e 1.

The length of time required for a project’s discounted cash flows to equal the initial
cost of the project is called the:
a. net present value.
b. internal rate of return.
c. payback period.
d. discounted profitability index.
e. discounted payback period.

c 2. A situation in which accepting one investment prevents the acceptance of another

investment is called the:
a. net present value profile.
b. operational ambiguity decision.
c. mutually exclusive investment decision.
d. issues of scale problem.
e. multiple choices of operations decision.

e 3. Which of the following are capital budgeting decisions?

I. determining whether to sell bonds or issue stock
II. deciding which product markets to enter
III. deciding whether or not to purchase a new piece of equipment
IV. determining which, if any, new products should be produced
a. I only
b. III only
c. II and IV only
d. I, III, and IV only
e. II, III, and IV only

c 4. You are comparing two mutually exclusive projects. The crossover point is 9 percent.
You determine that you should accept project A if the required return is 6 percent. This
implies that you should:
I. reject project B if the required return is 6 percent.
II. always accept project A and always reject project B.
III. always reject project A any time the discount rate is greater than 9 percent.
IV. accept project A any time the discount rate is less than 9 percent.
a. I and II only
b. III and IV only
c. I, III, and IV only
d. I, II, and IV only
e. I, II, III, and IV
e 5. You are considering a project with the following data:

Internal rate of return 8.7 percent

Profitability ratio .98
Net present value -$393
Payback period 2.44 years
Required return 9.5 percent

Which one of the following is correct given this information?

a. The discount rate used in computing the net present value must have been less than 8.7
percent.
b. The discounted payback period will have to be less than 2.44 years.
c. The discount rate used to compute the profitability ratio was equal to the internal rate
of return.
d. This project should be accepted based on the profitability ratio.
e. This project should be rejected based on the internal rate of return.

b 6. What is the net present value of a project with the following cash flows and a required
return of 12 percent?

Year Cash Flow

0 -$28,900
1 $12,450
2 $19,630
3 $ 2,750
a. -$287.22
b. -$177.62
c. $177.62
d. $204.36
e. $287.22

a 7. You are considering the following two mutually exclusive projects. The required rate
of return is 11.25 percent for project A and 10.75 percent for project B. Which
project
should you accept and why?

Year Project A Project B

0 -$48,000 -$126,900
1 $18,400 $ 69,700
2 $31,300 $ 80,900
3 $11,700 $ 0
a. project A; because its NPV is about $335 more than the NPV of project B
b. project A; because it has the higher required rate of return
c. project B; because it has the largest total cash inflow
d. project B; because it returns all its cash flows within two years
e. project B; because it is the largest sized project
d 8. A project has an initial cost of $1,900. The cash inflows are $0, $500, $900, and $700
over the next four years, respectively. What is the payback period?
a. 2.71 years
b. 2.98 years
c. 3.11 years
d. 3.71 years
e. never

c 9. Yancy is considering a project which will produce cash inflows of $900 a year for 4
years. The project has a 9 percent required rate of return and an initial cost of $2,800.
What is the discounted payback period?
a. 3.11 years
b. 3.18 years
c. 3.82 years
d. 4.18 years
e. never

d 10. A project has an initial cost of $38,000 and a four-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 $1,000, $1,200, $1,500, and $1,700 a year for
the next four years, respectively. What is the average accounting return?
a. 3.55 percent
b. 4.13 percent
c. 4.28 percent
d. 7.11 percent
e. 14.21 percent

e 11. You are analyzing the following two mutually exclusive projects and have developed
the following information. What is the crossover rate?

Project A Project B
Year Cash Flow Cash Flow
0 -$84,500 -$76,900
1 $29,000 $25,000
2 $40,000 $35,000
3 $27,000 $26,000
a. 11.113 percent
b. 13.008 percent
c. 14.901 percent
d. 16.750 percent
e. 17.899 percent