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Exam 9: Making Capital Investment Decisions

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Question 51

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Which one of the following is an advantage of the average accounting return method of analysis?

A) easy availability of information needed for the computation
B) inclusion of time value of money considerations
C) the use of a cutoff rate as a benchmark
D) the use of pre-tax income in the computation
E) use of real, versus nominal, average income

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Question 52

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It will cost $6,000 to acquire an ice cream cart.Cart sales are expected to be $3,600 a year for three years.After the three years, the cart is expected to be worthless as the expected life of the refrigeration unit is only three years.What is the payback period?

A) 1.48 years
B) 1.67 years
C) 1.82 years
D) 1.95 years
E) 2.00 years

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Question 53

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If a project has a net present value equal to zero, then:

Explain how the internal rate of return (IRR) decision rule is applied to projects with financing type cash flows.

How does the net present value (NPV) decision rule relate to the primary goal of financial management, which is creating wealth for shareholders?

Scott is considering a project that will produce cash inflows of $2,100 a year for 4 years.The project has a 12 percent required rate of return and an initial cost of $6,000.What is the discounted payback period?

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.

You are considering two independent projects with the following cash flows.The required return for both projects is 16 percent.Given this information, which one of the following statements is correct?

Applying the discounted payback decision rule to all projects may cause:

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 percent?

The Taxi Co.is evaluating a project with the following cash flows: The company uses an 8 percent interest rate on all of its projects.What is the MIRR using the discounted approach?

Which one of the following is a project acceptance indicator given an independent project with investing type cash flows?

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 percent? What if the discount rate is 13 percent?

You are analyzing a project and have gathered the following data: Based on the net present value of _____, you should _____ the project.

Which one of the following will decrease the net present value of a project?

An investment project provides cash flows of $1,190 per year for 10 years.If the initial cost is $8,000, what is the payback period?

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.

J&J Enterprises is considering an investment that will cost $318,000.The investment produces no cash flows for the first year.In the second year, the cash inflow is $47,000.This inflow will increase to $198,000 and then $226,000 for the following two years, respectively, before ceasing permanently.The firm requires a 15.5 percent rate of return and has a required discounted payback period of three years.Should the project be accepted? Why or why not?

A project has an initial cost of $18,400 and produces cash inflows of $7,200, $8,900, and $7,500 over three years, respectively.What is the discounted payback period if the required rate of return is 16 percent?

A project will produce cash inflows of $2,800 a year for 4 years with a final cash inflow of $5,700 in year 5.The project's initial cost is $9,500.What is the net present value of this project if the required rate of return is 16 percent?