Chapter 10: Capital-Budgeting Techniques and Practice.
Multiple Choice


1.  

If a project's NPV is greater than zero,

the project will also be acceptable using the payback period criteria.
the IRR will be greater than the NPV.
The project should be accepted.
The profitability index will be less than 1.


2.  

The major cause of multiple IRRs and the resulting ranking conflicts between the NPV and IRR methods is because of differing

initial cash flows.
cash flow signs.
salvage values.
profitability indices.


3.  

A major disadvantage of the payback period method is that it

requires too many years to recoup an investment's initial cost.
ignores cash flows beyond the payback period.
does account for the time value of money.
it deals with accounting profits.


4.  

If the NPV of a project is negative, then the discount rate that was used to discount the cash flows is

equal to the internal rate of return.
lower than the IRR.
Greater than the internal rate of return.
Too low.


5.  

The Johnson Corporation is considering investing in two independent projects. The corporation follows a policy that requires acceptable projects to recover all costs within 3 years. The discount rate is 10%. The cash flows for the two projects are:
TimeProject 1Project 2
0-200,000-$160,000
1   50,000   100,000
2   50,000      40,000
3   80,000      60,000
4   60,000              0
Which project(s) does the company invest in?

Project 1 only.
Neither Project.
Project 1 and Project 2.
Project 2 only.


6.  

Project A has an IRR of 18% and Project B has an IRR of 16 percent and the company's cost of capital (discount rate) is 12%. However, Project B has a higher NPV than Project A. Assuming that the two projects are of equal cash flow scales,

The projects vary directly with the discount rate.
Project B probably has a faster payback than Project A.
Project A probably has a faster payback than Project B.
The profitability index of Project A is higher than the profitability index of Project B.


7.  

A Corporation is considering an investment opportunity with estimated cash flows of $30,000 per year in Years 1 through 4, $35,000 per year in Years 5 through 9, and $40,000 in Year 10. This investment will cost the firm $150,000 today, and the firm's cost of capital is 10 percent. What is the payback period of this investment opportunity?

2.25 years
3.86 years
4.86 years
5.86 years


8.  

A company's manager is evaluating two mutually exclusive projects with the following net cash flows:
Year Project XProject Z
0-$150,000-$150,000
1    60,000    10,000
2    45,000    35,000
3    35,000    48,000
4    15,000    67,000
If the firm's cost of capital is 15 percent, which project would you choose?

Neither project.
Project X
Project Z
Both projects X and Z.


9.  

Two projects being considered are mutually exclusive and have the following projected cash flows:
YearProject XProject Y
0-$50,000-$50,000
113,7350
213,7350
313,7350
413,7350
513,73589,500
If the required rate of return on these projects is 10 percent, which project would be chosen and why?

Project Y because it has the higher NPV.
Project Y because it has the higher IRR.
Project X because it has the higher NPV.
Project X because it has the higher IRR.


10.  

The Michigan Instruments Company is deciding between two mutually exclusive projects with the following cash flows:
Time Project A
Cash Flows
Project B
Cash Flows
0-$60,000-$35,000
112,0007,000
218,00014,000
338,00019,000
422,00013,000
The company's cost of capital (discount rate) is 10 percent. What is the net present value (NPV) of the project with the highest internal rate of return (IRR)?

$35,000
$9,361.38
$6,088.04
$60,000


11.  

Dale Industries is considering an investment project which has the following cash flows:
timeProject
Cash Flows
0-$1,000
1500
2400
3600
4300
The company's discount rate is 10 percent. What is the project's payback, internal rate of return, and net present value? (Round NPV to the nearest dollar)

Payback = 2.4 years, IRR = 10.00%, NPV = $441.
Payback = 2.4 years, IRR = 29.97%, NPV = $260.
Payback = 2.6 years, IRR = 29.97%, NPV = $300.
Payback = 2.17 years, IRR = 29.97%, NPV = $441.


12.  

The Virginia Company is analyzing an investment opportunity with estimated end-of-year cash flows of $30,000 per year in Years 1 through 4, $35,000 per year in Years 5 through 9, and $40,000 in Year 10. This investment will cost the company $150,000 today, and the firm's cost of capital is 10 percent. What is the NPV for this investment? (round to the nearest dollar)

$48,250.00
$51,138.00
$53,000.00
$55,138.00


13.  

The New Dimension Computer Company needs a new machine to produce computer chips for use in their computers. Two companies have submitted bids, and you are the financial analyst with the task of choosing one of the machines. You have estimated that the cash flows are the:
Year Machine A Machine B
0 -$1,000 -$1,000
1 0475
2 0 475
3 0 475
4 1,950 475
If the cost of capital for your company is 6%, which of the following do you conclude is the best decision to make?

The NPVA < NPVB, therefore accept Machine B.
The NPVA > NPVB, therefore accept Machine A.
The IRRA > IRRB, therefore accept Machine A.
The IRRA = IRRB, therefore accept Machine B.


14.  

An investment project has an initial cost of $180 and generates inflows of $50 a year for the next five years. What is the project's payback period and IRR?

Payback = 2.0 years; IRR = 13.05%
Payback = 5.0 years; IRR = 12.05%
Payback = 2.6 years; IRR = 10.00%
Payback = 3.6 years; IRR = 12.05%


15.  

Given the following cash flows, what is the IRR of this project? (round to the nearest whole percent)
TimeNet cash flow
0$1,520
1-1,000
2-1,500
3500

23%
24%
25%
26%


16.  

ABC Service can purchase a new assembler for $15,052 that will provide an annual net cash flow of $6,000 per year for five years, at which time the assembler will be sold as junk for $750. Calculate the net present value of the assembler if the required rate of return is 12%. (Ignore taxes and round your answer to the nearest $10.)

$1,050
$4,560
$6,600
$7,000


17.  

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 Year 1-4 = $250,000 per year, and an additional after-tax terminal Cash Flow at End of Year 4 = $40,000. Compute the net present value of this project if the company's discount rate is 8%. (Round answer to nearest dollar).

$34,758
$107,433
$9,337
$1,534,758


18.  

Real Goods, Inc. is analyzing purchasing a new machine. Two companies have submitted bids, and you have been assigned the task of choosing one of the machines. The estimated cash flows are as follows:
YearMachine AMachine B
0-$2,000-$2,000
1         0      850
2         0      850
3         0      850
4   4,287      850
What is the internal rate of return for each machine?

IRRA = 19%, IRRB = 20%
IRRA = 21%, IRRB = 25%
IRRA = 17.5%, IRRB = 21.5%
IRRA = 22.5%, IRRB = 26.8%


19.  

Consider the following projects, A, B, and C:
Year Project A Project B Project C
0 -$3,600 -$6,000 -$3,500
1 0 $4,000 $2,000
2 0 3,000 0
3 0 2,000 2,000
4 0 0 2,000
5 $7,000 0 2,000
Which project is the most profitable project if the discount rate is 7.5%?

Project A
Project B
Project C
Both Projects B & C.


20.  

Consider a project with the following cash flows:
Year After-tax
Accounting
Profits
After-tax
Cash Flow
from Operations
1 $799  $750
2    150 1,000
3   200 1,200
The initial outlay of the project is $1,500 and the terminal cash flow is zero. Compute the profitability index if the company's discount rate is 10%.

15.8
1.61
0.61
62


21.  

A firm is considering two mutually exclusive machines. Machine A has an up-front cost of $150,000 and produces positive after-tax cash inflows of $50,000 a year at the end of each of the next six years. Machine B has an up-front cost of $80,000 and produces after-tax cash inflows of $50,000 a year at the end of the next three years. At the end of the third year, machine B can be replaced at a cost of $85,000 (paid at t = 3). The replacement machine will produce after-tax cash inflows of $52,000 a year for three years (inflows received at t = 4, 5, and 6). The company's cost of capital is 11.5 percent. What is the net present value (on a six-year extended basis) of the most profitable machine? (Hint: Use the replacement chain method of calculating the NPV of each project and round your answer to the nearest dollar.)

$50,000
$45,725
$58,515
$70,691


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