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 are not included opportunity costs are irrelevant 2. (TCO 4) There are several disadvantages to the payback method, among them: (Points : 4) payback ignores cash flows beyond the cutoff. payback can be used in conjunction with time adjusted methods of evaluation. payback is easy to use and to understand. none of the above is a disadvantage. 3. (TCO 3 and 4) The net present value is: (Points : 4) negative when a project's benefits exceed its costs. equal to the present value of an investment's benefits. equal to zero when the discount rate equals the IRR. negative when a project's IRR exceeds the required rate of return. the current measure of a project's cash inflows. 4. (TCO 3 and 4) What is the net present value of a project with the following cash flows, if the discount rate is 10 percent? Year 0 1 2 3 4 Cash flow -$32,000 $9,000 $10,000 $15,200 $7,800 (Points : 4) $1,085.25 $1,193.77 $3,498.28 $4,102.86 $4,513.15 5. (TCO 4) The Inventive Co. is considering a new project. This project requires an initial cash investment of $70,000. The project will generate cash inflows of $10,500 in the first year. Then, the project will do nothing for two years, after which time cash inflows of $25,000 will be generated for four years. How long will it take the Inventive Co. to recover its $70,000 investment? (Points : 4) 5.16 years 5.38 years 6.11 years 6.62 years 6.94 years 6. (TCO 4) The postponement of a project until conditions are more favorable: (Points : 4) is not a valuable option. is referred to as the option to extend. could 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) ____________, refers to the situation a firm faces when it has positive net present value projects, but cannot obtain financing for those projects. (Points : 4) capital planning. soft rationing. capital rationing. hard rationing. a sunk cause. 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

1. financing costs are not included

2) payback ignores cash flows beyond the cutoff. : 3) the current measure of a project's cash inflows 7. capital rationing. . 8. The net present value of the project is approximately $1011 9. $19,200 10)$82,000 3. (TCO 5, 6 and 7) An issue of common stock's most recent dividend is $3.75. Its growth rate is eight percent. What is its price if the market's rate of return is 16 percent? ANSWER Price of share =$3.75*1.08/.16-.08
= $50.63

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