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Jan 18, 2018

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Financial Management

© All Rights Reserved

134 views

Financial Management

© All Rights Reserved

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105. Baker's Supply imposes a payback cutoff of 3.5 years for its international investment

projects. If the company has the following two projects available, should it accept either of

them?

B. Accept Project A but not Project B

C. Accept Project B but not Project A

D. Both Project A and B are acceptable but you can only select one project

E. Reject both Projects A and B

PaybackB = 3 + [($61,000 - $16,500 - $26,300 - $15,600)/$4,900 = 3.53 years

The firm should reject both projects.

AACSB: Analytic

Bloom's: Analysis

Difficulty: Basic

Learning Objective: 08-01 Summarize the payback rule and some of its shortcomings.

Section: 8.2

Topic: Payback period

106. You're trying to determine whether or not to expand your business by building a new

manufacturing plant. The plant has an installation cost of $26 million, which will be depreciated

straight-line to zero over its three-year life. If the plant has projected net income of $2,348,000,

$2,680,000, and $1,920,000 over these three years, what is the project's average accounting

return (AAR)?

A. 11.69 percent

B. 14.14 percent

C. 15.08 percent

D. 17.82 percent

E. 19.21 percent

AACSB: Analytic

Bloom's: Analysis

Difficulty: Basic

Learning Objective: 08-02 Discuss accounting rates of return and some of the problems with them.

Section: 8.3

Topic: Average accounting return

107. What is the IRR of the following set of cash flows?

A. 12.93 percent

B. 14.90 percent

C. 15.81 percent

D. 16.33 percent

E. 17.78 percent

The IRR is the rate that makes the NPV equal zero.

AACSB: Analytic

Bloom's: Analysis

Difficulty: Basic

Learning Objective: 08-03 Explain the internal rate of return criterion and its associated strengths and weaknesses.

Section: 8.4

Topic: Internal rate of return

108. What is the NPV of the following set of cash flows at a discount rate of zero percent? What

if the discount rate is 15 percent?

A. -$41,700; -$8,665.07

B. -$41,700; $1,208.19

C. $0; $1,208.19

D. $2,500; $1,208.19

E. $2,500; -$8,665.07

AACSB: Analytic

Bloom's: Analysis

Difficulty: Basic

Learning Objective: 08-04 Evaluate proposed investments by using the net present value criterion.

Section: 8.1

Topic: Net present value

109. Chestnut Tree Farms has identified the following two mutually exclusive projects:

A. 8.28 percent or less

B. 8.28 percent or more

C. 9.33 percent or more

D. 9.55 percent or less

E. 9.55 percent or more

AACSB: Analytic

Bloom's: Analysis

Difficulty: Basic

Learning Objective: 08-03 Explain the internal rate of return criterion and its associated strengths and weaknesses.

Section: 8.4

Topic: NPV Profile

110. Jefferson International is trying to choose between the following two mutually exclusive

design projects:

The required return is 12 percent. If the company applies the profitability index (PI) decision

rule, which project should the firm accept? If the company applies the NPV decision rule, which

project should it take? Given your first two answers, which project should the firm actually

accept?

A. Project A; Project B; Project A

B. Project A; Project B; Project B

C. Project B; Project A; Project A

D. Project B; Project A; Project B

E. Project B; Project B, Project B

The firm should select project A because the PI rule should not be applied to mutually exclusive

projects.

AACSB: Analytic

Bloom's: Analysis

Difficulty: Basic

Learning Objective: 08-04 Evaluate proposed investments by using the net present value criterion. and 08-06 Calculate the profitability index

and understand its relation to net present value.

Section: 8.1 and 8.5

Topic: Net present value and profitability index

111. Consider the following two mutually exclusive projects:

Whichever project you choose, if any, you require a 14 percent return on your investment. If you

apply the payback criterion, you will choose investment _____, if you apply the NPV criterion,

you will choose investment _____; if you apply the IRR criterion, you will choose investment

____; if you choose the profitability index criterion, you will choose investment ____. Based on

your first four answers, which project will you finally choose?

A. A; B; A; A; B

B. A; A; B; B; A

C. A; A; B; B; B

D. B; A; B; A; A

E. B; A; B; B; A

PaybackB = ($23,000 - $11,600 - $11,200)/$12,500 = 2.02 years

The company should select Project A based on net present value. Payback ignores some cash

flows and the time value of money. Neither the internal rate of return nor the profitability ratio

are reliable methods when projects are mutually exclusive.

AACSB: Analytic

Bloom's: Analysis

Difficulty: Basic

Learning Objective: 08-01 Summarize the payback rule and some of its shortcomings.; 08-03 Explain the internal rate of return criterion and its

associated strengths and weaknesses.; 08-04 Evaluate proposed investments by using the net present value criterion. and 08-06 Calculate the

profitability index and understand its relation to net present value.

Section: 8.1, 8.2, 8.4, and 8.5

Topic: Comparing investment criteria

112. Textiles Unlimited has gathered projected cash flows for two projects. At what interest rate

would the company be indifferent between the two projects? Which project is better if the

required return is above this interest rate?

A. 11.76 percent; A

B. 12.49 percent; A

C. 12.49 percent; B

D. 13.15 percent; A

E. 13.15 percent: B

AACSB: Analytic

Bloom's: Analysis

Difficulty: Basic

Learning Objective: 08-03 Explain the internal rate of return criterion and its associated strengths and weaknesses.

Section: 8.4

Topic: Net present value profile

113. Quattro, Inc. has the following mutually exclusive projects available. The company has

historically used a 4-year cutoff for projects. The required return is 11 percent.

The payback for Project A is ____ while the payback for Project B is _____. The NPV for

Project A is _____ while the NPV for Project B is _____. Which project, if any, should the

company accept?

A. 3.92 years; 3.64 years; $780.85; $1,211.48; accept both Project A and B

B. 3.92 years; 3.79 years; -$211.60; $1,211.48; accept Project B only

C. 3.92 years; 3.79 years; $780.85; -$7,945.93; accept Project A only

D. 4.06 years; 3.64 years; $780.85; $1,211.48; accept both Project A and B

E. 4.06 years; 3.79 years; -$211.60; -$7,945.93; reject both projects

Payback B = 3 + ($125,000 - $38,600 - $33,400 - $31,200)/$27,500 = 3.79 years

AACSB: Analytic

Bloom's: Analysis

Difficulty: Basic

Learning Objective: 08-01 Summarize the payback rule and some of its shortcomings. and 08-04 Evaluate proposed investments by using the net

present value criterion.

Section: 8.1 and 8.2

Topic: Payback and net present value

114. Miller and Sons is evaluating a project with the following cash flows:

The company uses a 10 percent interest rate on all of its projects. What is the MIRR of the

project using the reinvestment approach? The discounting approach? The combination

approach?

A. 8.46 percent; 7.29 percent; 8.59 percent

B. 8.46 percent; 7.38 percent; 8.61 percent

C. 8.54 percent; 7.29 percent; 8.61 percent

D. 8.54 percent; 7.38 percent; 8.59 percent

E. 8.54 percent; 8.23 percent; 8.61 percent

Reinvestment approach:

Discounting approach:

Combination approach:

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