Net Present Value And Other Investment Ch8 Exam Questions

Chapter 08

Net Present Value and Other Investment Criteria

Test Bank - Static Key

1. The net present value of an investment represents the difference between the investment's:

A. cash inflows and outflows.

B. cost and its net profit.

C. cost and its market value.

D. cash flows and its profits.

E. assets and liabilities.

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Learning Objective: 08-04 Evaluate proposed investments by using the net present value criterion.

Section: 8.1 Net Present Value

Topic: Net present value

2. Net present value involves discounting an investment's:

A. assets.

B. future profits.

C. liabilities.

D. costs.

E. future cash flows.

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Learning Objective: 08-04 Evaluate proposed investments by using the net present value criterion.

Section: 8.1 Net Present Value

Topic: Net present value

3. The payback period is the length of time it takes an investment to generate sufficient cash flows to enable the project to:

A. produce a positive annual cash flow.

B. produce a positive cash flow from assets.

C. offset its fixed expenses.

D. offset its total expenses.

E. recoup its initial cost.

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Learning Objective: 08-01 Summarize the payback rule and some of its shortcomings.

Section: 8.2 The Payback Rule

Topic: Payback

4. The average net income of a project divided by the project's average book value is referred to as the project's:

A. required return.

B. market rate of return.

C. internal rate of return.

D. average accounting return.

E. discounted rate of return.

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Learning Objective: 08-02 Discuss accounting rates of return and some of the problems with them.

Section: 8.3 The Average Accounting Return

Topic: Average accounting return

5. The internal rate of return is the:

A. discount rate that causes a project’s aftertax income to equal zero.

B. discount rate that results in a zero net present value for the project.

C. discount rate that results in a net present value equal to the project's initial cost.

D. rate of return required by the project's investors.

E. project's current market rate of return.

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Learning Objective: 08-03 Explain the internal rate of return criterion and its associated strengths and weaknesses.

Section: 8.4 The Internal Rate of Return

Topic: Internal rate of return

6. The net present value profile illustrates how the net present value of an investment is affected by which one of the following?

A. Project's initial cost

B. Discount rate

C. Timing of the project's cash inflows

D. Inflation rate

E. Real rate of return

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Learning Objective: 08-03 Explain the internal rate of return criterion and its associated strengths and weaknesses.

Section: 8.4 The Internal Rate of Return

Topic: Internal rate of return

7. The possibility that more than one discount rate can cause the net present value of an investment to equal zero is referred to as:

A. duplication.

B. the net present value profile.

C. multiple rates of return.

D. the AAR problem.

E. the dual dilemma.

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Learning Objective: 08-05 Apply the modified internal rate of return.

Section: 8.4 The Internal Rate of Return

Topic: Modified internal rate of return

8. Both Projects A and B are acceptable as independent projects. However, the selection of either one of these projects eliminates the option of selecting the other project. Which one of the following terms best describes the relationship between Project A and Project B?

A. Mutually exclusive

B. Conventional

C. Multiple choice

D. Dual return

E. Crosswise

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Learning Objective: 08-03 Explain the internal rate of return criterion and its associated strengths and weaknesses.

Section: 8.4 The Internal Rate of Return

Topic: Mutually exclusive projects

9. Which one of the following can be defined as a benefit-cost ratio?

A. Net present value

B. Internal rate of return

C. Profitability index

D. Accounting rate of return

E. Modified internal rate of return

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Learning Objective: 08-06 Calculate the profitability index and understand its relation to net present value.

Section: 8.5 The Profitability Index

Topic: Profitability index

10. Which one of the following indicates that a project is expected to create value for its owners?

A. Profitability index less than 1.0

B. Payback period greater than the requirement

C. Positive net present value

D. Positive average accounting rate of return

E. Internal rate of return that is less than the requirement

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Learning Objective: 08-04 Evaluate proposed investments by using the net present value criterion.

Section: 8.1 Net Present Value

Topic: Net present value

11. The net present value:

A. decreases as the required rate of return increases.

B. is equal to the initial investment when the internal rate of return is equal to the required return.

C. method of analysis cannot be applied to mutually exclusive projects.

D. ignores cash flows that are distant in the future.

E. is unaffected by the timing of an investment's cash flows.

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Learning Objective: 08-04 Evaluate proposed investments by using the net present value criterion.

Section: 8.1 Net Present Value

Topic: Net present value

12. Which one of the following is generally considered to be the best form of analysis if you have to select a single method to analyze a variety of investment opportunities?

A. Payback

B. Profitability index

C. Accounting rate of return

D. Internal rate of return

E. Net present value

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Learning Objective: 08-04 Evaluate proposed investments by using the net present value criterion.

Section: 8.1 Net Present Value

Topic: Net present value

13. Which one of the following statements is correct?

A. The net present value is a measure of profits expressed in today's dollars.

B. The net present value is positive when the required return exceeds the internal rate of return.

C. If the initial cost of a project is increased, the net present value of that project will also increase.

D. If the internal rate of return equals the required return, the net present value will equal zero.

E. Net present value is equal to an investment's cash inflows discounted to today's dollars.

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Learning Objective: 08-04 Evaluate proposed investments by using the net present value criterion.

Section: 8.1 Net Present Value

Topic: Net present value

14. If an investment is producing a return that is equal to the required return, the investment's net present value will be:

A. positive.

B. greater than the project's initial investment.

C. zero.

D. equal to the project's net profit.

E. less than, or equal to, zero.

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Learning Objective: 08-03 Explain the internal rate of return criterion and its associated strengths and weaknesses.

Section: 8.4 The Internal Rate of Return

Topic: Internal rate of return

15. Which one of the following indicates that a project should be rejected? Assume the cash flows are normal, i.e., the initial cash flow is negative.

A. Average accounting return that exceeds the requirement

B. Payback period that is shorter than the requirement period

C. Positive net present value

D. Profitability index less than 1.0

E. Internal rate of return that exceeds the required return

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Learning Objective: 08-06 Calculate the profitability index and understand its relation to net present value.

Section: 8.5 The Profitability Index

Topic: Profitability index

16. Which one of the following indicators offers the best assurance that a project will produce value for its owners?

A. PI equal to zero

B. Negative rate of return

C. Positive AAR

D. Positive IRR

E. Positive NPV

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Learning Objective: 08-04 Evaluate proposed investments by using the net present value criterion.

Section: 8.1 Net Present Value

Topic: Net present value

17. Which one of the following statements is correct?

A. A longer payback period is preferred over a shorter payback period.

B. The payback rule states that you should accept a project if the payback period is less than one year.

C. The payback period ignores the time value of money.

D. The payback rule is biased in favor of long-term projects.

E. The payback period considers the timing and amount of all of a project's cash flows.

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Learning Objective: 08-01 Summarize the payback rule and some of its shortcomings.

Section: 8.2 The Payback Rule

Topic: Payback

18. Generally speaking, payback is best used to evaluate which type of projects?

A. Low-cost, short-term

B. High-cost, short-term

C. Low-cost, long-term

D. High-cost, long-term

E. Any size of long-term project

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Learning Objective: 08-01 Summarize the payback rule and some of its shortcomings.

Section: 8.2 The Payback Rule

Topic: Payback

19. Which one of the following is the primary advantage of payback analysis?

A. Incorporation of the time value of money concept

B. Ease of use

C. Research and development bias

D. Arbitrary cutoff point

E. Long-term bias

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Learning Objective: 08-01 Summarize the payback rule and some of its shortcomings.

Section: 8.2 The Payback Rule

Topic: Payback

20. The payback method of analysis ignores which one of the following?

A. Initial cost of an investment

B. Arbitrary cutoff point

C. Cash flow direction

D. Time value of money

E. Timing of each cash inflow

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Learning Objective: 08-01 Summarize the payback rule and some of its shortcomings.

Section: 8.2 The Payback Rule

Topic: Payback

21. Which one of the following methods of analysis ignores the time value of money?

A. Net present value

B. Internal rate of return

C. Discounted cash flow analysis

D. Payback

E. Profitability index

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Learning Objective: 08-01 Summarize the payback rule and some of its shortcomings.

Section: 8.2 The Payback Rule

Topic: Payback

22. Which one of the following methods of analysis has the greatest bias toward short-term projects?

A. Net present value

B. Internal rate of return

C. Average accounting return

D. Profitability index

E. Payback

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Learning Objective: 08-01 Summarize the payback rule and some of its shortcomings.

Section: 8.2 The Payback Rule

Topic: Payback

23. Which one of the following methods of analysis ignores cash flows?

A. Profitability index

B. Payback

C. Average accounting return

D. Modified internal rate of return

E. Internal rate of return

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Learning Objective: 08-02 Discuss accounting rates of return and some of the problems with them.

Section: 8.3 The Average Accounting Return

Topic: Average accounting return

24. Which one of the following methods of analysis is most similar to computing the return on assets (ROA)?

A. Internal rate of return

B. Profitability index

C. Average accounting return

D. Net present value

E. Payback

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Learning Objective: 08-02 Discuss accounting rates of return and some of the problems with them.

Section: 8.3 The Average Accounting Return

Topic: Average accounting return

25. The average accounting return:

A. measures profitability rather than cash flow.

B. discounts all values to today's dollars.

C. is expressed as a percentage of an investment's current market value.

D. will equal the required return when the net present value equals zero.

E. is used more often by CFOs than the internal rate of return.

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Learning Objective: 08-02 Discuss accounting rates of return and some of the problems with them.

Section: 8.3 The Average Accounting Return

Topic: Average accounting return

26. Which one of the following analytical methods is based on net income?

A. Profitability index

B. Internal rate of return

C. Average accounting return

D. Modified internal rate of return

E. Payback

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Learning Objective: 08-02 Discuss accounting rates of return and some of the problems with them.

Section: 8.3 The Average Accounting Return

Topic: Average accounting return

27. Which one of the following is most closely related to the net present value profile?

A. Internal rate of return

B. Average accounting return

C. Profitability index

D. Payback

E. Discounted payback

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Learning Objective: 08-03 Explain the internal rate of return criterion and its associated strengths and weaknesses.

Section: 8.4 The Internal Rate of Return

Topic: Internal rate of return

28. The internal rate of return is unreliable as an indicator of whether or not an investment should be accepted given which one of the following?

A. One of the time periods within the investment period has a cash flow equal to zero.

B. The initial cash flow is negative.

C. The investment has cash inflows that occur after the required payback period.

D. The investment is mutually exclusive with another investment of a different size.

E. The cash flows are conventional.

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Learning Objective: 08-03 Explain the internal rate of return criterion and its associated strengths and weaknesses.

Section: 8.4 The Internal Rate of Return

Topic: Internal rate of return

29. Which one of the following statements is correct? Assume cash flows are conventional.

A. If the IRR exceeds the required return, the profitability index will be less than 1.0.

B. The profitability index will be greater than 1.0 when the net present value is negative.

C. When the internal rate of return is greater than the required return, the net present value is positive.

D. Projects with conventional cash flows have multiple internal rates of return.

E. If two projects are mutually exclusive, you should select the project with the shortest payback period.

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Learning Objective: 08-03 Explain the internal rate of return criterion and its associated strengths and weaknesses.

Section: 8.4 The Internal Rate of Return

Topic: Internal rate of return

30. Which one of the following is an indicator that an investment is acceptable? Assume cash flows are conventional.

A. Modified internal rate of return that is equal to zero

B. Profitability index of zero

C. Internal rate of return that exceeds the required return

D. Payback period that exceeds the required period

E. Negative average accounting return

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Learning Objective: 08-03 Explain the internal rate of return criterion and its associated strengths and weaknesses.

Section: 8.4 The Internal Rate of Return

Topic: Internal rate of return

31. The modified internal rate of return is specifically designed to address the problems associated with:

A. mutually exclusive projects.

B. unconventional cash flows.

C. long-term projects.

D. negative net present values.

E. crossover points.

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Learning Objective: 08-05 Apply the modified internal rate of return.

Section: 8.4 The Internal Rate of Return

Topic: Modified internal rate of return

32. The reinvestment approach to the modified internal rate of return:

A. individually discounts each separate cash flow back to the present.

B. reinvests all the cash flows, including the initial cash flow, to the end of the project.

C. discounts all negative cash flows to the present and compounds all positive cash flows to the end of the project.

D. discounts all negative cash flows back to the present and combines them with the initial cost.

E. compounds all of the cash flows, except for the initial cash flow, to the end of the project.

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Learning Objective: 08-05 Apply the modified internal rate of return.

Section: 8.4 The Internal Rate of Return

Topic: Modified internal rate of return

33. Which one of the following is specifically designed to compute the rate of return on a project that has a multiple negative cash flows that are interrupted by one or more positive cash flows?

A. Average accounting return

B. Profitability index

C. Internal rate of return

D. Indexed rate of return

E. Modified internal rate of return

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Learning Objective: 08-05 Apply the modified internal rate of return.

Section: 8.4 The Internal Rate of Return

Topic: Modified internal rate of return

34. Which one of the following methods of analysis is most appropriate to use when two investments are mutually exclusive?

A. Internal rate of return

B. Profitability index

C. Net present value

D. Modified internal rate of return

E. Average accounting return

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Learning Objective: 08-04 Evaluate proposed investments by using the net present value criterion.

Section: 8.4 The Internal Rate of Return

Topic: Mutually exclusive projects

35. You are using a net present value profile to compare Projects A and B, which are mutually exclusive. Which one of the following statements correctly applies to the crossover point between these two?

A. The internal rate of return for Project A equals that of Project B, but generally does not equal zero.

B. The internal rate of return of each project is equal to zero.

C. The net present value of each project is equal to zero.

D. The net present value of Project A equals that of Project B, but generally does not equal zero.

E. The net present value of each project is equal to the respective project's initial cost.

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Learning Objective: 08-03 Explain the internal rate of return criterion and its associated strengths and weaknesses.

Section: 8.4 The Internal Rate of Return

Topic: Internal rate of return

36. Which one of the following will occur when the internal rate of return equals the required return?

A. The average accounting return will equal 1.0.

B. The profitability index will equal 1.0.

C. The profitability index will equal 0.

D. The net present value will equal the initial cash outflow.

E. The profitability index will equal the average accounting return.

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Learning Objective: 08-06 Calculate the profitability index and understand its relation to net present value.

Section: 8.5 The Profitability Index

Topic: Profitability index

37. An investment has conventional cash flows and a profitability index of 1.0. Given this, which one of the following must be true?

A. The internal rate of return exceeds the required rate of return.

B. The investment never pays back.

C. The net present value is equal to zero.

D. The average accounting return is 1.0.

E. The net present value is greater than 1.0.

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Learning Objective: 08-06 Calculate the profitability index and understand its relation to net present value.

Section: 8.5 The Profitability Index

Topic: Profitability index

38. Which one of the following is true if the managers of a firm accept only projects that have a profitability index greater than 1.5?

A. The firm should increase in value each time it accepts a new project.

B. The firm is most likely steadily losing value.

C. The price of the firm's stock should remain constant.

D. The net present value of each new project is zero.

E. The internal rate of return on each new project is zero.

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Learning Objective: 08-06 Calculate the profitability index and understand its relation to net present value.

Section: 8.5 The Profitability Index

Topic: Profitability index

39. If a project with conventional cash flows has a profitability index of 1.0, the project will:

A. never pay back.

B. have a negative net present value.

C. have a negative internal rate of return.

D. produce more cash inflows than outflows in today's dollars.

E. have an internal rate of return that equals the required return.

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Learning Objective: 08-06 Calculate the profitability index and understand its relation to net present value.

Section: 8.5 The Profitability Index

Topic: Profitability index

40. The profitability index reflects the value created per dollar:

A. invested.

B. of sales.

C. of net income.

D. of taxable income.

E. of shareholders' equity.

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Learning Objective: 08-06 Calculate the profitability index and understand its relation to net present value.

Section: 8.5 The Profitability Index

Topic: Profitability index

41. Based on the most recent survey information presented in your textbook, CFOs tend to use which two methods of investment analysis the most frequently?

A. Payback and net present value

B. Payback and internal rate of return

C. Internal rate of return and net present value

D. Net present value and profitability index

E. Profitability index and internal rate of return

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Learning Objective: 08-04 Evaluate proposed investments by using the net present value criterion.

Section: 8.6 The Practice of Capital Budgeting

Topic: Capital budgeting

42. Mary has just been asked to analyze an investment to determine if it is acceptable. Unfortunately, she is not being given sufficient time to analyze the project using various methods. She must select one method of analysis and provide an answer based solely on that method. Which method do you suggest she use in this situation?

A. Internal rate of return

B. Payback

C. Average accounting rate of return

D. Net present value

E. Profitability index

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Learning Objective: 08-04 Evaluate proposed investments by using the net present value criterion.

Section: 8.1 Net Present Value

Topic: Net present value

43. You were recently hired by a firm as a project analyst. The owner of the firm is unfamiliar with financial analysis and wants to know only what the expected dollar return is per dollar spent on a given project. Which financial method of analysis will provide the information that the owner requests?

A. Internal rate of return

B. Modified internal rate of return

C. Net present value

D. Profitability index

E. Payback

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Learning Objective: 08-06 Calculate the profitability index and understand its relation to net present value.

Section: 8.5 The Profitability Index

Topic: Profitability index

44. In which one of the following situations would the payback method be the preferred method of analysis?

A. A long-term capital-intensive project

B. Two mutually exclusive projects

C. A proposed expansion of a firm's current operations

D. Different-sized projects

E. Investment funds available only for a limited period of time

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Learning Objective: 08-01 Summarize the payback rule and some of its shortcomings.

Section: 8.2 The Payback Rule

Topic: Payback

45. Which one of the following statements is correct?

A. The internal rate of return is the most reliable method of analysis for any type of investment decision.

B. The payback method is biased toward short-term projects.

C. The modified internal rate of return is most useful when projects are mutually exclusive.

D. The average accounting return is the most difficult method of analysis to compute.

E. The net present value method is applicable only if a project has conventional cash flows.

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Learning Objective: 08-01 Summarize the payback rule and some of its shortcomings.

Section: 8.2 The Payback Rule

Topic: Payback

46. Which one of the following indicates that an independent project is definitely acceptable?

A. Profitability index greater than 1.0

B. Negative net present value

C. Modified internal rate return that is lower than the requirement

D. Zero internal rate of return

E. Positive average accounting return

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Learning Objective: 08-06 Calculate the profitability index and understand its relation to net present value.

Section: 8.5 The Profitability Index

Topic: Profitability index

47. What is the net present value of a project with the following cash flows if the discount rate is 12 percent?

A. $ 4,881.10

B. $11,900.00

C. $ 4,358.13

D. $11,035.24

E. $ 8,129.06

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Learning Objective: 08-04 Evaluate proposed investments by using the net present value criterion.

Section: 8.1 Net Present Value

Topic: Net present value

48. What is the net present value of a project with the following cash flows if the discount rate is 9 percent?

A. $ 7,126.22

B. $ 8,297.15

C. $ 20,700.00

D. -$ 7,126.22

E. -$ 6,456.23

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Learning Objective: 08-04 Evaluate proposed investments by using the net present value criterion.

Section: 8.1 Net Present Value

Topic: Net present value

49. What is the net present value of a project that has an initial cost of $40,000 and produces cash inflows of $ 8,500 a year for 10 years if the discount rate is 13 percent?

A. $ 4,678.09

B. $ 6,500.00

C. $ 6,123.07

D. $ 7,189.34

E. $ 6,712.03

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Learning Objective: 08-04 Evaluate proposed investments by using the net present value criterion.

Section: 8.1 Net Present Value

Topic: Net present value

50. Daniel’s Market is considering a project with an initial cost of $176,500. The project will not produce any cash flows for the first three years. Starting in Year 4, the project will produce cash inflows of $127,500 a year for three years. This project is risky, so the firm has assigned it a discount rate of 17 percent. What is the project's net present value?

A. $105,222

B. -$6,500

C. $ 29,301.80

D. $ 621.30

E. -$601.03

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Learning Objective: 08-04 Evaluate proposed investments by using the net present value criterion.

Section: 8.1 Net Present Value

Topic: Net present value

51. Empire Industries is considering adding a new product to its lineup. This product is expected to generate sales for four years after which time the product will be discontinued. What is the project's net present value at a required rate of return of 14.8 percent?

A. $1,505.52

B. $1,067.24

C. $1,758.71

D. $1,519.58

E. $902.71

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Learning Objective: 08-04 Evaluate proposed investments by using the net present value criterion.

Section: 8.1 Net Present Value

Topic: Net present value

52. What is the net present value of the following set of cash flows at a discount rate of 6 percent? At 12 percent?

A. $17,586; $10,332.46

B. $16,235.26; $7,693.47

C. -$1,190.80; -$6,287.92

D. $15,316.29; $6,869.17

E. $17,220.90; $8,673.98

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Learning Objective: 08-04 Evaluate proposed investments by using the net present value criterion.

Section: 8.1 Net Present Value

Topic: Net present value

53. Trident Office is considering remodeling the office building it leases to Robert Roberts, CPA. The remodeling costs are estimated at $ $225,000. If the building is remodeled, Robert Roberts, CPA has agreed to pay an additional $75,000 per year in rent for the next five years. The discount rate is 10 percent. What is the benefit of the remodeling project to Professional Properties?

A. $59,309.01

B. -$69,158.56

C. $69,158.56

D. $68,399.15

E. -61,417.03

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Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 08-04 Evaluate proposed investments by using the net present value criterion.

Section: 8.1 Net Present Value

Topic: Net present value

54. A proposed project requires an initial cash outlay of $75,000 for equipment and an additional cash outlay of $25,000 in Year 1 to cover operating costs. During Years 2 through 4, the project will generate cash inflows of $50,000 a year. What is the net present value of this project at a discount rate of 12.2 percent?

A. $9,385.06

B. $9,432.42

C. $8,851.67

D. $7,441.33

E. $ $53,948.34

AACSB: Analytical Thinking

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Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 08-04 Evaluate proposed investments by using the net present value criterion.

Section: 8.1 Net Present Value

Topic: Net present value

55. John is considering a project with cash inflows of $1,100, $1,000, $1,050, and $1,200 over the next four years, respectively. The relevant discount rate is 12.5 percent. What is the net present value of this project if it the start-up cost is $3,200?

A. $54.50

B. $48.04

C. -$35.45

D. $89.33

E. $122.00

AACSB: Analytical Thinking

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Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 08-04 Evaluate proposed investments by using the net present value criterion.

Section: 8.1 Net Present Value

Topic: Net present value

56. Charles Henri is considering investing $37,800 in a project that is expected to provide him with cash inflows of $11,600 at the end of each of the first two years and $20,000 at the end of the third year. What is the project’s NPV at a discount rate of 0 percent? At 5 percent? At 10 percent?

A. $0; $1,045.91; -$2,641.47

B. $4,468.39; $38.29; -$2,784.08

C. $5,400; $1,045.91; -$2,641.47

D. $5,400; $417.92; -$3,406.10

E. $4,468.39; $38.29; -$2,641.47

AACSB: Analytical Thinking

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Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 08-04 Evaluate proposed investments by using the net present value criterion.

Section: 8.1 Net Present Value

Topic: Net present value

57. Joe and Rich are both considering investing in a project that costs $25,500 and is expected to produce cash inflows of $15,800 in Year 1 and $15,300 in Year 2. Joe has a required return of 8.5 percent but Rich demands a return of 12.5 percent. Who, if either, should accept this project?

A. Joe, but not Rich

B. Rich, but not Joe

C. Neither Joe nor Rich

D. Both Joe and Rich

E. Joe, and possibly Rich, who will be neutral on this decision as his net present value will equal zero

AACSB: Analytical Thinking

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Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 08-04 Evaluate proposed investments by using the net present value criterion.

Section: 8.1 Net Present Value

Topic: Net present value

58. You are making an investment of $110,000 and require a rate of return of14.6 percent. You expect to receive $48,000 in the first year, $52,500 in the second year, and $55,000 in the third year. There will be a cash outflow of $900 in the fourth year to close out the investment. What is the net present value of this investment?

A. $7,881.55

B. $4,305.56

C. $1,879.63

D. $633.33

E. $8,534.25

AACSB: Analytical Thinking

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Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 08-04 Evaluate proposed investments by using the net present value criterion.

Section: 8.1 Net Present Value

Topic: Net present value

59. What is the net present value of the following cash flows if the relevant discount rate is 11.4 percent?

A. $4,887.26

B. $5,006.19

C. $8,215.46

D. $13,058.39

E. $18,519.71

AACSB: Analytical Thinking

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 08-04 Evaluate proposed investments by using the net present value criterion.

Section: 8.1 Net Present Value

Topic: Net present value

60. What is the net present value of the following cash flows if the relevant discount rate is 7 percent?

A. $2,861.62

B. $2,311.92

C. $2,900.15

D. $3,248.87

E. $3,545.60

AACSB: Analytical Thinking

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 08-04 Evaluate proposed investments by using the net present value criterion.

Section: 8.1 Net Present Value

Topic: Net present value

61. What is the net present value of the following cash flows if the relevant discount rate is 5.75 percent?

A. -$1,482.15

B. -$1,232.68

C. $507.19

D. $1,211.40

E. $1,402.02

AACSB: Analytical Thinking

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 08-04 Evaluate proposed investments by using the net present value criterion.

Section: 8.1 Net Present Value

Topic: Net present value

62. A project has the following cash flows. What is the payback period?

A. 2.83 years

B. 2.38 years

C. 2.75 years

D. 2.92 years

E. 3.03 years

AACSB: Analytical Thinking

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 08-01 Summarize the payback rule and some of its shortcomings.

Section: 8.2 The Payback Rule

Topic: Payback

63. A project has the following cash flows. What is the payback period?

A. 1.72 years

B. 1.83 years

C. 2.06 years

D. 2.33years

E. 2.65 years

AACSB: Analytical Thinking

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 08-01 Summarize the payback rule and some of its shortcomings.

Section: 8.2 The Payback Rule

Topic: Payback

64. What is the payback period for a project with the following cash flows?

A. 2.56 years

B. 2.89 years

C. 3.08 years

D. 3.24 years

E. Never

AACSB: Analytical Thinking

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 08-01 Summarize the payback rule and some of its shortcomings.

Section: 8.2 The Payback Rule

Topic: Payback

65. The Golden Goose is considering a project with an initial cost of $46,700. The project will produce cash inflows of $10,000 a year for the first two years and $12,000 a year for the following three years. What is the payback period?

A. 2.87 years

B. 3.23 years

C. 3.41 years

D. 3.79 years

E. 4.23 years

AACSB: Analytical Thinking

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Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 08-01 Summarize the payback rule and some of its shortcomings.

Section: 8.2 The Payback Rule

Topic: Payback

66. Today, Sweet Snacks is investing $491,000 in a new oven. As a result, the company expects its cash flows to increase by $64,000 a year for the next two years and by $98,000 a year for the following three years. How long must the firm wait until it recovers all of its initial investment?

A. 3.97 years

B. 4.18 years

C. 4.46 years

D. 4.70 years

E. The project never pays back.

AACSB: Analytical Thinking

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Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 08-01 Summarize the payback rule and some of its shortcomings.

Section: 8.2 The Payback Rule

Topic: Payback

67. Greenbriar Cotton Mill is spending $284,000 to update its facility. The company estimates that this investment will improve its cash inflows by $50,500 a year for 8 years. What is the payback period?

A. 4.03 years

B. 4.95 years

C. 5.48 years

D. 5.62 years

E. The project never pays back.

AACSB: Analytical Thinking

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Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 08-01 Summarize the payback rule and some of its shortcomings.

Section: 8.2 The Payback Rule

Topic: Payback

68. EKG, Inc. is considering a new project that will require an initial cash investment of $419,000. The project will produce no cash flows for the first two years. The projected cash flows for Years 3 through 7 are $69,000, $98,000, $109,000, $145,000, and $165,000, respectively. How long will it take the firm to recover its initial investment in this project?

A. 3.81 years

B. 3.98 years

C. 5.57 years

D. 5.99 years

E. The project never pays back.

AACSB: Analytical Thinking

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Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 08-01 Summarize the payback rule and some of its shortcomings.

Section: 8.2 The Payback Rule

Topic: Payback

69. China Importers would like to spend $215,000 to expand its warehouse. However, the company has a loan outstanding that must be repaid in 2.5 years and thus will need the $215,000 at that time. The warehouse expansion project is expected to increase the cash inflows by $60,000 in the first year, $140,000 in the second year, and $150,000 a year for the following 2 years. Should the firm expand at this time? Why or why not?

A. Yes; because the money will be recovered in 1.69 years

B. Yes; because the money will be recovered in 1.87 years

C. Yes; because the money will be recovered in 2.10 years

D. No; because the project never pays back

E. No; because the money will not be recovered in time to repay the loan

AACSB: Analytical Thinking

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Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 08-01 Summarize the payback rule and some of its shortcomings.

Section: 8.2 The Payback Rule

Topic: Payback

70. What is the payback period for a $16,700 investment with the following cash flows?

A. 3.12 years

B. 3.89 years

C. 2.12 years

D. 3.44 years

E. 3.67 years

AACSB: Analytical Thinking

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 08-01 Summarize the payback rule and some of its shortcomings.

Section: 8.2 The Payback Rule

Topic: Payback

71. Services United is considering a new project that requires an initial cash investment of $26,000. The project will generate cash inflows of $2,500, $11,700, $13,500, and $10,000 over each of the next four years, respectively. How long will it take to recover the initial investment?

A. 2.74 years

B. 2.87 years

C. 2.99 years

D. 3.27 years

E. 3.68 years

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 08-01 Summarize the payback rule and some of its shortcomings.

Section: 8.2 The Payback Rule

Topic: Payback

72. Delta Mu Delta is considering purchasing some new equipment costing $393,000. The equipment will be depreciated on a straight-line basis to a zero book value over the four-year life of the project. Projected net income for the four years is $16,900, $25,300, $27,700, and $18,400. What is the average accounting rate of return?

A. 11.23 percent

B. 11.63 percent

C. 12.01 percent

D. 12.49 percent

E. 10.87 percent

AACSB: Analytical Thinking

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Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 08-02 Discuss accounting rates of return and some of the problems with them.

Section: 8.3 The Average Accounting Return

Topic: Average accounting return

73. Auto Detailers is buying some new equipment at a cost of $188,900. This equipment will be depreciated on a straight-line basis to a zero book value its eight-year life. The equipment is expected to generate net income of $11,000 a year for the first four years and $24,000 a year for the last four years. What is the average accounting rate of return?

A. 15.48 percent

B. 17.76 percent

C. 18.09 percent

D. 22.68 percent

E. 18.53 percent

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 08-02 Discuss accounting rates of return and some of the problems with them.

Section: 8.3 The Average Accounting Return

Topic: Average accounting return

74. Woodcrafters requires an average accounting return (AAR) of at least 17.5 percent on all fixed asset purchases. Currently, it is considering some new equipment costing $169,700. This equipment will have a four-year life over which time it will be depreciated on a straight-line basis to a zero book value. The annual net income from this equipment is estimated at $7,100, $13,300, $18,600, and $19,200 for the four years. Should this purchase occur based on the accounting rate of return? Why or why not?

A. Yes; because the AAR is less than 17.5 percent

B. Yes; because the AAR is equal to 17.5 percent

C. Yes; because the AAR is greater than 17.5 percent

D. No; because the AAR is less than 17.5 percent

E. No; because the AAR is greater than 17.5 percent

AACSB: Analytical Thinking

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Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 08-02 Discuss accounting rates of return and some of the problems with them.

Section: 8.3 The Average Accounting Return

Topic: Average accounting return

75. You are considering an equipment purchase costing $167,000. This equipment will be depreciated straight-line to zero over its three-year life. What is the average accounting return if this equipment produces the following net income?

A. 18.29 percent

B. 18.38 percent

C. 15.67 percent

D. 17.29 percent

E. 16.67 percent

AACSB: Analytical Thinking

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 08-02 Discuss accounting rates of return and some of the problems with them.

Section: 8.3 The Average Accounting Return

Topic: Average accounting return

76. An investment has an initial cost of $2.7 million and net income of $189,400, $178,600, and $172,500 for Years 1 to 3. This investment will be depreciated by $900,000 a year over the three-year life of the project. Should this project be accepted based on the average accounting rate of return if the required rate is 12.5 percent? Why or why not?

A. Yes, because the AAR is 12.5 percent

B. Yes, because the AAR is less than 12.5 percent

C. Yes, because the AAR is greater than 12.5 percent

D. No, because the AAR is greater than 12.5 percent

E. No, because the AAR is less than 12.5 percent

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 08-02 Discuss accounting rates of return and some of the problems with them.

Section: 8.3 The Average Accounting Return

Topic: Average accounting return

77. An investment has an initial cost of $300,000 and a life of four years. This investment will be depreciated by $60,000 a year and will generate the net income shown below. Should this project be accepted based on the average accounting rate of return (AAR) if the required rate is 9.5 percent? Why or why not?

A. Yes, because the AAR less than 9.5 percent

B. Yes, because the AAR is 9.5 percent

C. Yes, because the AAR is greater than 9.5 percent

D. No, because the AAR is 9.5 percent

E. No, because the AAR is greater than 9.5 percent

AACSB: Analytical Thinking

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 08-02 Discuss accounting rates of return and some of the problems with them.

Section: 8.3 The Average Accounting Return

Topic: Average accounting return

78. An investment has an initial cost of $462,000 and will generate the net income amounts shown below. This investment will be depreciated straight-line to zero over the four-year life of the project. Should this project be accepted based on the average accounting rate of return if the required rate is 14.75 percent? Why or why not?

A. Yes, because the AAR is equal to 14.75 percent

B. Yes, because the AAR is greater than 14.75 percent

C. Yes, because the AAR is less than 14.75 percent

D. No, because the AAR is greater than 14.75 percent

E. No, because the AAR is less than 14.75 percent

AACSB: Analytical Thinking

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 08-02 Discuss accounting rates of return and some of the problems with them.

Section: 8.3 The Average Accounting Return

Topic: Average accounting return

79. The Nifty Fifty is considering opening a new store at a start-up cost of $628,000. The initial investment will be depreciated straight-line to zero over the 15-year life of the project. What is the average accounting rate of return given the following net income projections?

A. 16.42 percent

B. 16.68 percent

C. 17.01 percent

D. 17.18 percent

E. 16.35 percent

AACSB: Analytical Thinking

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 08-02 Discuss accounting rates of return and some of the problems with them.

Section: 8.3 The Average Accounting Return

Topic: Average accounting return

80. A project has the following cash flows. What is the internal rate of return?

A. 14.79 percent

B. 13.58 percent

C. 12.96 percent

D. 13.67 percent

E. 13.10 percent

AACSB: Analytical Thinking

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 08-03 Explain the internal rate of return criterion and its associated strengths and weaknesses.

Section: 8.4 The Internal Rate of Return

Topic: Internal rate of return

81. A project has the following cash flows. What is the internal rate of return?

A. 15.17 percent

B. 13.41 percent

C. 13.68 percent

D. 12.53 percent

E. 13.15 percent

AACSB: Analytical Thinking

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 08-03 Explain the internal rate of return criterion and its associated strengths and weaknesses.

Section: 8.4 The Internal Rate of Return

Topic: Internal rate of return

82. A project has the following cash flows. What is the internal rate of return?

A. 5.43 percent

B. 5.50 percent

C. 5.92 percent

D. 5.57 percent

E. 5.53 percent

AACSB: Analytical Thinking

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 08-03 Explain the internal rate of return criterion and its associated strengths and weaknesses.

Section: 8.4 The Internal Rate of Return

Topic: Internal rate of return

83. Chasteen, Inc., is considering an investment with an initial cost of $145,000 that would be depreciated straight-line to a zero book value over the life of the project. The cash inflows generated by the project are estimated at $76,000 for the first two years and $30,000 for the following two years. What is the internal rate of return?

A. 21.44 percent

B. 21.29 percent

C. 17.43 percent

D. 17.55 percent

E. 20.11 percent

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 08-03 Explain the internal rate of return criterion and its associated strengths and weaknesses.

Section: 8.4 The Internal Rate of Return

Topic: Internal rate of return

84. You are considering an investment for which you require a rate of return of 8.5 percent. The investment costs $ 53,500 and will produce cash inflows of $20,000 for three years. Should you accept this project based on its internal rate of return? Why or why not?

A. Yes; because the IRR is 5.96 percent

B. Yes; because the IRR is 9.56 percent

C. Yes; because the IRR is 8.50 percent

D. No; because the IRR is 9.56percent

E. No’; because the IRR is 5.96 percent

AACSB: Analytical Thinking

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Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 08-03 Explain the internal rate of return criterion and its associated strengths and weaknesses.

Section: 8.4 The Internal Rate of Return

Topic: Internal rate of return

85. Performance Needlework needs to purchase a new machine costing $1.25 million. Management is estimating the machine will generate cash inflows of $175,000 the first year and $ 500,000 for the following three years. If management requires a minimum 10 percent rate of return, should the firm purchase this particular machine based on its IRR? Why or why not?

A. Yes, because the IRR is 10.75 percent

B. Yes, because the IRR is 11.28 percent

C. No, because the IRR is 10.75 percent

D. No, because the IRR is 11.28 percent

E. The answer cannot be determined as there are multiple IRRs

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 08-03 Explain the internal rate of return criterion and its associated strengths and weaknesses.

Section: 8.4 The Internal Rate of Return

Topic: Internal rate of return

86. The Steel Factory is considering a project that will produce annual cash flows of $43,800, $40,200, $46,200, and $41,800 over the next four years, respectively. What is the internal rate of return if the initial cost of the project is $127,900?

A. 13.00 percent

B. 10.19 percent

C. 11.28 percent

D. 12.24 percent

E. 12.83 percent

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 08-03 Explain the internal rate of return criterion and its associated strengths and weaknesses.

Section: 8.4 The Internal Rate of Return

Topic: Internal rate of return

87. Diamond Enterprises is considering a project that will produce cash inflows of $41,650 a year for three years followed by $49,000 in Year 4. What is the internal rate of return if the initial cost of the project is $219,000?

A. 9.43 percent

B. 8.29 percent

C. 7.81 percent

D. 8.42 percent

E. 7.55 percent

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 08-03 Explain the internal rate of return criterion and its associated strengths and weaknesses.

Section: 8.4 The Internal Rate of Return

Topic: Internal rate of return

88. Miller Brothers is considering a project that will produce cash inflows of $32,500, $38,470, $40,805, and $41,268 a year for the next four years, respectively. What is the internal rate of return if the initial cost of the project is $184,600?

A. 7.39 percent

B. 6.86 percent

C. 6.47 percent

D. 7.62 percent

E. 6.24 percent

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 08-03 Explain the internal rate of return criterion and its associated strengths and weaknesses.

Section: 8.4 The Internal Rate of Return

Topic: Internal rate of return

89. You are considering the following two mutually exclusive projects. What is the crossover point?

A. 20.76 percent

B. 23.72 percent

C. 25.89 percent

D. 18.79 percent

E. 22.08 percent

AACSB: Analytical Thinking

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 08-03 Explain the internal rate of return criterion and its associated strengths and weaknesses.

Section: 8.4 The Internal Rate of Return

Topic: Internal rate of return

90. You are considering the following two mutually exclusive projects. The crossover point is _____ percent and Project _____ should be accepted at a discount rate of 9 percent.

A. 15.68 percent; B

B. 11.38 percent; A

C. 11.38 percent; B

D. 15.68 percent; A

E. 14.02 percent; B

AACSB: Analytical Thinking

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 08-03 Explain the internal rate of return criterion and its associated strengths and weaknesses.

Section: 8.4 The Internal Rate of Return

Topic: Internal rate of return

91. You are considering the following two mutually exclusive projects. The crossover point is _____ and Project _____ should be accepted if the discount rate is 14 percent.

A. 13.28 percent; B

B. 13.28 percent; A

C. 0 percent; B

D. 15.96 percent; A

E. 15.96 percent; B

AACSB: Analytical Thinking

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 08-03 Explain the internal rate of return criterion and its associated strengths and weaknesses.

Section: 8.4 The Internal Rate of Return

Topic: Internal rate of return

92. Soft and Cuddly is considering a new toy that will produce the following cash flows. Should the company produce this toy based on IRR if the firm requires a rate of return of 17.5 percent?

A. Yes, because the project's rate of return is 16.45 percent

B. Yes, because the project's rate of return is 11.47 percent

C. No, because the project's rate of return is 16.45 percent

D. No, because the project's rate of return is 11.47 percent

E. No, because the internal rate of return is zero percent

AACSB: Analytical Thinking

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 08-03 Explain the internal rate of return criterion and its associated strengths and weaknesses.

Section: 8.4 The Internal Rate of Return

Topic: Internal rate of return

93. The Flour Baker is considering a project with the following cash flows. Should this project be accepted based on its internal rate of return if the required return is 18 percent?

A. Yes; because the project's rate of return is 7.78 percent

B. Yes; because the project's rate of return is 16.08 percent

C. Yes; because the project's rate of return is 19.47 percent

D. No; because the project's rate of return is 19.47 percent

E. No; because the project's rate of return is 16.08 percent

AACSB: Analytical Thinking

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 08-03 Explain the internal rate of return criterion and its associated strengths and weaknesses.

Section: 8.4 The Internal Rate of Return

Topic: Internal rate of return

94. The Black Horse is currently considering a project that will produce cash inflows of $11,000 a year for three years followed by $6,500 in Year 4. The cost of the project is $38,000. What is the profitability index if the discount rate is 9 percent?

A. .85

B. .93

C. 1.04

D. 1.09

E. 1.12

AACSB: Analytical Thinking

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Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 08-06 Calculate the profitability index and understand its relation to net present value.

Section: 8.5 The Profitability Index

Topic: Profitability index

95. A firm is reviewing a project that has an initial cost of $67,000. The project will produce annual cash inflows, starting with Year 1, of $8,000, $13,400, $18,600, $24,100, and finally in Year 5, $37,900. What is the profitability index if the discount rate is 11 percent?

A. .92

B. .98

C. 1.02

D. 1.05

E. 1.09

AACSB: Analytical Thinking

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Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 08-06 Calculate the profitability index and understand its relation to net present value.

Section: 8.5 The Profitability Index

Topic: Profitability index

96. A project has expected cash inflows, starting with Year 1, of $900, $1,200, $1,500, and finally in Year 4, $2,000. The profitability index is 1.11 and the discount rate is 12 percent. What is the initial cost of the project?

A. $3,899.16

B. $4,098.24

C. $3,692.71

D. $3,211.06

E. $4,250.00

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 08-06 Calculate the profitability index and understand its relation to net present value.

Section: 8.5 The Profitability Index

Topic: Profitability index

97. The net present value of a project's cash inflows is $2,716 at a discount rate of 12 percent. The profitability index is 1.09 and the firm's tax rate is 34 percent. What is the initial cost of the project?

A. $2,314.07

B. $2,018.50

C. $2,428.32

D. $2,491.74

E. $2,066.67

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 08-06 Calculate the profitability index and understand its relation to net present value.

Section: 8.5 The Profitability Index

Topic: Profitability index

98. You are considering the following two mutually exclusive projects. The required return on each project is 14 percent. Which project should you accept and what is the best reason for that decision?

A. Project A; because it pays back faster

B. Project A; because it has the higher profitability index

C. Project B; because it has the higher profitability index

D. Project B; because it has the higher net present value

E. Project A; because it has the higher net present value

AACSB: Analytical Thinking

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 08-04 Evaluate proposed investments by using the net present value criterion.

Section: 8.5 The Profitability Index

Topic: Mutually exclusive projects

99. You are considering the following two mutually exclusive projects. The required return on each project is 12 percent. Which project should you accept and what is the best reason for that decision?

A. Project A, because it pays back faster

B. Project A, because it has the higher internal rate of return

C. Project B, because it has the higher internal rate of return

D. Project A, because it has the higher net present value

E. Project B, because it has the higher net present value

AACSB: Analytical Thinking

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 08-04 Evaluate proposed investments by using the net present value criterion.

Section: 8.5 The Profitability Index

Topic: Mutually exclusive projects

100. Baker's Supply imposes a payback cutoff of 3.5 years for its international investment projects. If the company has the following two projects available, which project(s), if either, should it accept?

A. Reject both Projects A and B

B. Accept Project A but not Project B

C. Accept Project B but not Project A

D. Both Project A and B are acceptable but you can select only one project

E. Accept both Projects A and B

AACSB: Analytical Thinking

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 08-01 Summarize the payback rule and some of its shortcomings.

Section: 8.2 The Payback Rule

Topic: Payback

101. You're trying to determine whether or not to expand your business by building a new manufacturing plant. The plant has an installation cost of $29 million, which will be depreciated straight-line to zero over its three-year life. If the plant has projected net income of $1,848,000, $2,080,000, and $2,720,000 over these three years, what is the project's average accounting return (AAR)?

A. 14.69 percent

B. 14.14 percent

C. 15.03 percent

D. 15.28 percent

E. 14.21 percent

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 08-02 Discuss accounting rates of return and some of the problems with them.

Section: 8.3 The Average Accounting Return

Topic: Average accounting return

102. What is the IRR of the following set of cash flows?

A. 12.93 percent

B. 14.90 percent

C. 23.86 percent

D. 16.33 percent

E. 17.78 percent

AACSB: Analytical Thinking

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 08-03 Explain the internal rate of return criterion and its associated strengths and weaknesses.

Section: 8.4 The Internal Rate of Return

Topic: Internal rate of return

103. What is the NPV of the following set of cash flows at a discount rate of zero percent? What if the discount rate is 15 percent?

A. $0; -$665.07

B. $0; $6,916.59

C. $0; $7,208.19

D. $15,900; $7,208.19

E. $15,900; $6,916.59

AACSB: Analytical Thinking

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 08-04 Evaluate proposed investments by using the net present value criterion.

Section: 8.1 Net Present Value

Topic: Net present value

104. Chestnut Tree Farms has identified the following two mutually exclusive projects:







Over what range of discount rates would you choose Project A?

A. 7.13 percent or less

B. 7.13 percent or more

C. 6.38 percent or more

D. 6.38 percent or less

E. 6.57 percent or more

AACSB: Analytical Thinking

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 08-03 Explain the internal rate of return criterion and its associated strengths and weaknesses.

Section: 8.4 The Internal Rate of Return

Topic: Internal rate of return

105. Jefferson International is trying to choose between the following two mutually exclusive design projects:







The required return is 13 percent. If the company applies the profitability index (PI) decision rule, which project should the firm accept? If the company applies the NPV decision rule, which project should it take? Given your first two answers, which project should the firm actually accept?

A. Project A; Project B; Project A

B. Project A; Project B; Project B

C. Project B; Project A; Project A

D. Project B; Project A; Project B

E. Project B; Project B, Project B

AACSB: Analytical Thinking

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 08-04 Evaluate proposed investments by using the net present value criterion.

Learning Objective: 08-06 Calculate the profitability index and understand its relation to net present value.

Section: 8.1 Net Present Value

Section: 8.5 The Profitability Index

Topic: Net present value

106. Consider the following two mutually exclusive projects:





Whichever project you choose, if any, you require a rate of return of 14 percent on your investment. If you apply the payback criterion, you will choose Project ______; if you apply the NPV criterion, you will choose Project ______; if you apply the IRR criterion, you will choose Project _____; if you choose the profitability index criterion, you will choose Project ___. Based on your first four answers, which project will you finally choose?

A. A; B; A; A; B

B. A; A; B; B; A

C. A; A; B; B; B

D. B; A; B; A; A

E. B; A; B; B; A

AACSB: Analytical Thinking

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 08-01 Summarize the payback rule and some of its shortcomings.

Learning Objective: 08-03 Explain the internal rate of return criterion and its associated strengths and weaknesses.

Learning Objective: 08-04 Evaluate proposed investments by using the net present value criterion.

Learning Objective: 08-06 Calculate the profitability index and understand its relation to net present value.

Section: 8.1 Net Present Value

Section: 8.2 The Payback Rule

Section: 8.4 The Internal Rate of Return

Section: 8.5 The Profitability Index

Topic: Mutually exclusive projects

107. Textiles Unlimited has gathered projected cash flows for two projects. At what interest rate would the company be indifferent between the two projects? Which project is better if the required return is 12 percent?

A. 11.76 percent; A

B. 12.49 percent; A

C. 12.49 percent; B

D. -4.44 percent; A

E. -4.44 percent; B

AACSB: Analytical Thinking

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 08-03 Explain the internal rate of return criterion and its associated strengths and weaknesses.

Section: 8.4 The Internal Rate of Return

Topic: Internal rate of return

108. Quattro, Inc. has the following mutually exclusive projects available. The company has historically used a four-year cutoff for projects. The required return is 11 percent.





The payback for Project A is ____ while the payback for Project B is ____. The NPV for Project A is _____ while the NPV for Project B is ____. Which project, if any, should the company accept?

A. 2.782 years; 3.25 years; $ 7.090.12; $12,011.48; accept both Projects

B. 3.92 years; 3.79 years; -$6,197.89; $14,693.39; accept Project B only

C. 3.60 years; 3.95 years; -$6,197.89; -$14,693.39; reject both projects

D. 3.96 years; 3.42 years; $17,780.85; -$1,211.48; accept Project A only

E. 4.06 years; 3.79 years; $211.60; -$7,945.93; accept Project A only

AACSB: Analytical Thinking

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 08-01 Summarize the payback rule and some of its shortcomings.

Learning Objective: 08-04 Evaluate proposed investments by using the net present value criterion.

Section: 8.1 Net Present Value

Section: 8.2 The Payback Rule

Topic: Net present value

109. Miller and Sons 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 of the project using the reinvestment approach? The discounting approach? The combination approach?

A. 18.54 percent; 17.29 percent; 14.61 percent

B. 13.96 percent; 14.38 percent; 14.61 percent

C. 18.54 percent; 17.29 percent; 13.67 percent

D. 13.96 percent; 17.85 percent; 13.67 percent

E. 18.54 percent; 18.23 percent; 18.61 percent

AACSB: Analytical Thinking

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 08-05 Apply the modified internal rate of return.

Section: 8.4 The Internal Rate of Return

Topic: Modified internal rate of return

New Questions

110. What is the net present value of a project with the following cash flows if the discount rate is 9 percent?

A. -$972.61

B. $972.61

C. -$892.30

D. $892.30

E. $812.90

AACSB: Analytical Thinking

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 08-04 Evaluate proposed investments by using the net present value criterion.

Section: 8.1 Net Present Value

Topic: Net present value

111. What is the net present value of a project with the following cash flows if the discount rate is 13 percent?

A. -$ 17,126.22

B. $ 23,655.17

C. $ 20,933.78

D. $ 17,126.22

E. -$16,456.23

AACSB: Analytical Thinking

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 08-04 Evaluate proposed investments by using the net present value criterion.

Section: 8.1 Net Present Value

Topic: Net present value

112. What is the net present value of a project that has an initial cost of $25,000 and produces cash inflows of $ 5,500 a year for 8 years if the discount rate is 7 percent?

A. $ 3,635.04

B. $ 6,500.00

C. $ 7,842.14

D. $ 6,189.34

E. $ 5,712.03

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 08-04 Evaluate proposed investments by using the net present value criterion.

Section: 8.1 Net Present Value

Topic: Net present value

113. Murphy’s Authentic is considering a project with an initial cost of $124,000. The project will not produce any cash flows for the first three years. Starting in Year 4, the project will produce cash inflows of $85,000 a year for three years. This project is risky, so the firm has assigned it a discount rate of 15 percent. What is the project's net present value?

A. $105,222

B. $3,136.43

C. -$3,140.95

D. $131,000

E. $3,606.89

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 08-04 Evaluate proposed investments by using the net present value criterion.

Section: 8.1 Net Present Value

Topic: Net present value

What is the net present value of the following set of cash flows at a discount rate of 7 percent? At 14 percent?

A. $7,586; $1,332.46

B. $4,319.18; -$1,552.53

C. -$3,190.80; -$7,287.92

D. $12,000; $10,000

E. $7,220.90; $3,673.98

AACSB: Analytical Thinking

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 08-04 Evaluate proposed investments by using the net present value criterion.

Section: 8.1 Net Present Value

Topic: Net present value

114. A proposed project requires an initial cash outlay of $25,000 for equipment and an additional cash outlay of $8,000 in Year 1 to cover operating costs. During Years 2 through 4, the project will generate cash inflows of $16,000 a year. What is the net present value of this project at a discount rate of 9 percent?

A. $4.817.17

B. $4,864.53

C. $4,238.78

D. $2,873.44

E. $3,948.34

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 08-04 Evaluate proposed investments by using the net present value criterion.

Section: 8.1 Net Present Value

Topic: Net present value

115. John is considering a project with cash inflows of $1,750, $1,850, $2,000, and $2,550 over the next four years, respectively. The relevant discount rate is 14 percent. What is the net present value of this project if it the start-up cost is $5,000?

A. $818.35

B. $947.56

C. -$600.00

D. $693.61

E. $379.75

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 08-04 Evaluate proposed investments by using the net present value criterion.

Section: 8.1 Net Present Value

Topic: Net present value

116. A project has the following cash flows. What is the payback period?

A. 2.50 years

B. 2.24 years

C. 2.25 years

D. 2.08 years

E. 2.95 years

AACSB: Analytical Thinking

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 08-01 Summarize the payback rule and some of its shortcomings.

Section: 8.2 The Payback Rule

Topic: Payback