finance data bank

96. You are considering the following two mutually exclusive projects. Both projects will be depreciated using straight-line depreciation to a zero book value over the life of the project. Neither project has any salvage value.




Should you accept or reject these projects based on the profitability index?
A. accept Project A and reject Project B
B. reject Project A and accept Project B
C. accept both Projects A and B
D. reject both Projects A and B
E. You cannot make this decision based on the profitability index.

97. You are considering the following two mutually exclusive projects. Both projects will be depreciated using straight-line depreciation to a zero book value over the life of the project. Neither project has any salvage value.




Should you accept or reject these projects based on the average accounting return?
A. accept Project A and reject Project B
B. reject Project A and accept Project B
C. accept both Projects A and B
D. reject both Projects A and B
E. You cannot make this decision based on the information provided.

98. Motor City Productions sells original automotive art on a prepaid basis as each piece is uniquely designed to the customer's specifications. For one project, the cash flows are estimated as follows. Based on the internal rate of return (IRR), should this project be accepted if the required return is 9 percent?



A. Accept the project.
B. Reject the project.
C. The IRR cannot be used to evaluate this type of project.
D. The firm should be indifferent to either accepting or rejecting this project.
E. Insufficient information is provided to make a decision based on IRR.

99. Rosa's Designer Gowns creates exquisite gowns for special occasions on a prepaid basis only. The required return is 8 percent. Rosa has estimated the cash flows for one gown as follows. Should Rosa sell this gown at the price she is currently considering based on the estimated internal rate of return (IRR)?



A. Rosa should sell the gown for $155,000.
B. Rose can sell the gown for as little as $153,819 and still earn her required return.
C. The gown must be sold for a minimum price of $175,926 if Rosa is to earn her required return.
D. The IRR decision rule cannot be applied to this project.
E. Insufficient information is provided to make a decision based on IRR.

Essay Questions

100. The profitability index (PI) of a project is 1.0. What do you know about the project's net present value (NPV) and its internal rate of return (IRR)?

101. Explain how the internal rate of return (IRR) decision rule is applied to projects with financing type cash flows.

102. Explain the differences and similarities between net present value (NPV) and the profitability index.

103. How does the net present value (NPV) decision rule relate to the primary goal of financial management, which is creating wealth for shareholders?

Multiple Choice Questions

104. An investment project provides cash flows of $1,190 per year for 10 years. If the initial cost is $8,000, what is the payback period?
A. 3.36 years
B. 5.28 years
C. 6.72 years
D. 8.13 years
E. never

105. An investment project costs $21,500 and has annual cash flows of $4,200 for 6 years. If the discount rate is 20 percent, what is the discounted payback period?
A. 4.41 years
B. 4.67 years
C. 5.12 years
D. 5.40 years
E. never

106. You're trying to determine whether to expand your business by building a new manufacturing plant. The plant has an installation cost of $12 million, which will be depreciated straight-line to zero over its 4-year life. The plant has projected net income of $1,095,000, $902,000, $1,412,000, and $1,724,000 over these 4 years. What is the average accounting return?
A. 10.70 percent
B. 15.63 percent
C. 18.87 percent
D. 21.39 percent
E. 23.05 percent

107. A firm evaluates all of its projects by applying the IRR rule. The required return for the following project is 21 percent. The IRR is _____ percent and the firm should ______ the project.



A. 23.67 percent; reject
B. 24.26 percent; accept
C. 24.26 percent; reject
D. 26.30 percent; accept
E. 26.30 percent; reject

108. A firm evaluates all of its projects by using the NPV decision rule. At a required return of 14 percent, the NPV for the following project is _____ and the firm should _____ the project.



A. $5,684.22; reject
B. $7,264.95; accept
C. $7,264.95; reject
D. $9,616.93; accept
E. $9,616.93; reject

109. A project that provides annual cash flows of $12,600 for 12 years costs $67,150 today. At what rate would you be indifferent between accepting the project and rejecting it?
A. 15.28 percent
B. 15.40 percent
C. 15.51 percent
D. 15.62 percent
E. 15.74 percent

110. Hungry Hoagie's has identified the following two mutually exclusive projects:




At what rate would you be indifferent between these two projects?
A. 17.34 percent
B. 17.72 percent
C. 19.41 percent
D. 19.69 percent
E. 20.28 percent

111. Consider the following two mutually exclusive projects:




What is the crossover rate for these two projects?
A. 6.29 percent
B. 6.48 percent
C. 6.71 percent
D. 6.75 percent
E. 6.94 percent

112. The relevant discount rate for the following set of cash flows is 14 percent. What is the profitability index?



A. 0.89
B. 0.93
C. 0.99
D. 1.03
E. 1.07

113. Consider the following two mutually exclusive projects:




The required return is 15 percent for both projects. Which one of the following statements related to these projects is correct?
A. Because both the IRR and the PI imply accepting Project B, that project should be accepted.
B. The profitability rule implies accepting Project A.
C. The IRR decision rule should be used as the basis for selecting the project in this situation.
D. Only NPV implies accepting Project A.
E. NPV, IRR, and PI all imply accepting Project A.

114. An investment project has an installed cost of $518,297. The cash flows over the 4-year life of the investment are projected to be $287,636, $203,496, $103,802, and $92,556, respectively. What is the NPV of this project if the discount rate is zero percent?
A. $47,306
B. $72,418
C. $91,110
D. $128,415
E. $169,193

115. The Taxi Co. is evaluating a project with the following cash flows:




The company uses a 10 percent interest rate on all of its projects. What is the MIRR using the discounted approach?
A. 13.25 percent
B. 14.08 percent
C. 16.40 percent
D. 17.17 percent
E. 19.23 percent

116. The Chandler Group wants to set up a private cemetery business. According to the CFO, Barry M. Deep, business is "looking up". As a result, the cemetery project will provide a net cash inflow of $57,000 for the firm during the first year, and the cash flows are projected to grow at a rate of 7 percent per year forever. The project requires an initial investment of $759,000. The firm requires a 14 percent return on such undertakings. The company is somewhat unsure about the assumption of a 7 percent growth rate in its cash flows. At what constant rate of growth would the company just break even?
A. 4.48 percent
B. 5.29 percent
C. 5.61 percent
D. 6.49 percent
E. 6.75 percent

21. Gerold invested $6,200 in an account that pays 5 percent simple interest. How much money will he have at the end of ten years?
A. $8,710
B. $9,000
C. $9,300
D. $9,678
E. $10,099

22. Alex invested $10,500 in an account that pays 6 percent simple interest. How much money will he have at the end of four years?
A. $12,650
B. $12,967
C. $13,020
D. $13,256
E. $13,500

23. You invested $1,650 in an account that pays 5 percent simple interest. How much more could you have earned over a 20-year period if the interest had compounded annually?
A. $849.22
B. $930.11
C. $982.19
D. $1,021.15
E. $1,077.94

Simple interest = $1,650 + ($1,650´ .05´ 20) = $3,300
Annual compounding = $1,650´ (1.05)20 = $4,377.94
Difference = $4,377.94 - $3,300 = $1,077.94