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Chapter 08 - Net Present Value and Other Investment Criteria

Multiple Choice Questions

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?

A. Accept both Projects A and B
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

PaybackA = 3 + [($57,000 - $9,000 - $14,800 - $18,900)/$19,600] = 3.73 years
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

348.920. 14. 15.680. and $1.3 Topic: Average accounting return .348.000 + $0)/2] = 17. which will be depreciated straight-line to zero over its three-year life. Section: 8. 17.000.69 percent B.21 percent AAR = [($2.000 + $1.000 + $2. You're trying to determine whether or not to expand your business by building a new manufacturing plant.920.000.08 percent D.000.000)/3] + [($26.680.82 percent AACSB: Analytic Bloom's: Analysis Difficulty: Basic Learning Objective: 08-02 Discuss accounting rates of return and some of the problems with them. 19.82 percent E. $2.000 over these three years.14 percent C. The plant has an installation cost of $26 million.106. 11. If the plant has projected net income of $2. what is the project's average accounting return (AAR)? A.

93 percent B. 17. AACSB: Analytic Bloom's: Analysis Difficulty: Basic Learning Objective: 08-03 Explain the internal rate of return criterion and its associated strengths and weaknesses.4 Topic: Internal rate of return . 15.90 percent C.81 percent D.107.33 percent E. 16. Section: 8.78 percent The IRR is the rate that makes the NPV equal zero. 14. 12. What is the IRR of the following set of cash flows? A.

19 E.19 D.07 NPV0 percent = -$41.208. 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. $1.208. $1. $0.700.19 C.200 + $11.108.208. -$8. $1.500 AACSB: Analytic Bloom's: Analysis Difficulty: Basic Learning Objective: 08-04 Evaluate proposed investments by using the net present value criterion. $2.700 + $13.665. $2.900 + $19.07 B. Section: 8. -$41.500.665.100 = $2. -$41.500.700. -$8.1 Topic: Net present value .

8.55 percent.4 Topic: NPV Profile . 8.28 percent or less B. Section: 8. Chestnut Tree Farms has identified the following two mutually exclusive projects: Over what range of discount rates would you choose Project A? A.33 percent or more D.28 percent or more C. 9. 9.55 percent or more Project A should is preferred if the discount rate is 9. or less.109. AACSB: Analytic Bloom's: Analysis Difficulty: Basic Learning Objective: 08-03 Explain the internal rate of return criterion and its associated strengths and weaknesses.55 percent or less E. 9.

Project B.5 Topic: Net present value and profitability index .110. Section: 8. Project B. Project B The firm should select project A because the PI rule should not be applied to mutually exclusive projects. Project A. AACSB: Analytic Bloom's: Analysis Difficulty: Basic Learning Objective: 08-04 Evaluate proposed investments by using the net present value criterion. Project A. which project should the firm actually accept? A. Project A. Project B. Project A B. If the company applies the profitability index (PI) decision rule. which project should the firm accept? If the company applies the NPV decision rule. and 08-06 Calculate the profitability index and understand its relation to net present value. which project should it take? Given your first two answers. Project B C. Jefferson International is trying to choose between the following two mutually exclusive design projects: The required return is 12 percent. Project B. Project B E. Project A D.1 and 8. Project A. Project B. Project B.

B D. B. A. A.000 . A. B.600 = 2. A C.111. Neither the internal rate of return nor the profitability ratio are reliable methods when projects are mutually exclusive. A. Payback ignores some cash flows and the time value of money. A. A. If you apply the payback criterion. if you apply the NPV criterion.66 years PaybackB = ($23. Consider the following two mutually exclusive projects: Whichever project you choose. if any. B. B. you will choose investment ____. A. A E. A.000 . . B.$23. A PaybackA = ($54.200)/$27.$11.600 .500 = 2. B.02 years The company should select Project A based on net present value. you will choose investment _____. if you apply the IRR criterion. you will choose investment _____. you will choose investment ____. B B. B.700 . if you choose the profitability index criterion. B. which project will you finally choose? A. Based on your first four answers. B.$11. A.$12.200)/$12. B. A. you require a 14 percent return on your investment.

5 Topic: Comparing investment criteria . and 08-06 Calculate the profitability index and understand its relation to net present value.4. 8. 08-04 Evaluate proposed investments by using the net present value criterion. Section: 8.AACSB: Analytic Bloom's: Analysis Difficulty: Basic Learning Objective: 08-01 Summarize the payback rule and some of its shortcomings.. and 8. 8.1.2. 08-03 Explain the internal rate of return criterion and its associated strengths and weaknesses..

15 percent. Textiles Unlimited has gathered projected cash flows for two projects.4 Topic: Net present value profile .49 percent. 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.112. 12. 13.76 percent.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.49 percent. A E. 11. 12. 13. B D. A B. A C. Section: 8.

85. if any.$38. 3.300 .48.500 = 3.700 .$31.48.92 years Payback B = 3 + ($125. has the following mutually exclusive projects available. -$7. accept both Project A and B E. The NPV for Project A is _____ while the NPV for Project B is _____.2 Topic: Payback and net present value . 4. 4. and 08-04 Evaluate proposed investments by using the net present value criterion. 3. 3. The payback for Project A is ____ while the payback for Project B is _____. $780. -$7. reject both projects Payback A = 3 + ($82. Inc. 3.48.900)/$26. accept both Project A and B B.211. accept Project B only C. 3. accept Project A only D.79 years. Section: 8.200)/$27. $1.$33.64 years.60.06 years.93.400 .945. The company has historically used a 4-year cutoff for projects. $780. -$211. Quattro. 3.60.$18. -$211. 3.64 years.85.211.79 years AACSB: Analytic Bloom's: Analysis Difficulty: Basic Learning Objective: 08-01 Summarize the payback rule and some of its shortcomings.79 years. 3.211.945.1 and 8.92 years. $1.92 years.000 .$23.000 .85.600 .79 years. $1.200 = 3.93. Which project.113.92 years. The required return is 11 percent. should the company accept? A.06 years. $780.$15.

What is the MIRR of the project using the reinvestment approach? The discounting approach? The combination approach? A.23 percent. 8.46 percent.46 percent. 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.61 percent C.54 percent.38 percent. 8.114.59 percent E.61 percent .29 percent.54 percent.38 percent. 8. 8.61 percent D. 8.59 percent B. 7.29 percent. 8. 8. 8. 7.54 percent. 8. 8. 7. 8. 7.

Reinvestment approach: Discounting approach: Combination approach: .