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An investment has an initial cost of $3.3 million.This investment will be depreciated by $900,000 a year over the three-year life of the project.Should this project be accepted based on the average accounting rate of return if the required rate is 10.0 percent? Why or why not? An investment has an initial cost of $3.3 million.This investment will be depreciated by $900,000 a year over the three-year life of the project.Should this project be accepted based on the average accounting rate of return if the required rate is 10.0 percent? Why or why not? A) Yes, because the AAR is 10.0 percent B) Yes, because the AAR is less than 10.0 percent C) Yes, because the AAR is greater than 10.0 percent D) No, because the AAR is greater than 10.0 percent E) No, because the AAR is less than 10.0 percent


A) Yes, because the AAR is 10.0 percent
B) Yes, because the AAR is less than 10.0 percent
C) Yes, because the AAR is greater than 10.0 percent
D) No, because the AAR is greater than 10.0 percent
E) No, because the AAR is less than 10.0 percent

F) A) and D)
G) All of the above

Correct Answer

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Which one of the following indicates that a project is expected to create value for its owners?


A) Profitability index less than 1.0
B) Payback period greater than the requirement
C) Positive net present value
D) Positive average accounting rate of return
E) Internal rate of return that is less than the requirement

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

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You're trying to determine whether or not to expand your business by building a new manufacturing plant.The plant has an installation cost of $26 million,which will be depreciated straight-line to zero over its three-year life.If the plant has projected net income of $2,348,000,$2,680,000,and $1,920,000 over these three years,what is the project's average accounting return (AAR) ?


A) 11.69 percent
B) 14.14 percent
C) 15.08 percent
D) 17.82 percent
E) 19.21 percent

F) C) and E)
G) B) and E)

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Based on the most recent survey information presented in your textbook,CFOs tend to use which two methods of investment analysis the most frequently?


A) Payback and net present value
B) Payback and internal rate of return
C) Internal rate of return and net present value
D) Net present value and profitability index
E) Profitability index and internal rate of return

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

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What is the net present value of the following cash flows if the relevant discount rate is 8.0 percent? What is the net present value of the following cash flows if the relevant discount rate is 8.0 percent? A) $1,482.15 B) $4,529.59 C) $23,507.19 D) $54,211.40 E) $71,402.02


A) $1,482.15
B) $4,529.59
C) $23,507.19
D) $54,211.40
E) $71,402.02

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

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What is the net present value of the following cash flows if the relevant discount rate is 8 percent? What is the net present value of the following cash flows if the relevant discount rate is 8 percent? A) $1,587.61 B) $2,311.92 C) $2,900.15 D) $3,248.87 E) $3,545.60


A) $1,587.61
B) $2,311.92
C) $2,900.15
D) $3,248.87
E) $3,545.60

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

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What is the net present value of the following set of cash flows at a discount rate of 7 percent? At 20 percent? What is the net present value of the following set of cash flows at a discount rate of 7 percent? At 20 percent? A) $4,518.47; $628.30 B) $4,518.47; -$321.76 C) $4,518.47; -$525.13 D) $4,722.09; $504.21 E) $4,722.09; -$418.05


A) $4,518.47; $628.30
B) $4,518.47; -$321.76
C) $4,518.47; -$525.13
D) $4,722.09; $504.21
E) $4,722.09; -$418.05

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

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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 cost
B) Discount rate
C) Timing of the project's cash inflows
D) Inflation rate
E) Real rate of return

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

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Miller and Sons is evaluating a project with the following cash flows: 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.What is the MIRR of the project using the reinvestment approach? The discounting approach? The combination approach? A) 8.46 percent; 7.29 percent; 8.59 percent B) 8.46 percent; 7.38 percent; 8.61 percent C) 8.54 percent; 7.29 percent; 8.61 percent D) 8.54 percent; 7.38 percent; 8.59 percent E) 8.54 percent; 8.23 percent; 8.61 percent The company uses a 10 percent interest rate on all of its projects.What is the MIRR of the project using the reinvestment approach? The discounting approach? The combination approach?


A) 8.46 percent; 7.29 percent; 8.59 percent
B) 8.46 percent; 7.38 percent; 8.61 percent
C) 8.54 percent; 7.29 percent; 8.61 percent
D) 8.54 percent; 7.38 percent; 8.59 percent
E) 8.54 percent; 8.23 percent; 8.61 percent

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

Correct Answer

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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? 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 select only one project E) Reject both Projects A and B


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 select only one project
E) Reject both Projects A and B

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

Correct Answer

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A project has expected cash inflows,starting with year 1,of $2,200,$2,900,$3,500,and finally in year 4,$4,000.The profitability index is 1.14 and the discount rate is 12 percent.What is the initial cost of the project?


A) $7,899.16
B) $8,098.24
C) $8,166.19
D) $9,211.06
E) $9,250.00

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

Correct Answer

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Diamond Enterprises is considering a project that will produce cash inflows of $238,000 a year for three years followed by $149,000 in year 4.What is the internal rate of return if the initial cost of the project is $749,000?


A) 3.43 percent
B) 4.29 percent
C) 5.81 percent
D) 6.32 percent
E) 7.55 percent

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

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In which one of the following situations would the payback method be the preferred method of analysis?


A) A project that can easily be expanded
B) Two mutually exclusive projects
C) A proposed expansion of a firm's current operations
D) Different-sized projects
E) Investment funds available only for a limited period of time

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

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The average net income of a project divided by the project's average book value is referred to as the project's:


A) required return.
B) market rate of return.
C) internal rate of return.
D) average accounting return.
E) discounted rate of return.

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

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You are considering the following two mutually exclusive projects.The crossover point is _____ and Project _____ should be accepted at a 12 percent discount rate. You are considering the following two mutually exclusive projects.The crossover point is _____ and Project _____ should be accepted at a 12 percent discount rate. A) 11.07 percent; B B) 11.38 percent; A C) 11.38 percent; B D) 14.02 percent; A E) 14.02 percent; B


A) 11.07 percent; B
B) 11.38 percent; A
C) 11.38 percent; B
D) 14.02 percent; A
E) 14.02 percent; B

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

Correct Answer

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You are considering the following two mutually exclusive projects.The required return on each project is 14 percent.Which project should you accept and what is the best reason for that decision? You are considering the following two mutually exclusive projects.The required return on each project is 14 percent.Which project should you accept and what is the best reason for that decision? A) Project A, because it pays back faster B) Project A, because it has the higher internal rate of return C) Project B, because it has the higher internal rate of return D) Project A, because it has the higher net present value E) Project B, because it has the higher net present value


A) Project A, because it pays back faster
B) Project A, because it has the higher internal rate of return
C) Project B, because it has the higher internal rate of return
D) Project A, because it has the higher net present value
E) Project B, because it has the higher net present value

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

Correct Answer

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What is the payback period for a $28,500 investment with the following cash flows? What is the payback period for a $28,500 investment with the following cash flows? A) 3.65 years B) 3.89 years C) 4.22 years D) 4.44 years E) The project never pays back.


A) 3.65 years
B) 3.89 years
C) 4.22 years
D) 4.44 years
E) The project never pays back.

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

Correct Answer

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Discounted cash flow valuation is the process of discounting an investment's:


A) assets.
B) future profits.
C) liabilities.
D) costs.
E) future cash flows.

F) B) and E)
G) B) and C)

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You were recently hired by a firm as a project analyst.The owner of the firm is unfamiliar with financial analysis and wants to know only what the expected dollar return is per dollar spent on a given project.Which financial method of analysis will provide the information that the owner requests?


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

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

Correct Answer

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You are considering an equipment purchase costing $187,000.This equipment will be depreciated straight-line to zero over its three-year life.What is the average accounting return if this equipment produces the following net income? You are considering an equipment purchase costing $187,000.This equipment will be depreciated straight-line to zero over its three-year life.What is the average accounting return if this equipment produces the following net income? A) 12.29 percent B) 14.38 percent C) 15.67 percent D) 16.51 percent E) 21.00 percent


A) 12.29 percent
B) 14.38 percent
C) 15.67 percent
D) 16.51 percent
E) 21.00 percent

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

Correct Answer

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