Question 1

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 equivalent annual cost (EAC) is calculated by converting the initial investment and operating costs into an annualized cost using the discount rate. The formula for EAC is: EAC = (Initial Investment / Annuity Factor) + Annual Operating Costs. The annuity factor for 5 years at 8.5% is approximately 3.993. Therefore, EAC = ($15,000 / 3.993) + $4,000 = $7,806.49.

Question 2

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 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 chosen.

Accepted Answer

In order to compare the two projects, we need to calculate their present values (PVs) using the given discount rate of 10%. Project H has equal cash flows of $45,000 for 3 years, so we can calculate its PV as follows:

PV(H) = $45,000 / (1 + 0.1)^1 + $45,000 / (1 + 0.1)^2 + $45,000 / (1 + 0.1)^3 + $100,000
PV(H) = $110,871.62

Project T has different cash flows for each year, so we need to calculate the PV of each individual cash flow and add them up. We can do this using the same discount rate of 10%:

PV(T, year 1) = $30,000 / (1 + 0.1)^1 = $27,272.73
PV(T, year 2) = $40,000 / (1 + 0.1)^2 = $33,057.85
PV(T, year 3) = $70,000 / (1 + 0.1)^3 = $53,492.04

PV(T) = $27,272.73 + $33,057.85 + $53,492.04 + $100,000
PV(T) = $213,822.62

Since PV(T) is higher than PV(H), we should choose Project T. Therefore, the best choice is B, Project T should be chosen.

Question 3

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 You have been asked to analyze a...

Question 4

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, which means they will bring in more revenue than they cost. Since the projects are not mutually exclusive, the firm can choose to invest in both and maximize their revenue increase.

Question 5

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

Project BE has a higher net present value than project EH! despite requiring a larger initial investment. Therefore, it would be more profitable for the firm to choose project BE over EH!. Since the projects are mutually exclusive, the firm cannot choose both. Therefore, the best choice would be to accept project BE.

Question 6

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 7

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 for NPV calculation is to discount the incremental cash inflows and subtract the initial investment. The discount rate is 10%, which means we need to divide the cash inflow by (1.10)^n, where n is the year of the cash inflow. Therefore, the equation is NPV = -$30,000 + $20,000/(1.10)^1 + $20,000/(1.10)^2 + $20,000/(1.10)^3, which is equivalent to choice B.

Question 8

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 answer of Which of the following is a correct...

Question 9

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

The NPV of $1,525,855 implies that the project would add value to the firm. A positive NPV indicates that the project's expected cash inflows are greater than its initial cost of investment, which increases the firm's overall value. Other investment criteria such as payback period, profitability index, or internal rate of return might also be considered to make a more comprehensive evaluation of the project's potential.

Question 10

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 11

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

To determine the best choice, we use the Net Present Value (NPV) method. 
For Project H: 
NPV = -$100,000 + $45,000/(1+0.1) + $45,000/(1+0.1)^2 + $45,000/(1+0.1)^3 = $48,922.10 
For Project T: 
NPV = -$100,000 + $30,000/(1+0.1) + $40,000/(1+0.1)^2 + $70,000/(1+0.1)^3 = $45,596.50 
Since both projects have positive NPVs, it means that they are profitable. But if we want to choose only one project, we should select the one with the highest NPV, which is Project H ($48,922.10). However, since the projects are not mutually exclusive, it is better to accept both projects to maximize profit. Thus, the best choice is to accept both projects (D).

Question 12

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

To calculate the NPV, we need to discount the annual cash flows back to present value and subtract the initial cost of the machine. Using a financial calculator or Excel, we can find that the present value of the annual cash flows is $1598.47.

NPV = PV of cash flows - initial cost
NPV = $1598.47 - $1000
NPV = $598.47

Since the NPV is positive, this investment is expected to generate more than the required rate of return of 10%. Therefore, we should accept the investment. The closest rounded answer is $570, which corresponds to choice B.

Question 13

Which of the following is a correct EXCEL formula to solve for the net present value of a project. A)=NPV (k,CF_1, CF_2,^...CFn)+CF₀ B)=NPV (k,CF_0,CF_1, CF_2,^...CFn) C)=NPV (CF_0,CF_1, CF_2,^...CFn) D)=NPV (CF_1, CF_2,^...CFn)+CF₀

Accepted Answer

The correct formula for calculating the net present value (NPV) of a project in Excel is:=NPV(k,CF1,CF2,...CFn)+CF0where:k is the discount rateCF0 is the initial investment or cash outflowCF1, CF2, ... CFn are the cash inflows in each period

Question 14

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 net present value (NPV).
B)April because is has a higher equivalent annual cost (EAC).
C)October because it has a shorter life.
D)October because it has a lower equivalent annual cost (EAC).

Accepted Answer

The equivalent annual cost (EAC) is a measure that allows comparison of projects with different lifespans. Project October has a lower net present value of costs over a shorter period, which results in a lower EAC, making it the more cost-effective choice.

Question 15

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 whether the project is a worthwhile investment, we need to calculate the present value of the expected cash inflows and compare them to the initial cost of the machine. Using a discount rate of 16.25%, we can calculate the present value of each cash inflow as follows:

PV1 = $1,825,000 / (1 + 0.1625)^1 = $1,567,010
PV2 = $1,775,000 / (1 + 0.1625)^2 = $1,346,836
PV3 = $1,630,000 / (1 + 0.1625)^3 = $1,220,253
PV4 = $1,585,000 / (1 + 0.1625)^4 = $1,126,175
PV5 = $1,650,000 / (1 + 0.1625)^5 = $1,146,813

Next, we can add up the present values of the cash inflows to get the total present value:

Total PV = PV1 + PV2 + PV3 + PV4 + PV5 = $6,407,087

Since the total present value of the expected cash inflows ($6,407,087) is less than the cost of the machine ($5,575,000), the project should be rejected. Therefore, the best choice is B (rejected).

Question 16

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 17

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...

Question 18

Project H requires an initial investment of $100,000 and the produces annual cash flows of $50,000,$40,000,and $30,000.Project T requires an initial investment of $100,000 and the produces annual cash flows of $30,000,$40,000,and $50,000.If the required rate of return is greater than 0% and the projects are mutually exclusive
A)H will always be preferable to T.
B)T will always be preferable to H.
C)H and T are equally attractive.
D)The project rankings will change with different discount rates.

Accepted Answer

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

Question 19

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

Even though Project January has a higher NPV, the fact that the projects have unequal lives could make it possible to choose Project December over January. For example, if Project December has a shorter life than Project January, it could generate a higher return on investment in a shorter amount of time, making it a better choice for the company. Therefore, the unequal lives of the projects could be a deciding factor in choosing December over January, even though its NPV is lower.

Question 20

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 Which of the following statements is correct?
A)The...

Quiz 11: Investment Decision Criteria

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?

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

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 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?

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%.

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%.

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

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

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 $5,575,000.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

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%.

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

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?

Which of the following statements is correct?