,000 (Year 3);$1,585,000 (Year 4);and $1,650,000 (Year 5).At a discount rate of 16.25%,what is the NPV?
A)$81,724
B)$257,106
C)$416,912
D)$190,939

Accepted Answer

The answer of A machine has a cost of $5,375,000.It...

Question 18

Project January has a NPV of $50,000,project December has a NPV of $40,000.Which of the following circumstances could make it possible to choose December over January?
A)January has a shorter payback period.
B)The projects are mutually exclusive.
C)The projects have unequal lives.
D)The projects are mandated.

Accepted Answer

The projects have unequal lives. In this case, it may be possible that the December project has a shorter life than the January project, and therefore may generate a higher NPV per year. This could make it more attractive, even if the total NPV is lower.

Question 19

A machine costs $1,000,has a three-year life,and has an estimated salvage value of $100.It will generate after-tax annual cash flows (ACF)of $600 a year,starting next year.If your required rate of return for the project is 10%,what is the NPV of this investment? (Round your answer to the nearest $10. )
A)$490
B)$570
C)$900
D)-$150

Accepted Answer

First, we need to find the present value (PV) of the ACF. Using a financial calculator, the PV of $600 per year for three years at a discount rate of 10% is $1,543. Then, we need to subtract the initial cost of the machine ($1,000) and add the salvage value ($100) to get the total present value of cash flows.

NPV = PV of ACF - initial cost + salvage value
NPV = $1,543 - $1,000 + $100
NPV = $643

Since the NPV is positive, this investment would be a good choice, and the closest answer choice is B ($570).

Question 20

Project Full Moon has an initial outlay of $30,000,followed by positive cash flows of $10,000 in year 1,$15,000 in year 2,and $15,000 in year 3.The project should be accepted if the required rate of return is: A)greater than 0. B)^{less than 14.6%}. C)^{less than 16.25%}. D)^greater^{than 12%.}

Accepted Answer

The answer of Project Full Moon has an initial outlay...

Quiz 11: Investment Decision Criteria

WSU Inc.has various options for replacing a piece of manufacturing equipment.The present value of costs for option Ell is $84,000.Option Ell has a useful life of 5 years;annual operating costs were discounted at 9%.What is the equivalent annual cost?

A machine has a cost of $5,575,000.It will produce cash inflows of $1,825,000 (Year 1) ;$1,775,000 (Year 2) ;$1,630,000 (Year 3) ;$1,585,000 (Year 4) ;and $1,650,000 (Year 5) .At a discount rate of 16.25%,the project should be:

The equivalent annual cost method is most appropriate in which of the following situations? In each case,assume that several mutually exclusive options are available.

Which of the following is the correct equation to solve for the net present value of a project.

Project Eh! requires an initial investment of $50,000,and has a net present value of $12,000.Project B requires an initial investment of $100,000,and has a net present value of $13,000.The projects are proposals for increasing revenue and are not mutually exclusive.The firm should accept:

Artie's Soccer Ball Company is considering a project with the following cash flows: Initial outlay = $750,000 Incremental after-tax cash flows from operations Years 1-4 = $250,000 per year Compute the NPV of this project if the company's discount rate is 12%.

Which of the following is the correct equation to solve for the NPV of the project that has an initial outlay of $30,000,followed by three years of $20,000 in incremental cash inflow? Assume a discount rate of 10%.

Project EH! requires an initial investment of $50,000,and has a net present value of $12,000.Project BE requires an initial investment of $100,000,and has a net present value of $13,000.The projects are mutually exclusive.The firm should accept:

Warchester Inc.is considering the purchase of copying equipment that will require an initial investment of $15,000 and $4,000 per year in annual operating costs over the equipment's estimated useful life of 5 years.The company will use a discount rate of 8.5%.What is the equivalent annual cost?

Use the following to answer the following question(s) . The information below describes a project with an initial cash outlay of $10,000 and a required return of 12%. -Which of the following statements is correct?

Suppose you determine that the NPV of a project is $1,525,855.What does that mean?

The present value of the total costs over a five year period for Project April is $50,000.The net present value of total costs over a 4 year period for Project October is $40,000.The company uses a discount rate of 9%.Which project should it choose and why?

A machine has a cost of $5,375,000.It will produce cash inflows of $1,825,000 (Year 1) ;$1,775,000 (Year 2) ;$1,630,000 (Year 3) ;$1,585,000 (Year 4) ;and $1,650,000 (Year 5) .At a discount rate of 16.25%,what is the NPV?

Project January has a NPV of $50,000,project December has a NPV of $40,000.Which of the following circumstances could make it possible to choose December over January?

Project Full Moon has an initial outlay of $30,000,followed by positive cash flows of $10,000 in year 1,$15,000 in year 2,and $15,000 in year 3.The project should be accepted if the required rate of return is: