1. Which one of the following methods of project analysis is defined as computin
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1. Which one of the following methods of project analysis is defined as computing the value of a project based upon the present value of the project's anticipated cash flows? A. constant dividend growth model B. discounted cash flow valuation C. average accounting return D. expected earnings model E. internal rate of return 2. The length of time a firm must wait to recoup the money it has invested in a project is called the: A. internal return period. B. payback period. C. profitability period. D. discounted cash period. E. valuation period. 3. The internal rate of return is defined as the: A. maximum rate of return a firm expects to earn on a project. B. rate of return a project will generate if the project in financed solely with internal funds. C. discount rate that equates the net cash inflows of a project to zero. D. discount rate which causes the net present value of a project to equal zero. E. discount rate that causes the profitability index for a project to equal zero. 4. If a firm accepts Project A it will not be feasible to also accept Project B because both projects would require the simultaneous and exclusive use of the same piece of machinery. These projects are considered to be: A. independent. B. interdependent. C. mutually exclusive. D. economically scaled. E. operationally distinct. 5. The present value of an investment's future cash flows divided by the initial cost of the investment is called the: A. net present value. B. internal rate of return. C. average accounting return. D. profitability index. E. profile period. 6. Which one of the following will decrease the net present value of a project? A. increasing the value of each of the project's discounted cash inflows B. moving each of the cash inflows back to a later time period C. decreasing the required discount rate D. increasing the project's initial cost at time zero E. increasing the amount of the final cash inflow 7. If a project has a net present value equal to zero, then: A. the total of the cash inflows must equal the initial cost of the project. B. the project earns a return exactly equal to the discount rate. C. a decrease in the project's initial cost will cause the project to have a negative NPV. D. any delay in receiving the projected cash inflows will cause the project to have a positive NPV. E. the project's PI must be also be equal to zero. 8. Which one of the following is a project acceptance indicator given an independent project with investing type cash flows? A. profitability index less than 1.0 B. project's internal rate of return less than the required return C. discounted payback period greater than requirement D. average accounting return that is less than the internal rate of return E. modified internal rate of return that exceeds the required return 9. A project has a required payback period of three years. Which one of the following statements is correct concerning the payback analysis of this project? A. The cash flows in each of the three years must exceed one-third of the project's initial cost if the project is to be accepted. B. The cash flow in year three is ignored. C. The project's cash flow in year three is discounted by a factor of (1 + R)3. D. The cash flow in year two is valued just as highly as the cash flow in year one. E. The project is acceptable whenever the payback period exceeds three years. 10. Which one of the following correctly applies to the average accounting rate of return? A. It considers the time value of money. B. It measures net income as a percentage of the sales generated by a project. C. It is the best method of analyzing mutually exclusive projects from a financial point of view. D. It is the primary methodology used in analyzing independent projects. E. It can be compared to the return on assets ratio. 11. Which one of the following statements related to the internal rate of return (IRR) is correct? A. The IRR yields the same accept and reject decisions as the net present value method given mutually exclusive projects. B. A project with an IRR equal to the required return would reduce the value of a firm if accepted. C. The IRR is equal to the required return when the net present value is equal to zero. D. Financing type projects should be accepted if the IRR exceeds the required return. E. The average accounting return is a better method of analysis than the IRR from a financial point of view. 12. Which of the following statements related to the internal rate of return (IRR) are correct? I. The IRR method of analysis can be adapted to handle non-conventional cash flows. II. The IRR that causes the net present value of the differences between two project's cash flows to equal zero is called the crossover rate. III. The IRR tends to be used more than net present value simply because its results are easier to comprehend. IV. Both the timing and the amount of a project's cash flows affect the value of the project's IRR. A. I and II only B. III and IV only C. I, II, and III only D. II, III, and IV only E. I, II, III, and IV 13. When the present value of the cash inflows exceeds the initial cost of a project, then the project should be: A. accepted because the internal rate of return is positive. B. accepted because the profitability index is greater than 1. C. accepted because the profitability index is negative. D. rejected because the internal rate of return is negative. E. rejected because the net present value is negative. 14. Which one of the following is the best example of two mutually exclusive projects? A. building a retail store that is attached to a wholesale outlet B. producing both plastic forks and spoons on the same assembly line at the same time C. using an empty warehouse to store both raw materials and finished goods D. promoting two products during the same television commercial E. waiting until a machine finishes molding Product A before being able to mold Product B 15. Southern Chicken is considering two projects. Project A consists of creating an outdoor eating area on the unused portion of the restaurant's property. Project B would use that outdoor space for creating a drive-thru service window. When trying to decide which project to accept, the firm should rely most heavily on which one of the following analytical methods? A. profitability index B. internal rate of return C. payback D. net present value E. accounting rate of return 16. In actual practice, managers frequently use the: I. average accounting return method because the information is so readily available. II. internal rate of return because the results are easy to communicate and understand. III. discounted payback because of its simplicity. IV. net present value because it is considered by many to be the best method of analysis. A. I and III only B. II and III only C. I, II, and IV only D. II, III, and IV only E. I, II, III, and IV 17. Kristi wants to start training her most junior assistant, Amy, in the art of project analysis. Amy has just started college and has no experience or background in business finance. To get her started, Kristi is going to assign the responsibility for all projects that have initial costs less than $1,000 to Amy to analyze. Which method is Kristi most apt to ask Amy to use in making her initial decisions? A. discounted payback B. profitability index C. internal rate of return D. payback E. average accounting return Instructors Sample Problems Solved for Your Reference This is just an illustration of similar problems you may encounter related to this topic. What is the net present value of a project with the following cash flows if the required rate of return is 12%? Year Cash Flow 0 - $42,398 1 + $13,407 2 + $21,219 3 + $17,800 NPV = -42,398 + [13,407 / (1+12%)1] + [21,219 / (1+12%)2] + [17,800 / (1+12%)3] = -842 You are considering two mutually exclusive projects with the following cash flows. Which project(s) should you accept if the discount rate is 8.5%? What if the discount rate is 13%? Year Project A Project B 0 - $80,000 - $80,000 1 + $32,000 0 2 + $32,000 0 3 + $32,000 + $105,000 NPV A,8.5%= -80k +[32k / (1+8.5%)1] +[32k / (1+8.5%)2] +[32k / (1+8.5%)3] = $1,729 NPV A,13%= -80k +[32k / (1+13%)1] +[32k / (1+13%)2] +[32k / (1+13%)3] = -$4,443 NPV B,8.5%= -80k +[105k / (1+8.5%)3] = $2,205 NPV B,13%= -80k +[105k / (1+13%)3] = -$7,230 At 8.5%, accept project B since it has greatest NPV and NPV is positive. At 13%, accept neither project since neither NPV is positive. What is the profitability index for an investment with the following cash flows given a 14.5% required return? Year Cash Flow 0 - $46,500 1 + $12,200 2 + $38,400 3 + $11,300 PV inflows = [46,500 / (1+14.5%)1] + [38,400 / (1+14.5%)2] + [11,300 / (1+14.5%)3] = 47,473 PI = 47,473 / 46,500 = 1.02 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? Payback = 2 + [(6,500 - 900 - 2,200) / 3,600] = 2.94 years A project has an initial cost of $35,000 and a 3-year life. The company uses straight-line depreciation to a book value of zero over the life of the project. The projected net income from the project is $1,200, $2,300, and $1,800 a year for the next 3 years, respectively. What is the average accounting return? Average projected annual net income = (1,200 + 2,300 + 1,800) / 3 = $1,767 AAR = $1,767 / [0.5 x (35,000 + 0)] = 10.1% SHOW YOUR CALCULATIONS FOR #18-#25. 18. What is the net present value of a project that has an initial cash outflow of $33,500 and the following cash inflows? The required return is 14%. Year Cash Flow 1 + $13,000 2 0 3 + $20,800 4 + $15,500 19. You are considering the following two mutually exclusive projects. The required rate of return is 14.5% for project A and 13.7% for project B. Which project should you accept and why? Year Project A Project B 0 - $50,000 - $50,000 1 + $25,000 + $41,000 2 + $36,000 + $20,000 3 + $21,000 + $10,000 20. Based on the profitability index rule, should a project with the following cash flows be accepted if the discount rate is 14%? Why or why not? Year Cash Flow 0 - $26,200 1 + $11,800 2 0 3 + $24,900 21. You are considering two independent (not mutually exclusive) projects both of which have been assigned a discount rate of 15%. Based on the profitability index, what is your recommendation concerning these projects? Project A Project B Year Cash Flow Year Cash Flow 0 - $46,000 0 - $50,000 1 + $32,000 1 + $18,000 2 + $27,000 2 + $54,000 22. You are considering a project with an initial cost of $7,800. What is the payback period for this project if the cash inflows are $1,100, $1,640, $3,800, and $4,500 a year over the next four years, respectively? 23. A project produces annual net income of $46,200, $51,800, and $62,900 over its 3-year life, respectively. The initial cost of the project is $675,000. This cost is depreciated straight-line to a zero book value over three years. What is the average accounting rate of return if the required discount rate is 14.5%? You are analyzing a project and have gathered the following data: Year Cash Flow 0 - 175,000 1 56,400 2 61,800 3 72,000 4 75,000 Required payback period 2.5 years Required AAR 11.5% Required return 14.5% 24. Based on the net present value of _____, you should _____ the project: 25. Based on the payback period of _____ years for this project, you should _____ the project:Explanation / Answer
A. constant dividend growth model
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