Homework 5 Flashcards
Project A has an internal rate of return (IRR) of 15 percent. Project B has an IRR of 14 percent. Both projects have a required return of 12 percent. Which of the following statements is most correct? (Assume the projects are not mutually exclusive.)
A: Both projects should be accepted because the IRR is greater than the required return.
B: If the required return were less than 12 percent, Project B would have a higher IRR than Project A.
C: Both projects have a negative net present value (NPV).
D: Both projects should be rejected.
A: Both projects should be accepted because the IRR is greater than the required return.
Easy Appliances Inc. is considering a new inventory system that will cost $100,000. The system is expected to generate positive cash flows over the next four years in the amounts of $30,000 in year one, $35,000 in year two, $45,000 in year three, and $25,000 in year four. Easy Appliances required rate of return is 10%. What is the net present value of this project to the nearest ten dollars?
A. $7,080
B. $23,090
C. $ 9,460
D. $10,930
A. $7,080
The net present value method:
A. is a dollar measure of a project’s impact on firm value.
B. takes into consideration the time value of money.
C. all of these.
D. tells us the degree to which we are maximizing shareholder wealth.
C. All of these
What is the payback period for a project with an initial investment of $180,000 that provides an annual cash inflow of $20,000 for the first three years and $30,000 per year for years four through eight?
A. 5 years
B. 7 years
C. 6 years
D. 8 years
B. 7 years
One disadvantage of the NPV method is that:
A. the NPV requires long, detailed cash flow forecasts.
B. the NPV gives equal regard to all returns within a project’s life.
C. the NPV deals with cash flows.
D. the NPV will always give the same project accept/reject decision as the IRR.
A. the NPV requires long, detailed cash flow forecasts.
The internal rate of return is:
A. the discount rate that makes NPV negative.
B. the discount rate that makes the NPV positive.
C. the discount rate that equates the present value of the cash inflows with the present value of the cash outflows.
D. the rate of return that makes the NPV positive.
C. the discount rate that equates the present value of the cash inflows with the present value of the cash outflows.
A significant disadvantage of the payback period is that it:
A. is complicated to explain.
B. provides a measure of liquidity.
C. does not properly consider the time value of money.
D. increases firm risk.
C. does not properly consider the time value of money.
Which of the following statements about the net present value is true?
A. It produces a percentage result that is easy to describe.
B. It has an inadequate reinvestment assumption.
C. It is likely that there will be more than one NPV for a project.
D. It deals with free cash flows rather than accounting profits.
C. It is likely that there will be more than one NPV for a project.
One disadvantage of the payback period method is that the decision rule is subjective, meaning that two people can agree on the payback period calculation and still make different accept/reject decisions.
A. True
B. False
A: True
The net present value method clearly demonstrates that the NPV of a project increases as the discount rate decreases.
A. True
B. False
A. True
United Parcel Service is considering a project with the following cash flows:
Initial Outlay = $55,000
Cash Flows: Year 1 = $30,000
Year 2 = $65,000
Year 3 = $12,000
If the appropriate discount rate is 15%, compute the NPV of this project rounded to the nearest dollar.
A. $28,126
B. -$30,920
C. $24,458
D. $15,258
A. $28,126
If a project has NPV equal to zero, all of the following are true EXCEPT:
A. IRR is equal to the required rate of return.
B. The project has no impact on firm value.
C. The project earns more than the required rate of return.
D. The projects cash outflow equals the present value of the cash inflows.
C. The project earns more than the required rate of return.
You purchased land 3 years ago for $50,000 and believe its market value is now $60,000. You are considering building a hotel on this land instead of selling it. To build the hotel, it will initially cost you $75,000, an expense that you plan to depreciate straight line over the next three years. Wells Fargo offered you a loan for $60,000 at an 8% interest rate to be repaid over the next 4 years. You anticipate that the hotel will earn revenues of $140,000 each year, while expenses will be a mere $30,000 each year. The initial working capital requirement will be $7,000 which will be recovered in the last year. The tax rate is 35%. Your estimated cost of capital is 11%. What is the net present value of this project?
A. $63,993
B. $59,226
C. $30,495
D. $10,729
B. $59,226
What is the change in net working capital for the following project: Accounts receivable will increase from $4,000 to $7,000, inventory will drop by $2,000 and accounts payable will decrease $1,000?
A. -$1,000
B. $2,000
C. $1,000
D. -$4,000
B. $2,000
