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Exam 9: Making Capital Investment Decisions

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Question 31

Multiple Choice

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A project has a net present value of zero.Which one of the following best describes this project?

A) The project has a zero percent rate of return.
B) The project requires no initial cash investment.
C) The project has no cash flows.
D) The summation of all of the project's cash flows is zero.
E) The project's cash inflows equal its cash outflows in current dollar terms.

F) A) and C)
G) A) and B)

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Question 32

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Which of the following are considered weaknesses in the average accounting return method of project analysis? I.exclusion of time value of money considerations II.need of a cutoff rate III.easily obtainable information for computation IV.based on accounting values

A) I only
B) I and IV only
C) II and III only
D) I, II, and IV only
E) I, II, III, and IV

F) A) and D)
G) A) and E)

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Question 33

Multiple Choice

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Sheakley Industries is considering expanding its current line of business and has developed the following expected cash flows for the project.Should this project be accepted based on the discounting approach to the modified internal rate of return if the discount rate is 13.4 percent? Why or why not?

Which of the following are advantages of the payback method of project analysis? I.works well for research and development projects II.liquidity bias III.ease of use IV.arbitrary cutoff point

You are analyzing a project and have gathered the following data: Based on the internal rate of return of _____ percent for this project, you should _____ the project.

A project has an initial cost of $6,500.The cash inflows are $900, $2,200, $3,600, and $4,100 over the next four years, respectively.What is the payback period?

What is the profitability index for an investment with the following cash flows given a 14.5 percent required return?

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.

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)?

Mutually exclusive projects are best defined as competing projects which:

Which of the following are definite indicators of an accept decision for an independent project with conventional cash flows? I.positive net present value II.profitability index greater than zero III.internal rate of return greater than the required rate IV.positive internal rate of return

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?

Hungry Hoagie's has identified the following two mutually exclusive projects: At what rate would you be indifferent between these two projects?

Which one of the following is the best example of two mutually exclusive projects?

Which one of the following statements related to payback and discounted payback is correct?

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?

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

Western Beef Exporters is considering a project that has an NPV of $32,600, an IRR of 15.1 percent, and a payback period of 3.2 years.The required return is 14.5 percent and the required payback period is 3.0 years.Which one of the following statements correctly applies to this project?

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?

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 payback analysis?