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The Spoon Restaurant is considering a project with an initial cost of $525,000. The project will not produce any cash flows for the first three years. Starting in year four, the project will produce cash inflows of $721,000 a year for three years. This project is risky, so the firm has assigned it a discount rate of 17 percent. What is the project's net present value?


A) $382,507.17
B) $389,211.76
C) $414,141.41
D) $451,329.69
E) $469,691.45

F) C) and D)
G) B) and D)

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Ed has to choose between Project A and Project B, which are mutually exclusive. Project A has an initial cost of $28,000 and an internal rate of return of 16 percent. Project B has an initial cost of $47,000 and an internal rate of return of 12 percent. Explain why the selection of the project with the higher internal rate of return could be a faulty decision.

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0.16 X $28,000 = $4,480
0.12 X...

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Benny's is considering adding a new product to its lineup. This product is expected to generate sales for four years after which time the product will be discontinued. What is the project's net present value if the firm wants to earn a 14 percent rate of return? Benny's is considering adding a new product to its lineup. This product is expected to generate sales for four years after which time the product will be discontinued. What is the project's net present value if the firm wants to earn a 14 percent rate of return? A) $2,336.29 B) $2,511.49 C) $2,874.21 D) $3,013.05 E) $3,268.47


A) $2,336.29
B) $2,511.49
C) $2,874.21
D) $3,013.05
E) $3,268.47

F) B) and C)
G) All of the above

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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. 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 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

F) None of the above
G) A) and B)

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An investment has conventional cash flows and a profitability index of 1.0. Given this, which one of the following must be true?


A) The internal rate of return exceeds the required rate of return.
B) The investment never pays back.
C) The net present value is equal to zero.
D) The average accounting return is 1.0.
E) The net present value is greater than 1.0.

F) B) and C)
G) A) and B)

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Which one of the following methods of analysis has the greatest bias towards short-term projects?


A) Net present value
B) Internal rate of return
C) Average accounting return
D) Profitability index
E) Payback

F) C) and E)
G) All of the above

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The Steel Factory is considering a project that will produce annual cash flows of $36,800, $45,500, $56,200, and $21,800 over the next four years, respectively. What is the internal rate of return if the initial cost of the project is $135,000?


A) 7.56 percent
B) 9.19 percent
C) 11.28 percent
D) 12.24 percent
E) 12.83 percent

F) C) and E)
G) C) and D)

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Consider the following two mutually exclusive projects: 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 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

F) A) and E)
G) B) and E)

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Mary has just been asked to analyze an investment to determine if it is acceptable. Unfortunately, she is not being given sufficient time to analyze the project using various methods. She must select one method of analysis and provide an answer based solely on that method. Which method do you suggest she use in this situation?


A) Internal rate of return
B) Payback
C) Average accounting rate of return
D) Net present value
E) Profitability index

F) D) and E)
G) A) and B)

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Miller Brothers is considering a project that will produce cash inflows of $61,500, $72,800, $84,600, and $68,000 a year for the next four years, respectively. What is the internal rate of return if the initial cost of the project is $225,000?


A) 9.39 percent
B) 10.22 percent
C) 11.47 percent
D) 11.62 percent
E) 12.24 percent

F) B) and E)
G) A) and E)

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You are considering an investment for which you require a 14 percent rate of return. The investment costs $58,900 and will produce cash inflows of $25,000 for 3 years. Should you accept this project based on its internal rate of return? Why or why not?


A) Yes; because the IRR is 13.13 percent
B) Yes; because the IRR is 13.65 percent
C) Yes; because the IRR is 13.67 percent
D) No; because the IRR is 13.13 percent
E) No; because the IRR is 13.65 percent

F) C) and D)
G) B) and C)

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In words, explain how the crossover rate is computed and why the net present value profile is useful.

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The crossover rate is the internal rate ...

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Identify one primary strength and one primary weakness for each of the following methods of investment analysis. Net present value: Strength: Weakness: Internal rate of return: Strength: Weakness: Profitability index: Strength: Weakness: Payback: Strength: Weakness: Average accounting return: Strength: Weakness:

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Student answers should include comments ...

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Which one of the following is the primary advantage of payback analysis?


A) Incorporation of the time value of money concept
B) Ease of use
C) Research and development bias
D) Arbitrary cutoff point
E) Long-term bias

F) A) and B)
G) C) and D)

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