# Essentials of Corporate Finance Ch8

 Molly is considering a project with cash inflows of \$811, \$924, \$638, and \$510 over the next four years, respectively. The relevant discount rate is 11.2 percent. What is the net present value of this project if it the start-up cost is \$2,700?A \$10.45B -\$425.91C -\$131.83D -\$383.01E \$229.50 B You are using a net present value profile to compare Projects A and B, which are mutually exclusive. Which one of the following statements correctly applies to the crossover point between these two?A The net present value of Project A equals that of Project B, but generally does not equal zero.B The internal rate of return for Project A equals that of Project B, but generally does not equal zero.C The net present value of each project is equal to the respective project’s initial cost.D The internal rate of return of each project is equal to zero.E The net present value of each project is equal to zero. A What is the net present value of a project with the following cash flows if the discount rate is 15 percent? A -\$2,687.98B \$1,035.24C -\$1,618.48D \$9,593.19E \$1,044.16 A The reinvestment approach to the modified internal rate of return:A individually discounts each separate cash flow back to the present.B discounts all negative cash flows back to the present and combines them with the initial cost.C reinvests all the cash flows, including the initial cash flow, to the end of the project.D compounds all of the cash flows, except for the initial cash flow, to the end of the project.E discounts all negative cash flows to the present and compounds all positive cash flows to the end of the project. D What is the net present value of a project that has an initial cost of \$42,700 and produces cash inflows of \$9,250 a year for 9 years if the discount rate is 14.65 percent?A \$2,111.41B \$798.48C \$2,470.01D \$1,240.23E \$1,992.43 E Which one of the following methods of analysis ignores cash flows?A Average accounting returnB Profitability indexC PaybackD Modified internal rate of returnE Internal rate of return A The net present value profile illustrates how the net present value of an investment is affected by which one of the following?A Project’s initial costB Inflation rateC Real rate of returnD Timing of the project’s cash inflowsE Discount rate E The internal rate of return is unreliable as an indicator of whether or not an investment should be accepted given which one of the following?A The cash flows are conventional.B The initial cash flow is negative.C One of the time periods within the investment period has a cash flow equal to zero.D The investment has cash inflows that occur after the required payback period.E The investment is mutually exclusive with another investment of a different size. E Generally speaking, payback is best used to evaluate which type of projects?A Low-cost, short-termB Any size of long-term projectC High-cost, long-termD High-cost, short-termE Low-cost, long-term A Joe and Rich are both considering investing in a project that costs \$25,500 and is expected to produce cash inflows of \$15,800 in Year 1 and \$15,300 in Year 2. Joe has a required return of 8.5 percent but Rich demands a return of 12.5 percent. Who, if either, should accept this project? A Joe, but not RichB Joe, and possibly Rich, who will be neutral on this decision as his net present value will equal zeroC Neither Joe nor RichD Rich, but not JoeE Both Joe and Rich E The average net income of a project divided by the project’s average book value is referred to as the project’s:A average accounting return.B discounted rate of return.C required return.D internal rate of return.E market rate of return. A Which one of the following indicates that an independent project is definitely acceptable?A Modified internal rate return that is lower than the requirementB Profitability index greater than 1.0C Negative net present valueD Zero internal rate of returnE Positive average accounting return B Net present value involves discounting an investment’s:A liabilities.B assets.C costs.D future profits.E future cash flows. E Which one of the following indicates that a project should be rejected? Assume the cash flows are normal, i.e., the initial cash flow is negative.A Payback period that is shorter than the requirement periodB Internal rate of return that exceeds the required returnC Positive net present valueD Average accounting return that exceeds the requirementE Profitability index less than 1.0 E The profitability index reflects the value created per dollar:A of sales.B of shareholders’ equity.C of net income.D invested.E of taxable income. D The net present value of an investment represents the difference between the investment’s:A cost and its market value.B cash inflows and outflows.C cash flows and its profits.D cost and its net profit.E assets and liabilities. A Which one of the following statements is correct?A The net present value is positive when the required return exceeds the internal rate of return.B If the initial cost of a project is increased, the net present value of that project will also increase.C If the internal rate of return equals the required return, the net present value will equal zero.D The net present value is a measure of profits expressed in today’s dollars.E Net present value is equal to an investment’s cash inflows discounted to today’s dollars. C Which one of the following is the primary advantage of payback analysis?A Incorporation of the time value of money conceptB Ease of useC Research and development biasD Arbitrary cutoff pointE Long-term bias B Both Projects A and B are acceptable as independent projects. However, the selection of either one of these projects eliminates the option of selecting the other project. Which one of the following terms best describes the relationship between Project A and Project B?A CrosswiseB Dual returnC ConventionalD Mutually exclusiveE Multiple choice D The net present value:A ignores cash flows that are distant in the future.B method of analysis cannot be applied to mutually exclusive projects.C is unaffected by the timing of an investment’s cash flows.D decreases as the required rate of return increases.E is equal to the initial investment when the internal rate of return is equal to the required return. D 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 returnB Net present valueC PaybackD Average accounting rate of returnE Profitability index B You are making an investment of \$110,000 and require a rate of return of14.6 percent. You expect to receive \$48,000 in the first year, \$52,500 in the second year, and \$55,000 in the third year. There will be a cash outflow of \$900 in the fourth year to close out the investment. What is the net present value of this investment?A \$633.33B \$7,881.55C \$1,879.63D \$8,534.25E \$4,305.56 B
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