1. (TCO 4) Which of the following is true regarding the evaluation of projects?

Question

1. (TCO 4) Which of the following is true regarding the evaluation of projects? (Points : 4) sunk costs should be included erosion effects should not be considered financing costs need to be included opportunity costs are relevant 2. (TCO 4) Which of the following investment ranking methods does not consider the time value of money? (Points : 4) net present value method payback method internal rate of return method all of these are time-adjusted methods 3. (TCO 3 and 4) A net present value of zero implies that an investment: (Points : 4) has no initial cost. has an expected return that is less than the required return. should be rejected even if the discount rate is lowered. never pays back its initial cost. is earning a return that exactly matches the requirement. 4. (TCO 3 and 4) What is the net present value of a project with the following cash flows, if the discount rate is 15 percent? Year 0 1 2 3 4 Cash flow -$45,000 $11,520 $13,630 $16,470 $18,990 (Points : 4) -$2,989.48 -$2,599.55 $1,153.37 $2,880.08 $3,312.09 5. (TCO 4) Leward Manufacturing is spending $115,000 to update its equipment. This is necessary if the firm wishes to be competitive in the marketplace and provide a wide array of product models. The company estimates that these updates will improve its cash inflows by $27,500 a year, for eight years. What is the payback period? (Points : 4) 4.18 years 5.82 years 6.62 years 7.79 years This project never pays back 6. (TCO 4) The postponement of a project until conditions are more favorable: (Points : 4) is a valuable option. is referred to as the option to extend. could not cause a negative net present value project to become a positive net present value project. will generally cause the internal rate of return for a project to decline. 7. (TCO 4) ___________, occurs when a firm cannot raise financing for a project under any circumstances. (Points : 4) contingency planning. hard rationing. soft rationing. capital constraint. scenario analysis. 8. (TCO 4) ABC Cameras is considering an investment that will have a cost of $10,000 and the following cash flows: $6,000 in year 1, $4,000 in year 2 and $3,000 in year 3. Assume the cost of capital is 10%. Which of the following is true regarding this investment? (Points : 4) The net present value of the project is approximately $10,000 This project should be accepted because it has a positive net present value This project

Explanation / Answer

financing costs need to be included payback is easy to use and to understand. have positive AARs. $6,795.61 6.62 years - ignores the possibility that one variable is the primary source of the forecasting risk associated with a project. capital rationing. This project should be accepted because it has a negative net present value $19,200 $96,000

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