Frazier Fudge has a project with an initial outlay of $40,000, followed by three years of annual incremental cash flows

Frazier Fudge has a project with an initial outlay of $40,000, followed by three years of annual incremental cash flows of $35,000. At the end of the third year, equipment will be sold producing additional cash flow of $10,000. Assuming a discount rate of 10%, which of the following is the correct equation to solve for the IRR of the project?

A) $40,000 = $35,000(1.12)1 + $35,000(1.12)2 + $45,000(1.12)3 

B) $40,000 = $35,000(1 + IRR)1 + $35,000(1 + IRR)2 + $45,000(1 + IRR)3 

C) $40,000 = $35,000/(1.12)IRR + $35,000/(1.12)IRR + $45,000/(1.12)IRR 

D) $40,000 = $35,000/(1 + IRR) + $35,000/(1.IRR) + $45,000/(1 + IRR)

The Seattle Corporation has been presented with an investment opportunity which will yield cash flows of $30,000 per year in Years 1 through 4, $35,000 per year in Years 5 through 9, and $40,000 in Year 10. This investment will cost the firm $100,000 today, and the firm's cost of capital is 10%. Assume cash flows occur evenly during the year.

A) 5.23 years

B) 4.26 years

C) 4.35 years

D) 3.72 years

Below are the expected after-tax cash flows for Projects Y and Z. Both projects have an initial cash outlay of $20,000 and a required rate of return of 17%.

                        Project Y       Project Z

Year 1            $12,000         $10,000

Year 2             $8,000           $10,000

Year 3             $6,000                 0

Year 4             $2,000                 0

Year 5             $2,000                 0

Discounted payback periods for projects Y and Z are

A) 1.64 and 1.71 years.

B) 3.14 years and never.

C) 2 years and 2 years.

D) 5 years and never.

You are considering investing in a project with the following year-end after-tax cash flows:

Year 1: $5,000

Year 2: $3,200

Year 3: $7,800

If the initial outlay for the project is $12,113, compute the project's IRR.

A) 14%

B) 10%

C) 32%

D) 24%

WKW, Inc. is analyzing a project that requires an initial investment of $10,000, followed by cash inflows of $1,000 in Year 1, $4,000 in Year 2, and $15,000 in Year 3. The cost of capital is 10%. What is the profitability index of the project?

A) 1.04

B) 1.55

C) 1.78

D) 1.97

Frazier Fudge has a project with an initial outlay of $40,000, followed by three years of annual incremental cash flows of $35,000. At the end of the third year, equipment will be sold producing additional cash flow of $10,000. Assuming a cost of capital of 10%, calculate the MIRR of the project.

A) 46.5%

B) 51.3%

C) 62.9%

D) 74.7%

Below are the expected after-tax cash flows for Projects Y and Z. Both projects have an initial cash outlay

Below are the expected after-tax cash flows for Projects Y and Z. Both projects have an initial cash outlay of $20,000 and a required rate of return of 17%.

                        Project Y       Project Z

Year 1            $12,000         $10,000

Year 2             $8,000           $10,000

Year 3             $6,000                 0

Year 4             $2,000                 0

Year 5             $2,000                 0

Payback for Project Y is

A) two years.

B) one year.

C) three years.

D) four years.

What is payback for Project Z?

A) Two years

B) One year

C) Zero years

D) Project Z does not payback the original investment.

MacHinery Manufacturing Company is considering a three-year project that has a cost of $75,000. The project will generate after-tax cash flows of $33,100 in Year 1, $31,500 in Year 2, and $31,200 in Year 3. Assume that the firm's proper rate of discount is 10% and that the firm's tax rate is 40%. What is the project's payback?

A) 0.33 years

B) 1.22 years

C) 2.33 years

D) Three years

MacHinery Manufacturing Company is considering a three-year project that has a cost of $75,000. The project will generate after-tax cash flows of $33,100 in Year 1, $31,500 in Year 2, and $31,200 in Year 3. Assume that the appropriate discount rate is 10% and that the firm's tax rate is 40%. What is the project's discounted payback period?

A) 2.81 years

B) 2.33 years

C) 1.22 years

D) The project never reaches payback.

Analysis of a machine indicates that it has a cost of $5,375,000. The machine is expected to produce cash inflows of $1,825,000 in Year 1; $1,775,000 in Year 2; $1,630,000 in Year 3; $1,585,000 in Year 4; and $1,650,000 in Year 5. What is the machine's IRR?

A) 12.16%

B) 17.81%

C) 23.00%

D) 11.11%

Manheim Candles is considering a project with the following incremental cash flows. Assume a discount rate of 10%

Manheim Candles is considering a project with the following incremental cash flows. Assume a discount rate of 10%.

             Year                          Cash Flow

                0                              ($20,000)

                1                              0

                2                              $30,000

                3                              $30,000

Calculate the project's MIRR. (Round to the nearest whole percentage.)

A) 31%

B) 47%

C) 53%

D) 61%

Project H requires an initial investment of $100,000 and produces annual cash flows of $50,000, $40,000, and $30,000. Project T requires an initial investment of $100,000 and the produces annual cash flows of $30,000, $40,000, and $50,000. The projects are mutually exclusive. The company accepts projects with payback periods of 3 years or less.

A) Project H will be accepted.

B) Project T will be accepted.

C) H and T will both be accepted.

D) Neither projected will be accepted.

A new forklift under consideration by Home Warehouse requires an initial investment of $100,000 and produces annual cash flows of $50,000, $40,000, and $30,000. Which of the following will not change if the required rate of return is increased from 10% to 12%.

A) The net present value.

B) The internal rate of return.

C) The profitability index.

D) The modified internal rate of return.

Project Ell requires an initial investment of $50,000 and the produces annual cash flows of $30,000, $25,000, and $15,000. Project Ess requires an initial investment of $60,000 and then produces annual cash flows of $25,000 per year for the next ten years. The company ranks projects by their payback periods.

A) Projects with unequal lives cannot be ranked using the payback method.

B) Ess will be ranked higher than Ell.

C) Ell and Ess will be ranked equally.

D) Ell will be ranked higher than Ess.

Which of the following series of cash flows could have more than one IRR? (Negative cash flows are in parentheses.)

A) $(XX,XXX), $X,XXX , $X,XXX, $X,XXX

B) $(XX,XXX), $X,XXX , $X,XXX, $X,XXX, $(XX,XXX)

C) $X,XXX, $X,XXX , $X,XXX, $X,XXX, $(XX,XXX)

D) $XX,XXX, $X,XXX , $X,XXX, $X,XXX

Project Black Swan requires an initial investment of $115,000. It has positive cash flows of $140,000 for each

Project Black Swan requires an initial investment of $115,000. It has positive cash flows of $140,000 for each of the next two years. Because of major demolition and environmental clean-up costs, cash flow for the third and final year of the project is $(170,000). If the company 's required rate of return is 12%, the project should be

A) rejected because the IRR is less than 12%.

B) accepted because the NPV is positive at 12%.

C) the project is unacceptable at any discount rate.

D) rejected because there may be more than one IRR.

Project Black Swan requires an initial investment of $115,000. It has positive cash flows of $140,000 for each of the next two years. Because of major demolition and environmental clean-up costs, cash flow for the third and final year of the project is $(170,000).

A) All possible IRR's for this project are negative.

B) It is not possible to compute an IRR for this project.

C) The project is unacceptable at any required rate of return.

D) This project might have more than one IRR.

Compute the payback period for a project with the following cash flows, if the company's discount rate is 12%.

Initial outlay = $450

Cash flows: Year 1 = $325

                        Year 2 = $65

                        Year 3 = $100

A) 3.43 years

B) 3.17 years

C) 2.88 years

D) 2.6 years

Project Black Swan requires an initial investment of $115,000. It has positive cash flows of $140,000 for each of the next two years. Because of major demolition and environmental clean-up costs, cash flow for the third and final year of the project is $(170,000).

A) All possible IRR's for this project are negative.

B) It is not possible to compute an IRR for this project.

C) This project might have more than one IRR, but only one MIRR.

D) The project is unacceptable at any required rate of return. This project might have more than one IRR.

Project Black Swan requires an initial investment of $115,000. It has positive cash flows of $140,000 for each of the next two years. Because of major demolition and environmental clean-up costs, cash flow for the third and final year of the project is $(170,000). The company accepts all projects with a payback period of 2 years or less.

A) The payback rule would reject this project because of its risks are too high.

B) The payback rule would reject this project because all negative cash flows are added together.

C) If strictly applied, the payback rule would reject this project.

D) If strictly applied, the payback rule would accept this project.

Consider a project with the following cash flows:

                   After-Tax                  After-Tax

                 Accounting              Cash Flow

Year             Profits              from Operations

1                    $799                           $750

2                    $150                       $1,000

3                    $200                       $1,200

Initial outlay = $1,500

Terminal cash flow = 0

Compute the profitability index if the company's discount rate is 10%.

A) 15.8

B) 1.61

C) 1.81

D) 0.62

Webley Corp. is considering two expansion options, but does not have enough capital to undertake both,

Webley Corp. is considering two expansion options, but does not have enough capital to undertake both, Project W requires an investment of $100,000 and has an NPV of $10,000. Project D requires an investment of $80,000 and has an NPV of $8,200. If Webley uses the profitability index to decide, it would

A) choose D because it has a higher profitability index.

B) choose W because it has a higher profitability index.

C) choose D because it has a lower profitability index.

D) choose W because it has a lower profitability index.

If a project has a profitability index greater than 1

A) the npv will also be positive.

B) the irr will be higher than the required rate of return.

C) the present value of future cash flows will exceed the amount invested in the project.

D) all of the above.

A project has an initial outlay of $4,000. It has a single payoff at the end of Year 4 of $6,996.46. What is the IRR for the project (round to the nearest percent)?

A) 16%

B) 13%

C) 21%

D) 15%

Given the following annual net cash flows, determine the IRR to the nearest whole percent of a project with an initial outlay of $1,800.

Year               Net Cash Flow

    1                        $1,000

    2                        $750

    3                        $500

A) 14%

B) 12%

C) 8%

D) 25%

Initial Outlay                                         Cash Flow in Period

                                                       1                      2                      3                      4

  -$4,000                               $1,546.17      $1,546.17      $1,546.17      $1,546.17

The IRR (to the nearest whole percent) is

A) 10%.

B) 18%.

C) 20%.

D) 16%.

Your company is considering a project with the following cash flows:

Initial outlay = $1,748.80

Cash flows Years 1-6 = $500

Compute the IRR on the project.

A) 9%

B) 11%

C) 18%

D) 24%

What is the NPV of a $45,000 project that is expected to have an after-tax cash flow of $14,000 for the first two years

What is the NPV of a $45,000 project that is expected to have an after-tax cash flow of $14,000 for the first two years, $10,000 for the next two years, and $8,000 for the fifth year? Use a 10% discount rate. Would you accept the project?

Answer:

               After-tax           PVIF            Present

Year    Cash Flow        at 10%           Value

1              $14,000             .909             $12,726

2               14,000              .826               11,564

3               10,000              .751                 7,510

4               10,000              .683                 6,830

5                8,000               .621                 4,968

            Present value cash flow       $43,598

            Initial outlay                              45,000

            Net present value                    $-1,402

Project should be rejected.

Dieyard Battery Recyclers is considering a project with the following cash flows:

Initial outlay = $13,000

Cash flows: Year 1 = $5,000

                        Year 2 = $3,000

                        Year 3 = $9,000

If the appropriate discount rate is 15%, compute the NPV of this project.

Answer:  NPV=13,000 + 5,000/(1.15) + 3,000/(1.15)2 + 9,000/(1.15)3

Two projects are under consideration by the same company at the same time. Project Alpha has a NPV of $20 million and an estimated useful life of 10 years. Project Beta has a NPV of $12 million and also an estimated useful life of 10 years. What should the company's decision be

a) if the project's involve unrelated expansion decisions or

b) if the project's are mutually exclusive because they would have to occupy the same space?

Answer:  If the projects involve unrelated expansion decisions, they should both be accepted because they both add significant value to the firm. If they are mutually exclusive, they cannot both be accepted so the company should accept project Alpha because it has the higher NPV and reject project Beta.

Dudster Manufacturing has 2 options for installing legally required safety equipment. Option Ex has an initial cost of $25,000 and annual operating costs over 3 years of $5,000, $5,250, $5,600. Option WYE has an initial cost of $40,000 and annual operating costs of $4,000, $4,200, $4,450, $4,750, $5,100. Whether Dudster chooses Ex or Wye, the equipment is always needed and must be replaced at the end of its useful life. Which choice is least expensive over the long run? Use a discount rate of 9%.

Answer: 

NPV Project X = -$25,000 - $5,000/(1.09)1 - $5,250/(1.09)2 - $5,600/(1.09)3 =-$38,330.20

NPV = -$40,000 - $4,000/(1.09)1 - $4,200/(1.09)2 - $4,450/(1.09)3 - $4,750/(1.09)4 - $5,100/(1.09)5 = -$57,320.67. Using a financial calculator, the EAC for project Ex is N = 3, i = 9,PV = -38,330.20, PMT = 15,138.57, FV = 0. For Project Wye N = 5, i = 9,PV = -57,320.67, PMT = 14,736.71, FV = 0. Project Wye has the lower EAC (PMT) and should be selected.

What is the NPV of a $45,000 project that is expected to have an after-tax cash flow of $14,000 for the first two years, $10,000 for the next two years, and $8,000 for the fifth year? Use a discount rate of 8%. Would you accept or reject the investment?

Answer:

                After-tax           PVIF            Present

Year     Cash Flow        at 8%             Value

1              $14,000            .926             $12,964

2               14,000              .857               11,998

3               10,000              .794                 7,940

4               10,000              .735                 7,350

5                 8,000               .681                 5,448

            Present value of cash flows $45,700

            Initial outlay                            $45,000

            Net present value                        $ 700

The project is acceptable.

A machine has a cost of $5,575,000. It will produce cash inflows of $1,825,000 (Year 1); $1,775,000

A machine has a cost of $5,575,000. It will produce cash inflows of $1,825,000 (Year 1); $1,775,000 (Year 2); $1,630,000 (Year 3); $1,585,000 (Year 4); and $1,650,000 (Year 5). At a   of 16.25%, the project should be

A) accepted.

B) rejected.

C) discounted at a lower rate.

D) abandoned after the first year.

Which of the following is the correct equation to solve for the NPV of the project that has an initial outlay of $30,000, followed by three years of $20,000 in incremental cash inflow? Assume a discount rate of 10%.

A) NPV = -30,000 + (3 × 20,000)/(1.10)3

B) NPV = -$30,000 + $20,000/(1.10)1 + $20,000/(1.10)2 + $20,000/(1.10)3 

C) NPV = -$30,000 + $20,000/(1.01).10 + $20,000/(1.02).10 + $20,000/(1.03).10 

D) NPV = -$30,000 + $20,000/(1.1).10 + $20,000(1.2).10 + $20,000(1.3).10

Project Full Moon has an initial outlay of $30,000, followed by positive cash flows of $10,000 in year 1, $15,000 in year 2, and $15,000 in year 3. The project should be accepted if the required rate of return is

A) greater than 0.

B) less than 14.6%.

C) less than 16.25%.

D) greater than 12%.

Which of the following is a correct EXCEL formula to solve for the net present value of a project.

A) =NPV (k,CF1, CF2,...CFn)+CF0

B) =NPV (k,CF0,CF1, CF2,...CFn)

C) =NPV (CF0,CF1, CF2,...CFn)

D) =NPV (CF1, CF2,...CFn)+CF0

WSU Inc. has various options for replacing a piece of manufacturing equipment. The present value of costs for option Ell is $84,000. Option Ell has a useful life of 5 years; annual operating costs were discounted at 9%. What is the equivalent annual cost?

A) $16,800

B) $21,595.77

C) $14,035.77

D) $18,312

The equivalent annual cost (EAC) method is appropriate for evaluating accessibility projects mandated by the Americans With Disabilities Act.

Answer:  TRUE

The required rate of return represents the cost of capital for a project.

Answer:  TRUE

The higher the discount rate, the greater the importance of the early cash flows.

Answer:  TRUE

The equivalent annual cost (EAC) method is helpful for mutually exclusive projects with unequal economic lives.

Answer:  TRUE