Suppose you calculate the ordinary payback for a project, given the project cash flows

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QUESTION 1

  1. Suppose you calculate the ordinary payback for a project, given the project cash flows and a required rate of return of 12%. After you calculate the ordinary payback, you discover that the actual required rate of return is 14%. The new payback you calculate using a required rate of return of 14% would be
    lower than the payback calculated with a required rate of return of 12%.
    higher than the payback calculated with a required rate of return of 12%.
    the same as the payback calculated with a required rate of return of 12%.
    uncertain because it could be either lower or higher than the payback calculated with a required rate of return of 12%.

3 points

 

QUESTION 2

  1. Suppose you calculate the Net Present Value (NPV) for a project, given the project cash flows and a required rate of return of 12%. After you calculate the NPV, you discover that the actual required rate of return is 14%. The new NPV you calculate using a required rate of return of 14% would be
    lower than the NPV calculated with a required rate of return of 12%.
    higher than the NPV calculated with a required rate of return of 12%.
    the same as the NPV calculated with a required rate of return of 12%.
    uncertain because it could be either lower or higher than the NPV calculated with a required rate of return of 12%.

3 points

 

QUESTION 3

  1. Suppose you calculate the Internal Rate of Return (IRR) for a project, given the project cash flows and a required rate of return of 12%. After you calculate the IRR, you discover that the actual required rate of return is 14%. The new IRR you calculate using a required rate of return of 14% would be
    lower than the IRR calculated with a required rate of return of 12%.
    higher than the IRR calculated with a required rate of return of 12%.
    the same as the IRR calculated with a required rate of return of 12%.
    uncertain because it could be either lower or higher than the IRR calculated with a required rate of return of 12%.

3 points

 

QUESTION 4

  1. Suppose a company has proposed a new 4-year project. The project has an initial outlay of $60,000 and has expected cash flows of $17,000 in year 1, $22,000 in year 2, $27,000 in year 3, and $49,000 in year 4. The required rate of return is 15% for projects at this company. What is the Payback for this project? (Answer to the nearest tenth of a year, e.g. 1.2)

3 points

 

QUESTION 5

  1. Suppose you calculate the Profitability Index (PI) for a project, given the project cash flows and a required rate of return of 12%. After you calculate the PI, you discover that the actual required rate of return is 14%. The new PI you calculate using a required rate of return of 14% would be
    lower than the PI calculated with a required rate of return of 12%.
    higher than the PI calculated with a required rate of return of 12%.
    the same as the PI calculated with a required rate of return of 12%.
    uncertain because it could be either lower or higher than the PI calculated with a required rate of return of 12%.

3 points

 

QUESTION 6

  1. What is the decision rule for Profitability Index (PI)?
    a.accept a project when the PI is positive.
    b.accept a project when the PI is greater than 1.
    c.accept a project when the PI is greater than the required rate of return.
    d.accept a project when the PI is greater than the Internal Rate of Return (IRR).
    e.accept a project when the PI is greater than the risk free rate.
    f.accept the project when the PI is negative.
    g.accept the project when the PI is less than 1.
    h.accept the project when the PI is less than the required rate of return.
    i.accept the project when the PI is less than the Internal Rate of Return (IRR).
    j.accept the project when the PI is less than the risk free rate.

3 points

 

QUESTION 7

  1. The decision criteria for the Payback is to reject a project if the Payback is
    1.less than a rule of thumb in a particular company.
    2.equal to a rule of thumb in a particular company.
    3.greater than a rule of thumb in a particular company.
    4.negative.
    5.equal to zero.
    6.positive.
    7.less than one.
    8.equal to one.
    9.greater than one.
    10.less than the required rate of return.
    11.equal to the required rate of return.
    12.greater than the required rate of return.

3 points

 

QUESTION 8

  1. Suppose a company has proposed a new 4-year project. The project has an initial outlay of $47,000 and has expected cash flows of $17,000 in year 1, $24,000 in year 2, $29,000 in year 3, and $34,000 in year 4. The required rate of return is 10% for projects at this company. What is the Payback for this project? (Answer to the nearest tenth of a year, e.g. 1.2)

3 points

 

QUESTION 9

  1. Suppose a company has proposed a new 5-year project. The project has an initial outlay of $25,000 and has expected cash flows of $4,000 in year 1, $4,000 in year 2, $6,000 in year 3, $6,000 in year 4, and $7,000 in year 5. The required rate of return is 11% for projects at this company. What is the Payback for this project? (Answer to the nearest tenth of a year, e.g. 3.2)

3 points

 

QUESTION 10

  1. Suppose a company has proposed a new 4-year project. The project has an initial outlay of $62,000 and has expected cash flows of $20,000 in year 1, $24,000 in year 2, $28,000 in year 3, and $34,000 in year 4. The required rate of return is 12% for projects at this company. What is the discounted payback for this project? (Answer to the nearest tenth of a year, e.g. 3.2)

3 points

 

QUESTION 11

  1. Suppose a company has proposed a new 5-year project. The project has an initial outlay of $169,000 and has expected cash flows of $35,000 in year 1, $46,000 in year 2, $57,000 in year 3, $67,000 in year 4, and $79,000 in year 5. The required rate of return is 13% for projects at this company. What is the discounted payback for this project? (Answer to the nearest tenth of a year, e.g. 3.2)

3 points

 

QUESTION 12

  1. Suppose a company has proposed a new 5-year project. The project has an initial outlay of $112,000 and has expected cash flows of $35,000 in year 1, $48,000 in year 2, $54,000 in year 3, $69,000 in year 4, and $75,000 in year 5. The required rate of return is 16% for projects at this company. What is the net present value for this project? (Answer to the nearest dollar.)

3 points

 

QUESTION 13

  1. Suppose a company has proposed a new 4-year project. The project has an initial outlay of $19,000 and has expected cash flows of $7,000 in year 1, $9,000 in year 2, $11,000 in year 3, and $14,000 in year 4. The required rate of return is 14% for projects at this company. What is the net present value for this project? (Answer to the nearest dollar.)

3 points

 

QUESTION 14

  1. Suppose a company has two mutually exclusive projects, both of which are three years in length. Project A has an initial outlay of $8,000 and has expected cash flows of $2,000 in year 1, $4,000 in year 2, and $5,000 in year 3. Project B has an initial outlay of $8,000 and has expected cash flows of $2,000 in year 1, $4,000 in year 2, and $6,000 in year 3. The required rate of return is 13% for projects at this company. What is the net present value for the best project? (Answer to the nearest dollar.)

4 points

 

QUESTION 15

  1. If a project has an initial outlay of $35,000 and cash flows of $13,000 per year for the next 5 years, what is the IRR of this project? (Answer to the nearest tenth of a percent, e.g. 12.3).

3 points

 

QUESTION 16

  1. Suppose a company has proposed a new 5-year project. The project has an initial outlay of $234,000 and has expected cash flows of $35,000 in year 1, $41,000 in year 2, $52,000 in year 3, $67,000 in year 4, and $74,000 in year 5. The required rate of return is 12% for projects at this company. What is the profitability index for this project? (Answer to the nearest hundredth, e.g. 1.23)

3 points

 

QUESTION 17

  1. Suppose a company has proposed a new 4-year project. The project has an initial outlay of $26,000 and has expected cash flows of $7,000 in year 1, $9,000 in year 2, $11,000 in year 3, and $14,000 in year 4. The required rate of return is 12% for projects at this company. What is the profitability index for this project? (Answer to the nearest hundredth, e.g. 1.23)

3 points

 

QUESTION 18

  1. A company is considering a 5-year project to open a new product line. A new machine with an installed cost of $70,000 would be required to manufacture their new product, which is estimated to produce sales of $90,000 in new revenues each year. The cost of goods sold to produce these sales (not including depreciation) is estimated at 48% of sales, and the tax rate at this firm is 27%. If straight-line depreciation is used to calculate annual depreciation, what is the estimated annual operating cash flow from this project each year? (Answer to the nearest dollar.)

5 points

 

QUESTION 19

  1. A company is considering a 6-year project that requires an initial outlay of $20,000. The project engineer has estimated that the operating cash flows will be $4,000 in year 1, $6,000 in year 2, $7,000 in year 3, $7,000 in year 4, $7,000 in year 5, and $8,000 in year 6. At the end of the project, the equipment will be fully depreciated, classified as 5-year property under MACRS. The project engineer believes the equipment can be sold for $5,000 at the end of the project. If the tax rate is 29% and the required rate of return is 16%, what is the net present value (NPV) of this project? (Answer to the nearest dollar.)

5 points

 

QUESTION 20

  1. A company is considering a 3-year project that requires an initial installed equipment cost of $14,000. The project engineer has estimated that the operating cash flows will be $4,000 in year 1, $5,000 in year 2, and $8,000 in year 3. The new machine will also require a parts inventory of $2,000 at the beginning of the project (assume this inventory can be sold for cost at the end of the project). It is also estimated that the equipment can be sold as salvage for an after tax salvage cash flow of $5,000 at the end of the project. If the tax rate is 29% and the required rate of return is 12%, what is the net present value (NPV) of this project? (Answer to the nearest dollar.)

5 points

 

QUESTION 21

  1. A company is considering a 5-year project to expand production with the purchase of a new automated machine using the latest technology. The new machine would cost $230,000 FOB St. Louis, with a shipping cost of $4,000 to the plant location. Installation expenses of $15,000 would also be required. This new machine would be classified as 7-year property for MACRS depreciation purposes. The project engineers anticipate that this equipment could be sold for salvage for $44,000 at the end of the project. If the corporate tax rate is 32%, what is the after tax salvage cash flow for this new machine at the end of the project? (Answer to the nearest dollar.)

    MACRS percentages for depreciation each year are as follows:

     Year %
    
     1 14.29
     2 24.49
     3 17.49
     4 12.49
     5 8.93
     6 8.93
     7 8.93
     8 4.45
    
     

5 points

 

QUESTION 22

  1. A company is considering an 8-year project to expand into a new geographical area. The project requires a new machine, which would cost $180,000 FOB San Francisco, with a shipping cost of $6,000 to the new plant location. Installation expenses of $9,000 would also be required. This new machine would be classified as 7-year property for MACRS depreciation purposes. The project engineers anticipate that this equipment could be sold for salvage for $46,000 at the end of the project. If the corporate tax rate is 32%, what is the after tax salvage cash flow for this new machine at the end of the project? (Answer to the nearest dollar.)

    MACRS percentages for depreciation each year are as follows:

     Year %
    
     1 14.29
     2 24.49
     3 17.49
     4 12.49
     5 8.93
     6 8.93
     7 8.93
     8 4.45
    
     

5 points

 

QUESTION 23

  1. A company is considering a 5-year project that opens a new product line and requires an initial outlay of $78,000. The assumed selling price is $100 per unit, and the variable cost is $69 per unit. Fixed costs not including depreciation are $21,000 per year. Assume depreciation is calculated using stright-line down to zero salvage value. If the required rate of return is 14% per year, what is the accounting break-even point? (Answer to the nearest whole unit.)

4 points

 

QUESTION 24

  1. A company is considering a 5-year project that opens a new product line and requires an initial outlay of $85,000. The assumed selling price is $94 per unit, and the variable cost is $51 per unit. Fixed costs not including depreciation are $18,000 per year. Assume depreciation is calculated using stright-line down to zero salvage value. If the required rate of return is 11% per year, what is the cash break-even point? (Answer to the nearest whole unit.)

4 points

 

QUESTION 25

  1. A company is considering a 5-year project that opens a new product line and requires an initial outlay of $82,000. The assumed selling price is $91 per unit, and the variable cost is $65 per unit. Fixed costs not including depreciation are $21,000 per year. Assume depreciation is calculated using stright-line down to zero salvage value. If the required rate of return is 12% per year, what is the financial break-even point? (Answer to the nearest whole unit.)

4 points

 

QUESTION 26

  1. Suppose that a company purchased some land 5 years ago for $1,000,000 and they now want to use this land to build a new manufacturing plant. Recently they received an offer from a commercial real estate firm to purchase the land for $1,500,000. However, the company prefers to build a plant on that land instead, assuming the project is profitable. To build the plant, they must first remove some trees and an existing structure at a cost of $500,000. The construction of the plant itself will cost $3,000,000. What is the proper cash flow to use as the initial investment for this project?
    a.$500,000
    b.$1,000,000
    c.$1,500,000
    d.$2,000,000
    e.$2,500,000
    f.$3,000,000
    g.$3,500,000
    h.$4,000,000
    i.$4,500,000
    j.$5,000,000
    k.$5,500,000
    l.$6,000,000

5 points

 

QUESTION 27

  1. A company is considering two mutually exclusive projects, A and B. Project A has an NPV of $3,000,000 and Project B has an NPV of $4,000,000. What should the company do if the financial objective of the firm is to maximize the value of the firm?
    a.Pursue only Project A.
    b.Pursue only Project B.
    c.Pursue both Project A and Project B.
    d.Do not pursue either project.

5 points (Extra Credit)

 

QUESTION 28

  1. An NPV profile is
    a.a written document that describes the NPV of the project.
    b.a written document that presents the NPV of a project given different initial outlays.
    c.a written document that presents the NPV of a project in comparison with the Profitability Index.
    d.a chart that shows the NPV of a project at various discount rates.
    e.a chart that shows the NPV of a project at various internal rates of return.
    f.a chart that shows the NPV of a project in comparison with the Profitability Index.

5 points (Extra Credit)

 

QUESTION 29

  1. Identify which of the following might be something an NPV Profile might be used for. Check all that apply.
    a.An NPV Profile indicates if there is a conflict between the NPV and the Profitability Index.
    b.An NPV Profile can indicate which project is the best at a given required rate of return given two mutually exclusive projects.
    c.An NPV Profile can indicate if a project has more than one internal rate of return.
    d.An NPV Profile can indicate if the profitability of a project is sensitive to changes in the initial outlay.
    e.An NPV Profile can show how the NPV might change if the estimate for the required rate of return is uncertain.
    f.An NPV Profile can indicate the NPV of a project at various internal rates of return.

 

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