Mlll ltiple Choke Question :

t DFFINlTIONS
NET PRESENT V AI.UE
CHAPTER 7
Net P11esenr Va.l ue and Other I 11Vestment Rules
a 1. Tite djffere.nce betv.e.en the presem \'alue of illl 1n,o.esttnerlt ilfld cost is. tl 1e:
a. net present value.
lb. intcmal rate of lfclu m.
(. pa)back fJeriod.
d. proti ity i ooex.
e. disc-oum.ed payi)ack period.
Dif!i ulry &Hy
NET PRESENT V ALUJE. RULE
c 2. Which one oflhe f oJIO\\.'mng statements ttle[ present ruue (NPV) (orre.(t?
a. At:l s.houM be a(-cepled if. and only the PV is. exactly equaJ to z.ero.
lb. Aml s.hould be acc:epled om1ly 1 f Ule N PV is [ 0 the 1 c:as!h flow.
c. Attl s.hould be acc:epled. if the NPV pos.illivc and rejecte.d if it is
d, An wiih c:;.:o;h mhun <.:ii!s!h m1Mlnw:o.;, rcg:JJn:iles ' -Llf when il-te
cash tl m s occur. win always have a pt.1s.ilil\<'e NPV and tllerefore should ah ays. be
a.c(etJtcd.
e. Any prt1joct that has pos;tive. (asl1 tlO\'IS for every ti me. fleriod after the
investment should be accep[oo.
T>ijjiculty level: Easy
PAYBACK
c 3. 'fihe lcnglh nr iil!lie rcttuin:d l{lr ;,m ip\.'cslmcni ln gepcmre c :;J:o;h -o;tJi llic1epl lin
rec.:n\:e.- the in i i1 ;,IH ..:: n, 11 he 1n\.'c:o.;f mc.n'l i:o.; i 1-tc:
a. net \'alue.
lh. ipkmal nlie n.r rerum.
c pa.ybad:: period.
d. index.
e. ctJsh petiiml.
T>i}Jiclllty fr:vel : Easy
PAYBACK RULE
4. \Vhich nne .f..lf mhe fnlluwi ng :o.;iJUemcni s is c.:m,-ed th payfNtCik perind?
Ja. An is if i rt c::tltt!ibled period isle'' ilrJ;,m :'ii nme pre-
-o;pec.:i mi t."C'lr ['(!rind nf i1 m
lh. An ipvt."iimen1 shmdd he nocepmed if ihe is pnsiiive ;,nd rejected i r i-o;

C'. An i mc:nt S;nnuld he ruj,ecl 00 iHhc k i :s pus11 i vc :j)CCL'l'lkid i r i m j<;

d. An i ment is ut:cepmJhlc i f (;:al cui k peri.,)d j:oo; grc'"der mhmiJ sum(!' .Pire-
-;pecili G'tL pennd
An i nvc-c:l meQI sl'muld !he ltC<.:eplc:d any i ime the puy1:mc'k period is IC:$<; ln:m l he
pe-rilld, gi\ten Jl pn!'il ive di$<!fll!l nl mJe.
DISCOUNTED P A\"BACK
c 5. Tihe lc ngJh nf lime required. a pmjccfs dio;cft l!l nlod (;il<;h li n equal mhc in11iul
cnsl nf lilru: pmj eel i-; c;)Ued II he;
Ill. nd v:al ue.
b. i nlem:al r:ale M remum.
c. payback period.
d. discounted profitability index.
c. diiscotmtcd paybilCk period.
DISCOUNTED PA'\"BACK RULE
d. 6. Tihe payh:ack rule )'fH.J "hould uccepl pruj ecms:
;JJ. whkh have: a payba k period that is grcalcrr nhan s.ornc period
or li me.
b. 1f the discmmtcd payoodk is poslti vc: and rejected if it is negati vc:.
c. only if tbc discountcrll payback per iod cqual:s some prc-spcdtiicd period of ti111-.c.
d. 1f the discmmtcd payback period! less than sorru: period of ti me.
c. only if tbc discounted payback per iod is to zero.
Difficulty lel-el; Easy
A Rll:"FURN
c 7. An j nvcstrncnt' s averragc net income by average book value dd:i ncs tl:te
average:
a. net present '\o' altae.
b. lnlcrrnal rntc of return.
c. ac<::ounting return.
d. protitabi
c. payback period.
D{fficuJry level. f;asy
A VKRA(J!E RlrfURN fUJL!E
b 8. An is acceptable average accounti ng rctum (AAR):
a. is. less than a target AAR.
b. exceeds a target AAR.
c. exceeds the tii rrn's return on equity (ROB).
d, i. IL."'i:o. I he f1rm' s n:1 urn nq sc'l (R OA ),
c. i s eqt,mul io zc.rn ;lnd n n I y when i I i tn ;ze>m,
I. T!ER AL RATE OF RETUR J
b. 9. The mre th:a1t makes ihe rn: l prc,c;enr \ ':;tl ue nf :m 1n\IC:simenl i ly cqi,Ud Ito
i<i lllc;
a. external rnte of return.
h. i nlarnrd r:aJc remtllifl .
c. ;u:ouunl1n,g rc i urn.
d. p ll'u1ii tlb11 il y in ex.
c. izer.
Difjiculf}' ltwel. Eas)'
I. T!ER AL RATE OF RETUR Rut.E
d I 0. An 1nvc"'ii lililt.:rll is cep1;1blc if il ' I R R;
a. is e,;nclly equal to its net present vajue ( PV).
b. is e,;nclly equal to zcm.
c. is lcs:r; than the required ret11.1r n.
d. cxce&.:d"' ihe n::c1 uin.<'tl rei
e. is e,;acdy equal to ]00 pclicent.
Dif.ficulf}' ltwel: Easy
MUt. TIN.E RA TiES OF R1' RN
e 1 '1. Tihe pos:s] biUly tlilat more than one discount mle will mruce tlilc N!PV of an investment
equal to zero s caUcd the problc m.
a. net present vnlllliC prot1U ng
b. operntio.n..,ll ambiguity
c. llilUlua!ll y exclusive investment dcdsion
d. issues of &ealc:
e. muhiple rntes of return
Difficulty level:
A-UJTIJALL\' lf.XCLl PR()JEt l'S
12. A situation in whiclil accepting one i nve tment prevents mhe LWCcptilllce of another
investment is ciid ld the:
a. net present vnlllliC prot11c.
b. operntio.naJ decision.
c. mutuiidJ y c."tdusivc illlvestmenl deds.ion.
d. iss.'Ues of s.cal problcrn.
c. tlJluhipLc chokes of operations decision.
DifjicuJry level: Easy
PROFIT ABILITY rNDEX
d, 13' The V<ll ue n r un illl e ' I :o.; hli ure d1 .... i ded hy nh in1 fiJd cuSJI ufi 1-te
i n'\lestment C' aJ led the:
111ei preseni v:ll ue.
b. irliern:al r:Ue nf return.
'-'. accuurtl'i lilg r ei Ltrn.
d.. pmfiiJabilii y index,
c. profile period.
PROFIT ABILfTV INDE . RULE
a 14. An invcsLmcnt acceptable me profitalbi IJty ( P]) of die j mcsi.ITK:nt is:
a. greater tb::m one.
b. k s tiJ_l!Jn one.
c . lf!Tt'!:aier HaLSn the l lilfL!Tiiltd mie u( rc'l um (IRR),
d. less tbma lihc net prre cnt vah.LC (N PV ).
c. greater th::m a prrc-spcdt1ed rate of rrctum.
lewl: Easy
U. CO CEPTS
NET f'R!I:!:SENT VAI!.J JI.
d 15. AU el c consumt, Lhe present "raliuc of a project increases when:
a. the discount rate increases.
b. <::3ch cash intlow is delayed by one year.
c. the ini rial cost of a pmj cct
d. the mtc of return decreases.
c. all rash int1ows occur during the I:.JSm year of a project's life insmca.d of
pcri-odicall)' lhmllllgoout the of ihe projcC"t.
I e ll.el.: J::asy
NET fiR[._ ENT A E
a 16. The primLU)" reason tlrml company projects with net present arc
considered! acceptable ms tlrlmt:
a. iliey create "'alue t'oli the mvncrs of the fi n111.
b. the plfoje.{'l s. r-al!e of rctum exceeds. the mte of i ntlalion_
c. they retllll:rrn Lhe cash outlay wi tbjn three years
d. ilie rreqrui red cash intlows exceed the artllllal cash i ntlows.
c. the investment's cost exceeds the vrurue oftloc cash intlmv:s.
. ET PRESENT VALUE
1 n. lr u pn'l-j t t:i h:as Ill llf!i prescni tn :tj;li1, ihen:
I' 11-te J1reseni li.C [J r ihe cash in tlt:nV'Ii cxcccd!-i ini t"(:: , 0 r ihe Jlmjecl.
n. 11-K: p:rfljccl J1T4Xli,JCCS it! r;.de uf rulum lh ;_d j liS I i 1-K: rnc required ill ;,c.:'(:cpl [h
proj ect .
m. 11-fe J1Tnj,ec'l l"i e xptclcd Ill iJlH'Idu.cc nnl} llrte n'liliiJim:a.lly rClJUired CU.' h inllm'l:li.
nny de I ay in rccei \li 111;!?, i be prnj c.crcd <;:a.<ilh i nflm'I'S will lhe pmjeci rn 111
negtli i\e llf!l preseni val nc,
,., 11 ur){l m 1 y
b. ll and JV o:nly
c. I, II , :md IV
d. 11, Ill , tlnd IV nnfy
e, J, IJ, :md Ill fml}
ET PRESE T VALUE
b 8. N t'l pn.""ienm \'ulu :
a. :.mnO( be used when deciding bet""'cen two mutuaHy cxdushc projects.
b. is more to dct'ismon malk.crn. than d:te intcmru rate of rctmn \\rhcn compadng
ditlerent sized projc1:ts.
c. is easy to explain to non-t1nancial managcr.s ;md tbus is lhe primary method of analysis
used by the lowest le.,.rds of m;magcmcnt.
d. is not an as widely used tool as payback and discoll!lntcd payback
c. is ' 'cry siLlllililf in its mclhodology to lhc average return.
Difficulty le,rtd: Easy
PAYBACK
c 9.
il.
b.
(;,
d.
c.
Payback is l!lscd to htdepcndcnt pmjc.('ts because:
it considers lhc tim-e of money.
all rdcvant cash t1ows i.lfC induded in th-e tl.IIDiysms.
it is easy and Qll!lick to calculate.
it is the mo&t dcsinili1c of aU the a"LlHabk: amu}tk al methods from a t1n;md ru
perspective.
it produce'S beucr decisions tb:.m those made using cJ ther NPV oc :IRR.
Difficulty Easy

c 20. l ' hc ad"'illltagcs. of the :payback method of project illJalysis indude the:
t D!pplkation of a discount rate to each separate cas!h tlow.
It bias towards
l J. case of use.
V. a.ubiu;y-y cutoff point.
a.. I and II Oil
b. .I and II I on
c. 11 and JD
d. 'II und IV n11ly
e, II, Ill , and IV nnl y
Difficulty
PA BACK
d 21. A 11 e 1 se i he p.ui }'hack peril..nJ fnr wi 11 dtl"Teu ' wihene ver rhe;
<l. i nif i:a.l in re:t..;e:t-;,
b. required return for a pmjcct
c. -;igned Jr<de d.et'rens.e ' ,
d, C'ISh in rJ nW' 1110\
1
txl i 11 ri me ,
e, d.ru.r;,i iun nf u p!rojet:i is
DISCOUNTED PAYBACK
d
'J'')
--
tl t
b.
c,
d.
c,
Tbc- di ' mti11iCd period nf Ill "''ill tlet:rea:t-;e rhe:
di "
1
C1Ui11i r:de ::tppl ied i lfte i " i ocreasetl,
C:JJShJ outlay of tbc project ms in-creased.
time period of the proje-cm is i
al!llotml of each project cash t1ow is 'ncreased.
C't.)Ms t.)f ihe 1i xecl :as sCI Ull il i zed 1 n 'I he ]lloject i
.Difficulty Medfum
DISCOUNTED PAYBACK
a 23. The d:Ls.countcd payback ru[c carus.e:
a.. orne posithc net pliC ent \o':liue projects be rejected.
b. d1c mo::.t IU quid projects lo be rcj cctcd in favor of less id projects.
c. to llx: incorre-ctly dl!tC to grmring the time of money.
d. proje-cts with negative net pre:scnt value:s to be accepted.
-c. some to be whkh would omhcnvis.<: be rejected under the payback
rule.
INTER AL RATE OF RIE R.
h 24. 'f hc 'nternal rare of return UK.R):
[, rule states tnat a projec-t \.?'ith an IRR that ms less than the roequhed rate should be
accepted.
[[. is the rate generated solely by the cash tlmvs of an investment.
[[[. is. the rate that cm.11scs l:hc net plrC ent value of a to exactly cquat zcm.
IV. can etlcctively be used to analyze all i nvcsLrncnt sec nruios.
a. I and IV o:nJy
b. II and Ill on
c, 1. II, and I U
d. n, m I and IV
INTER AL RATE OF Rl:: R.
:a,
25.
:i-.
b.
c.
d .
e,
Tile i rtlt.'T'rt:l1 nHe t)f rerum rnr pmj ec.:i wi 11 int.,.ea-;c i r:
I 1-te i rtil i ens I nf rt he pll'oj(!l(;l he
11-te lumul anl tmnl nf mhc i-; ruduc.:ed,
each cash intlow is moved st!c'll tmm h occurs one year later than origilllliiUy projected.
Il-K: required mile [1 r relum i '
11-te nf rihc pr.f..ljccm i ' nmi Ut.."tL fmm
INTER AL RA TB OF Rl:: R
r 26. l'he inter nail rate of return is:
;,t, molic reli :a..o; decisiu111 ng lilcl presc n I val uc- whcrae\t-r you ;il.re
mn ick-riqg n'mfUull y e t: In i \
1
c pmjeel-;,
b. equivalent to the discount rntc th..1l mnkcs the net present equal to one.
c. diffic!Jllt to compute without the usc of either a calculator m a computer.
d. dependent upon the interest rates oftered the mnrkcti place.
e. u bctiL'T' mc'l' hod()lngy lhun net pn:,.elll \
1
ulnc when dc .. di ng wilh uncn:n venmitmal c:a..;lh
t1mvs.
Difficulty Medium
INTER AL RA TB OF Rl:: R
a 27. l'he inter nail ITtle of return tends to be;
a. easier for managers to comprehend thnill the net present va.h.1c.
b. extremely accurate C'\'Cn whcn cash tlow estimates arc faulty.
c . ignored by mostti nrn1ciaJ rnml_yst:s .
d. U"iod primari to diffcrcntbtc mutually e.xch.1:shrc
c. utilized in projc"Cm ;:mn1)"5ls only when net pres.enl vaBrues. apply.
Difficulty Easy
I <CRE:ME TAL INTER AL RATE OF RETURN
c 28. You arc to dctciJTIIline 'i.ll,rhelher lo accept project A or pmjc.ct B. These :pmjccts
DJFC munml1y exdusivc. As p'<!JIIt ofyom analysis. you :should compute the
IR R by detmlnh11g:
iL tlrlc i nEcrna.l rate of return for the cash of ellC'h pmjccl.
b. tl!tc net present ralue of each projec-m using the mtc of return as the di cmuu
rate.
c _ the di scount rate tllat equates. l!he dm countca payback periods for eac-h project
d. toc di scount rate that ma!kes. the net. present value 1.1f each project cqua.l to 1.
c. the inlcrnal rate of return for the an the rash tlows ot'llhc two p-HJ:ic- ts.
Difficllltj Medr11m
I CREMENTAL lNTERNAL RATE OF RETURN
b 29. Graphing Htc iliJcremcnm:al TRR helps cxplai 11:
tl . Wh)
1
ptt'loject is :al W;tys S\l.pcriur mn mmher
b. lhnv.
1
de c1 iun::;. .tnnccmi 11g mUll mtl ly e:-;c 1 i ve :are dcri \ICd .
c. H1c nf :a projcc Jaffecr he decision ;1' which pmjecl 10
d. i he. nem IJlllt;SA;n v;tilue :md II he i mi i al n nMl nw :l. me rel :decl
c. lbow the protlmbility and tbc net value arc lidated.
PROFIT A81LIT\' D:EX
d 30. The profitabmty index d osdy rdatcd to:
:1. payback.
b. d i counted paybar k.
<:. ihc :;tC' cmmli ng rci urn,
d. 111e rreserd '!,.-;til ue.
c. muu.mlly cxdusive wrojccts.
Difficulty {ew!l: Easy
PROF1T A81LITY D:E
b 3 t. Anallysis using the profitability ndex:
:1. frcquendy oonili cts with the: accept and Kjc:ct dedsions generated by the application of
the net present value rnk.
b. is usd111l as a decision tool '1.\tlen investment f11.mds ru-e
c. is us.cful }vhen trying to detemJj nc which one ot' two mu ttmUy ex.dushe pJrOjC(:l:S
shoold be accepted.
d. izes the :same basic vari abk:o. as those used in the a,,.crn,gc accmml ing rctiJm.
c. fPI OOU(:CS \.'1-'hkh l:yfPtc<illy arc difficult to comprehend or
Difficulty Metffum
PROFIT A81LITY D:EX
e 32.
a.
b.
C.
d.
c.
:If you wanl to rc"'ic"\' a projC(:t from a peupcctive. )'01.11 shouldlus.c lhc
__ method of
net present value
paybac:k
i ntcrmd rate of return
avcrngc acc:omllh ng return
profitability ndex
Di!Jk.:ulty lvt1: Easy
PlltOt TF A81LlT\' INDILX
b 33.
a.
h.
c.
d.
c.
When the present vaue of the cash exceeds. the cost of a project. then
the prrojcct should be:
m.cceptcd because the httemal rate. ot' Ietum is posmd ve.
m.ccepted because the prontabrli my i ndcx j s. greater than I .
m.cceptcd because the pronrabrlit)' index is negative.
Jeject cd because the internal rate of rerurn is ne,gad vc_
Jejeoted because the net present value. is. ncgarive.
MUTUALI.Y F.XCl.UST\fiE. PROJECTS
c 34. Whi ch one of the fo.llowing d11c best example of two mutually exc.lusive pmjccts?
a. planning to build a ... ,raJiehousc and a rt:taH outLet side by side
b. buying s.uftlcient to ma.m.11facmure both desks. and cha.itrS simulta.ncous.y
c _ an emJ'my watehouse for s.tora,ge or 1'ent:i l'llg it entre 1 y out to aoother fintl
d. the company s.ales. force fo protnote s.aJes. of both shoos. and socks
e. bolll nveJitory and fixed ass.et.s ILI.Si ng t'unds. f mn'll the bond issue
lev.el.: Medium
MUTUA Y F.XCLUST\ff.. PROJ IE.CTS
d 35. ' ll:Je Liberty Co. is two projects . .!Project A consists of builldi ng a wholesale
book oollel on lut #169 of !.he Relad Center. iProject B consist:s of building
il sit-down restaurant Otllm #169 ofthe Relail Center. When to
whether or blili ld the book ourJet the tes.taue.ant, s.l!'tould rely
most hea results. fmllr'li the __ l!r"teUlod of <Hlalys.is..
a. index
b. r.uc of relllrl'll
c. payback
d. net presem vaue.
e. accooflting rale of return
.MUTUA L Y EXeLUSIVE PROJECTS
c 36. When two p.t'Oje.cls. both requ:i re the total use of the same resource,
l1le pmjects. are gene.rnlly considered to be:
a. independent
b. y prnfi riJab le.
c _ exclusive.
d. :ltX:epi:ahle.
e. protitalbJe.
Y EXCLUSIVE PROJECTS
c 37. Matt is two nmtually projects. of s.ize aftd has. prepared the
rlala. Both p:rojccms have 5 year J h:cs.
Net pcs.cnt val uc
I period
A veragc a{' COuttti ng relll1111
ttequ rcl.UJ:n
AAR
A

2.76 years
Y .3 percent
8.3 perce ttt
Y .0 perce 111
Project B
$14.6Y3
2.51 years
ii)_6 percent
8.0 percent
ii)_O percent
Matt has been for h bes.l recommendlll.iol1 gi vcn this. iuformatio:t:L Hi s.
should be to accept
a. :project B because has the s.hmtcst payback period.
b. both as they both have po-sitive oct prcse nt vah.Lcs.
c. project A and rejecm.proj eel B based on their net pmscnt vaJ ues.
d prnje t B and reject project A 'based 011 iil.\'erage returns.
e. project B iil.fld reject project A based OJl ibom the payback period ru1dl the avemge
accoontim1g rebllrl'll.
lNVE li'M ENT ANA t VSIS
a 38. Given tlmt the net present vaLue (NPV) is geocraUy cons.iderccl to be the lbesm n1ciliod
of analysis, why shoo ld yt:.u sli U use tlle otl 1er
a. TI 1e otltel' nt eLhods help \'ali date whether OJ' f lot tlle results. front the m1el pres.cnl value
ilJJlalys.is arc
b. You ne.ed lOuse me orl1er metbo!llii s.i11ce oon praaice dictates. []);at you
accept projects. after you have genermed mrec accept i ooicillOrs.
c. You need l O use oilier tnelht'lds because the net prcseJ1t .?a:! uc. mctbod is U!fireliahle
'i.'.rlren a pmjoct has unconventional cash
d TI.1e average accoulflling rerum n1ust ah a)'S. indicrue acceptance s.ince tl11is. is. t!1 1e best
method ftmn a financial penpectjve.
e. TI1e cliscou nledl payback methoo always be ompuled lo deterrtlli ne i r a project.
I'CllH"'ElS. a positive casl1 flow s.ince N PV does. oot med!lum'e tll is. aspect of a. m)rojecl.
Dijj'i.c;ulty le."t>.el: Medium
J tE T A L YSJS
e 39. In acmal [practice., rrequemily us.e tlre:
I. AAR: ihe is :1\':a.ilu,hl
II . IRR lk.X"aus.e r.he are. easy to corrmur1icate. and
Ill, p::tybu, k nf
IV. net pr.ese nl vaLue ibecaus.e it is cons.jdeted by ltillnY lo be lhc bes.t method of
a. 1 only
h. n ilml m only
c:. I. H], a nd TV [mly
d. II . m. und ]V only
e. 1 U. Jll. and IV
ANA LYSIS
a 40. Ncl m;_Uicr hnw many rnr ms nf inv.e:..rmenl tlnuly:!iois ynu tin;
11-te u hud re, ulr'i fmm :a. prnjecm m:l}' vury f rom mhe expecred re"'iUlt .
h. I t.e i 11Et. 'TiiJ:Jl rnle nf mi urn willl ul WJays pmdut"C I he nll.) rdi:alhfc
<.:. "ri ll ne\'eli be. a cepled urde ' :o; Hte periud
d. 11-te i rtil i 1.1l cosrs will y \ 'aliy c:nn fmm I he c"'il cosl'i.
e. only the three of a proj e'Ct ever atlect its. tinal outcome.
E(ZS)'
INYESTMIEJ T J\ AL YSIS
b 4] . \Vbicb of the followilllg methods. of are bias.ed to'Willfds short-teml
projocts?
[. i ntcmall rate of return
n ' t"'Ulllil f i ng r:;JII(! n f reatJJrn
J. p.aybtJck
[V, d IJXIyb.aC k
a. J J1 only
b. 1 II and IV only
<.:. II nrtd llll1m I y
d. 1 and ]V only
e. ]] :md IV only
Difficulty few!/: Medium
INV ESTMIE. T ANALYSIS
a 42. lf a pr0:ject is assigJJJcd a rcqui red mtc of rctmn equal to zero. then:
il. tlrlc: timing of the project's cash flows bas liiO bcari ng Olil lhc value of me pmjccl.
b. tlrlc: projec-t will be accepted.
c. thlc project will ili1ways be rejected.
d. whctlllcr the project is accepted or rejected wiU depend on the of dll: cash now .
e. tbc project can never add valll!.c for the shareholders.
Difficulty few!/: Medium
b iCISU) Rl "LES
e 43. Y oo arc a pmjcct whh the followilllg data:
[nternal mtc of return
ProtitaWHty ratio
Net Jnesc!tt va.J.uc
I period
Kcquircd return
8. 7 percclilt
.98
.. $393
2.44 years.
9. 5 percent
\Vhicn one of the fol]o.,v:i ng comet gmvcn this
Tt1t: tli ' ouni wie used in C:l lcllifmiing ihe pel pn::sc:nl \
1
uluc mu$m hoen le. 8.7
pen:: '!ilt .
b. Tbc:: di sccm111ied puyn:.J.ck h::t e io he ks<.i 1han 2.44 y'<=:;J.N,
<:. Tile di ' cm111i nlie iu mlhe pmfii ahi lirt y r:art in w:as '-xtu:a.l mn ilrte i
nf 1'C:i urn.
d. Tllis rmjed . lilmdd lhe nn II he profiiJIInil iiy
e. Tl'tis rmjecl llould lhe rc j cc I ctl hus.ed !l n II he i niem:al .!Tale Cl f
Difficlllf! Medi10n
NE'f PRF.SE T VALUE
c: 44. Ac:c: pl.lsiiivc Nf'V ihe htGmsc:
i i i ' mt.c: mnsr eusil y undcr-o;inotl valu:ai ifr prnCc"'is.
h. II he prcsenll \'ill LI C nr 'lli'Je e,; <:ar<; h rn nw ' Jlrf.' ei}IUJil fn he
c. the present vru.ue of t1tK: cash tlows. arc greater than the cost.
d. the mo t easily calculated.
c. None of the above.
NE'f PRF.SE T VALUE
:a, 45. \Vhich nr i llc rnll1lWi ng nni chmnderi 2't.: NPV?
a. NPV does not incorporate i111to tllc :.malysis.
b. N PV in-corporates all rdev:mt intbrmation.
c. NPV u es aU of the project's cash t1ow .
d. NPV dhco!r!inls aU future cash flows.
c. N PV will to decisions that maximkrc slil::u-cboldcr '\vc..'llth.
PAVBACK
e 46. The payba-ck period rule:
a. dri comus cash tlows.
b. initial cost.
c. rnscs aJ cash tlows its. calcublion.
d. B()th A and C.
c. None of the above.
Diffic:ulty few/: Easy
PA\'BA: K
c 47. The paybock period mle accepts alll project s i111 .,-.,bich lhe payback pcr]od foli
the cash tlmvs 1
a.. equal to the cutoff poi111t.
b. greater rtha.n the cuto1ilf poilllt.
c. less than dle cutoff point.
d. vc.
e. Nnrte n r the uhu,.c.
PAVBACK
d 48. The p:t)'l:li!i k peried rule i n mild usdul IJcc(':mse:
i i pro\'ide quick of lmw mpidly ihe irui i al i n\ 'e'rtmeni \.Yilllhe realuped.
10, resulf<; nf shuri nl l e dcci"'iitt..m W'i ll IJe Ctuick) Y seen,
c. dbcs not take into ac<:ount time , raJue of money.
tl, All nnhe
e. Nnrte [) r lhc uht.We.
DISCOUNTED PAYBACK
a 49. The discmmted payback period ndc:
ccmsit&!:P.) I he lime \
1
ulue uf mnney.
10, tl i srnun'l I he (;uinflf pninl ,
c. liliACeitain -cash tlows..
dl. preferred to the NPV mle.
c. None of the above.
Difficulty Easy
PAVBACK
c 50. The payback period 111 le:
a. a cutoff point so that all projects accepted lby tthc N PV ruk wiU be accepted
lby the paybadk fP'=riod r!Jlle.
lb. determines a 'CUtoff point oo that dcpreciiltion is jltls.t equal to posid ... c 'Cash flow's in the
payba'Ck year.
c. requires an ml'litrary choice of a cutotf point.
d. varks the cutoff point wilh llhe rate.
c. B()ili A and D.
AVERAGE ACCOUNTI G RETUR
c 51 . The average acrounli no retl.!lm is detcrrni ned by:
a. the yearly 'Cash tlo\VS by the investment.
lb. divjdJing lDc average c-a0 tlows by the mn'\o'eSIIIUClll.
c. the a verngc net mcome by the a' rerngc investment
dl. the a vcrngc net income by lhc all investment.
e. cli\Fjcling tbc net inco:mc by tloc cah t1ow.
Diffit:ulty
AVERAGE ACCOUNTI G RETURN
In 52. The in\'c">lmcnm rul n.::l:ailcs :a,\cr:a,gc nci im:nmc :averng<= is
rl hc;
n. llo'i. mcHeud.
b. average acoounti ng return method.
c. JIVt'r:lge PJ)'ID::.ck melhnd.
tl, prnfilbi fil y imle .
e. Nnne nr lhe .
.Difficulty Easy
MODIFIED 1 TERNAL RA TIE OF RET RN
d 5''. 1\tndified 1n1 cm.al mrc uf rd nm :
mhe muhiple IRR pr.f..lbl em hy llmvs unm1 1 only nrrtt ch:tngc ill
s change remains.
b. requJ res tlhe usc of ::11 discount rate.
c. dOc not the usc of a dj s.oount r.ate.
tL. Rurh A uml R.
c. llotJh A and C .
.Difficulty Medium
A \' ERA(iE ACCOUNT [N(i Rli.T IJRN
d 54. The :slbmtcoming(s) of the a':emge a-ccounti ng rctlll!m (AAR method Is (are):
a. the me of net income instead of caslb tlows.,
b. the pattern of income tlows. bas no impact on the AAR.
c. there is no decision mle.
d. All of the above.
c. None of the above .
.Difficulty Medium
INTER AL RATE OF RIE
c. 55. The avo fatal fl aws of tbc i ntem:aB ra.tc of return rule arc:
a. arbitrary detcrmi nation of a ruscoUJ nl rate and fuil ure to considtcr inilial
b. arbitrnry dctcnmnation of a d1sroUJnl rate and faih.m:: to ttnal:yze m!JJLual.ly
exclusive investment c
c. arbitrnry determination of a d1sC1JIJJnl rate and tlrtc mll!IILip!e rnte of return
d. t"aHI!lrc to consider initia.l cxpcnditl!llfcs and faill!lrc to cmTc.cdy analyze muruaHy
exclusive itncstment ce>ts.
e. faHI!lrc to concctly ana.Jy.zc. mutual ly exd usive in es.uuem proj ects and the LlrmJtiplc rate.
of liCtlll!rn problem.
MIJTUALL V I PROJE ,l .S
d 56. A m!l!ltuaUy cxdusmve project is a proj cx;t whose:
a. acceptance or rejection has no effect on other projects.
b. NPV is always negative.
c. IRR is always negative.
d. acceptance or rejection affects other projects.
e. cash !low panern exhibits more than one sign change.
Dijjicu./1)> level: Easy
INTERNAL RATE OF RETURN
d 57. A project wi ll have more than one IRR if:
a. the IRR is positive.
b. the IRR is negative.
c. the NPV is zero.
d. the cash !low panern exhibits more than one sign change.
e. the cash tlow pattern exhibits exactly one sign change.
Dijjicully level: Easy
INTERNAL RATE OF RETURN RULES
b 58. Using internal rate of return, a conventional project should be accepted if the internal
rate of return is:
a. equal to the discount rate.
b. greater than the discount rate.
c. less than the discount rate.
d. negative.
e. positive.
Dijjicully level: Easy
INTERNAL RATE OF RETURN
a 59. The internal rate of return may be detlned as:
a. the discount rate that makes the NPV cash tlows equal to zero.
b. the difference between the market rate of interest and the NPV.
c. the market rate of imerest less the risk-free rate.
d. the project acceptance rate set by management.
e. None of the above.
Dijjicully level: Medium
MULTIPLE INTERNAL RATE OF RETURNS
d 60. The problem of multiple IRRs can occur when:
a. there is only one sign change in the cash tlows.
b. the tlrst cash tlow is always positive.
c. the cash tlows decline over the lite of the project.
d. there is more than one sign change in the cash tlows.
e. None of the above.
Difficulty level: Easy
TTh'ONG AND SCALE ISSUES WITH INTERNAL RATE OF RETURN
b 6 1. The el emems thar cause probl ems wi th rhe use of rhe IRR i n proj ects rhar are mutually
exclusive are:
a. the discount rate and scale problems.
b. tirni ng and scale problems.
c. the discoum rme <md timing problems.
d. scale and reversi ng flow problems.
e. Liming and reversing tlow problems.
Difficulty level: Meditun
NET PRESENT VALUE DECISION
c 62. If there is a contlicr between mutually exclusive proj ects due ro the IRR, one should:
a. drop the rwo projects immediatel y.
b. spend more money on gathering information.
c. depend on the NPV as i t will always provide the most value.
d. depend on the AAR because ir does not suffer from these same probl ems.
e. None of the above.
Difficulty level: Meditun
PROFITABILITY INDEX
e 63. The profitabilit y i ndex is rhe rati o of:
a. average net income to average investmem.
b. internal rare of rerum to current market interest rare.
c. net presem value of cash flows ro i merna I rate of return.
d. net present value of cash flows to average accounti ng remrn.
e. present val ue of cash tlows to ini ti al investment cosr.
D({]iculty level: Emy
INVESTMENT DECISION RULES
a 64. Which of rhe following statement is rrue?
a. One musr know rhe discoum rare to compute the NPV of a project but one can compute
the IRR without referring ro the discoum rate.
b. One musr know rhe discoum rate ro compur.e the IRR of a bur one can compute
rhe NPV without referring ro the discoum rate.
c. Payback accounts for rime value of money.
d. There will al ways be one TRR regardle-ss of cash tlows.
e. Average accounting renun is the ratio of total assets to total net income.
Di{]iculty level: Medium
CAPITAL BUDGETING PRACTICE
b 65. Gr!.lh:a.m :a. ntl Harvey (100 I) ih:a11 _nod_ were l \Vo nlll ' l pof!Ul ar capiilal
hudgci in;g mci
a. lni etnul R!.lie of Reium; PtYh!.l.tk Periud
h. lni etn<tl R<lie nf Reium; Nem Value
c:. Nem Prc-.;enF V aluc; Payb:ack Period
d. Mndified lrderpul R::tie nr" Rei urn ; lniem:a.l R::de Rei urn
e. l11ierpul R::tie or" Re iiJrn; Nei Vulue
I n. PROBILEMS
. ET PRF.SE T \
1
ALUIE
b 66. Wh!.li is ihe llet pll'esen'l val ue nf a prnjecm wiih ii i'Je fullnwing CJISh ::tllld Jl rt:t{Ui red
return of l2 percent?
Y carr ElmY
0 -$28.900
2.450
2 $l9.630
3 $ 2.750
a. -$287.22
b. -$177.62
c. $177.62
d. $204.36
c. $28.7.22
Difficulty {e\ref: Easy
NEt rRESENl ' \ 'ALUIE
n 67. \Vhat is Lhc net present ,,.nluc of a that !has an initial cash oud1ow of l 2.6i'O
and Lhc lowing casb intlows? The rcq lll!ircd return is ] t .5 pe1rrcnt.
Year Tnt1mv1i
l $4.375
2 $ 0
3 $8.750
4 $4JOO
a. $218.68
b_
$37tU 6
c. $768.20
d _
$1..249_65
c. $1.37L02
Difficult)' lew!: Easy
NEt PRE'iE 1' \"AlUIL
b 68. A project wi] l prod'ncc cash intlo.,. .,s of $l . 750 a )'Car for four years. Tbc project
iniliall) (.'\l) s .$1 0,600 gci raricEi l,n yc:ar fi\
1
c, 11 he pmjoc U he c.:l uscd and ;,1s a
ru' ulf <ihnuld pn'lllhJce cu.<ih nf 8.500. \Vh<1 i " mhc nei \o'al uc ,,fHtis
prnjccm rutc nf 1s I 3.75 pcrt:en1
iJ. -$5,4 7 4. 76
b. -$1 .m 1.4o
<:. -$9 35 .56
d. $1 ,011 L40
e. $5,474.76
.Difficulty Easy
NET PRF.SE T VALUE
::1. 69. Ynu arc cnnsidet'ing ihe l'nllm\/ing li Wn mlhum wili 111 0i be
repe:ded. The rt:tfuin:d r:de of remum i"i 11. 25 pcrceni fwr pmjed A :1ml 10.75 pen.;eni fulf
project B. \Vhich proj eel hould yo1111 accept and why?
Y .'1.( f__mb;_ t A E!ro jctB
0 -$48,000 -$ 126,900
I 8.400 $ 69,700
2 3l ,300 $ 8.0,900
3 U,700 $ 0
a. project bccaus.e its NPV is about $33:5 mnore than the NPV of project B
n. prnjccm A; hocuus.e ii ihe higher rot.Juirud r:de nr ruuam
c. project bccau e it has. the aota.J cash inflow
d. project :B bee au e it returns aU cash flows two year
c. project :B bee au e it is the large'St s.iJzcd project
.Difficult)' fewd: Medium
NET PRESENT VALUE
a 70. Yoo rue n.vo mlll!l11.1ally cxclushrc projects. with the foUo"-""'ing cash t1ow.;;.
\ViH your choice between lhe l '\J,'O project s differ if doc required mtc of return is 8
pc:rcenl rather than l] percent'] 1f so, what should you. do?
Ysnr Jf!roi!;.QLA (!m jctB
0 -$240.000 -$ 19 &.000
] 0 $110.800
2 0 $ &2.500
3 32:5,000 $ 45,000
a.. yes; S:cJect A at & percent and B at 11 pel' cent
b. yc:s; Select B at 8 percent and A at 11 pcrccnt.
c. yes; &eJect A at & percent and s.ck ot ndd:Jcr illl I I perc-ent.
d. no; Regardless ohhc r-cqujred rate, project A ruways ha5 the hJgller NPV.
c. no; RcgardJc:ss ohhe requhrcd rate, project B always has. tbc higbcr NPV.
Diffkulty Medfum
INTERNAL RA l 'E ot REll
b 71. What is the internal rate of return on an investment with the following cash t1ows'?
a. 5.93 percent
b. 5.96 percent
c. 6.04 percenr
d. 6.09 percent
e. 6.13 percent
Year
0
I
2
3
Dijjicu./1) level: Easy
INTERNAL RATE OF RETURN
Cash Flow
-$123,400
$ 36,200
$ 54,800
$ 48,100
a 72. An investment has the following cash !lows. Should the project be accepted if ir has
been assigned a required remrn of9.5 percent? Why or wh)' not?
Year Cash Flow
0 -$24,000
I $ 8,000
2 $12.000
3 $ 9,000
a. yes; bemuse the IRR exceeds the required return by about 0.39 percent
b. yes; bemuse the IRR is less t han the required renurn by about 3.9 percent
c. yes; bemuse the IRR is positjve
d. no; because the IRR exceeds the required return by about 3.9 percent
e. no; because the IRR is 9.89 percent
Dijjicully level: Medium
INTERNAL RATE OF RETURN AND NET PRESENT VALUE
e 73. You are considering two independent projects wli th the following cas h tlows. The
required :remrn for both projects is 10 percenr. Given this information, which one of
the following statements is conect?
Year Project A Project B
0 -$950,000 -$.)25,000
I $330,000 $ 55,000
2 $400,000 $ 50,000
3 $450,000 $ 50,000
a. You should accept project B since it has the higher IRR and reject pr-oject A because
you can not accept both projects .
b. You should accept project A because it has the lower NPV and rejecn project B.
c. You should accept project A because it has the higher NPV and you can nor accept
both projects.
d. You should accept project B because it has the higher IRR and reject project A.
e. You should accept both projects if the funds are available to do so since both NPV's
are >0.
Difficulty level: Meditun
INTERNAL RATE OF RETURN
e 74. You are considering an invesunent with the following cash tlows. If uhe required rate
of rewm for this investment is 13.5 percent, shouJd you accept it based solei) on the
internal rate of return rule? Why or why not?
Year Cash Flow
0 -$ 12,000
I $ 5,500
2 $ 8,000
3 -$ 1,500
a. yes; because the IRR exceeds the required return
b. yes; because the IRR is a positive rate of return
c. no; because the IRR is less than the required return
d. no; because the IRR is a negative nue of return
e. You can not apply the IRR rule in this case because there lU"e multiple IRRs.
Difficulty level: Medium
PROFITABILITY INDEX
d 75. What is the protltabili ty index for an investment with the following c.ash !lows given a
9 percent required return?
Yeru Cash Flow
0 -$21 ,500
I s 7,400
2 s 9,800
3 s 8,900
a. .96
b. .98
c. 1.00
d. 1.02
e. 1.04
Difficulty level: &1sy
PROFITABILITY INDEX
e 76. Based on the profi tability ind.ex (PI) rule, should a project with the foll owing cash
tlows be accepted if the discount rate is 8 percent? Why or why not?
Year
0
I
2
Cash Flow
-$18,600
$10,000
$ 7,300
3 $ 3.700
;,s, IJcctuJJ"ic 11 he PI i ' I . 008
h. IJcctuJJ"ic 11hc PI i ' .992
c. bcc;JU"ie li he PI i ' .999
d. nn; becau"ie PI i ' I .008
t:, nn; bec:afU"i e PI i ' .992
Difficui('l' MedilDn
PROFIT ABU ILITY INDEX
c 77. YnJ arc cfmsicte:.. "T"i ng independent prnjt:cl$ huih of v.
1
hi<.: tt h.Jtve heen JIS ' igned
n nde nr 8 pc,n.cni, R:ascd un mhc pmfiio.ilii li1y i111dt:;'lrl, u.lrt.U is your
rc<.:nflllmcmkd i em c.uliJCt."T' Iililllg i hese prnjed-.?
Project A Project B
Ye.Dr Y car C:JJsh Elqw
0 -$38,500 0 -$412.000
1 $20.0{1() I $10,000
2 $24JJOO 2 $40,000
a. You should accept bO(h projects since both of thtcir Pis me positive.
b. You should accept A it has the higher Pl
<.:. Yl'tl]l shllUid :attepl bnH1 .. hn'l h nr H.eir Ph Uli"C ihn I.
d. Y 04.1 hould only accept p11ojcc1 B since it has llbe la11gest PJ and the PI exceeds 1 .
e. d th:eT project is accept able.
Difficulty few!/: Medium
PROFIT ABILITY I DEX
d 78. You would 11 kc to in\es.t in tbe t'oUowing project.
Ye.Dr Flow
0 -$55,000
] $30.000
2 $37.000
Victorla. ym1r boss, ins.sts that only projects tbat can retwm at least $L to in today's
doUrus tb11 every $] invested can be at:ccptcd. Six also insists on a ] 0 percent
d rate to all >Cash tlmvs. B ascd on these critcri a. YOl'
a. accept tlrle proje.cm because it retm:ns ill.hnost $ 1.22 for every $ J i nvcsmcd.
b. at:ccpl the projc'Cm bcca!!lsc it has a pos vc Pl
c. accept tlrle proje.cm because lihc N 1v is 2.,8.5].
d. reject dR: project because the PI is !.05.
e. reje'Clilhe proj e because the IRR exceeds l 0 percent.
Diffil:ulty level: CllaHeuge
rA PI!:RJ( )D
c: 79. If \'!t ill cn"i 2,600 h"Ltc:'-.Lui re u smuU ice cn:um em. Cart tlc:o; nlie ro he
$1 .400 :a ycu.- I"M mhn...-e ' . A freTii he Uilrec year'. mhc carl is e be \\
1
Hni hie ' :<i
U' rlh:;Jil is he remaining life nr HJC c: noling period
nf ri he ice cream c::u,i ?
.&6 ye:ar;
b. 1.46 year"i
c. 1.86 year"i
d. 2.46 year"
e. 2.86 year"i
Difficlllty E(lsy
PA BACK PERIOD
e 8:0. Ynu me cnl!lsidcri ng u plrujL-c wirlh a11 inirlial ct:l"i1 nf $41,300. \\'tutl i-; Hte
period foli thh projccm if the cash jnt1ows arc $5:50, 970. $2.600, and $500 a year o.,cr
dl!: rnexm four years,
a. 2.04 _years
b.
c.
d.
c.
2.'"'6 year"i
2.89 ye:ar""i
3.04 _years
3.36 _years
Di.fficulry (lsy
PA \'BA<:K Pli:Rl()b
d 81. A project has an irnjti aJ cosr of $1,900. The cash int1ows rulic $0, $500, $900. and $700
ova the nc.xrt four )'"Cru-s, respccdvdy. What Ls the payback [PCriod?
a. 2.71 years
b. 2.98 years
c. 3.11 years
d. 3.71 ycru:s
C. IJ]C\fCf
Difficulty Easy
PAYBACK PERIOD
c 82. Jack ad.dirng toys to his general store. He esthnatcs tlmt the cost of
inventory wiU be $4.200. The remodeling CXfPCns.cs and sheh .. costs arc estimated at
$1 jUU. Toy s.alles mrc expected to produc.c net cash int1m\rs ,200, $1 jUU, $] ,600.
and $1 ,7 50 over the next four ycru-s, rcspccthcly. Should J ilc!k add loys to his -slorc if
!he assigns a three-ycru payback: period to this project?
a. yes ; the payback [PCrioo is 2.94 yerus
b. yes ; because the payback period is 2.02 yerus
c. yes ; lbccat1se the paylback period 3.80 ycalis.
d. because the payback period is 2.02 years
c. no; !because tbc payback period is 3. 80 years
.Difficulty lew!/: Medium
DISCOUNTED PAYHACK PERIOD
c 83. A iJmljee'l h1.1, ' un ini mid OOM $8,500 produc:e t::;tSh in fl nw of $2,600, 54.900.
and $1.500 over the next ihrcc .:Y-ears, respecthcly. \Vhat is llle discounred payback
perind if rhe requi red mre uf mlum 1<i 7
:1, 2,1"' y:;J.T"i
b. 2.33 yerJ.T"i
(;, 2.67 y:a.T"i
d. 2. 91 years
e. ne.,."Cr

DISCOUNTED PA YHACK PERIOD
c 84. Yanc} ms considedng a project \Vhich wiD prodm;e cas!h intlows of $900 a for 4
years. The project has a pc!J"CICnt n::qui rf.':d rate of retnm nndl an i rul:i :II cost of 2.800.
\Vhni is rhe payhJ.c!k pcrind?
a. 3.11 .years
b. 3.1& years
c. 3.8.2ycars
d. 4.18. years
C. IJC"'Cf
Difficulty Medium
DISCOUNTED PAYHACK PERIOD
e 85. Gilmy Tmcblood considcri lllg an i n,.cslnlc:nt which wi U cost her $] 20.000. The
invc Lmcnt produce.., no C'ash nov .. tor tlllc first ycrn:. In the second ycru lhc cash
intlow is 35JlUO. int1ow wW to ill.lld then $75,000 for loc
following two years before ccasmng pcnnancndy. Ginny requires a l 0 percent rate of
return and has a required! drlscountcd 1XJiy'back period of thrf.':e years. Ginny
__ d"Jj s pmjcct the discm.11ntcd payback period is __
2.03
b. 2.97 years..
c. accept; 3.97 years.
d. 3.03 years.
c. reject; 3. 97 ye-ars.
lJiffil:ulty level: Medium
A \t' ERAfiE ACl."C:liJNTl G RET UR
c 86. t.urrys l...antcms is c-onsi dcri ng Cl project which wm produce sales of $240.000 Cl year
for the ncxl nvc years .. n 11c protil n1ar_gjn is estimated at 6 percent. '11tc project
rost $290J1lX!l a.nd be depreciated slrnight-linc lO a book value of zem over tllc life of
toc project .. Lany's ihas a rctl!lrn of8 percent l 'his project shouM
be becal!lis.e the AAIR is
a. 4.14 pcn.--ent.
h. rejecletl; 6 pen:erd.
<.:. rejecletl; 8.28 pen.--cfl._
d. u<:t-eph=d; S. 28 percenl.
c. 9.93 pen.enl,
Diffic11.fty Medr11m
AVERAGE RETURN
d 87. A proJect has <m initial oosm of$3&.000 and! a four-year life. Tihe comptmy uses
:d rnigh i -lint: li cJ ::t. hllllk value Elf zern nver rhe 1 i fe nf illilf: The
projected l!ll!l i fr.om lhe rmjecl i"i $1,000. $11.200, I.SOO, :mtl $ L700 u year fnr
rt.t fnur yt;;tJT"i, is rhe :K"<.lnUni ing ren11rn1
:1. 3 .55 pen.-eni
b. 4. I 3 pen.--cni
c. 4 .2S percent
d. i .ll percent
c. t4.2l percent
AVERAGE ACCOUNTI G RETUR
d 88. A pmjte'l prnduces !lei ipc: nme nf $9.500, 12.500. ;)nd 15.500 El\' e r ihe mhrce
years of its li fc. The i11hi al cost of the: proj cct is 260.400. 'fhis cost
dcp11eciated stra.ight-Hne to a zcro book "'aluc over tl:Jrcc yeaJJs. \Vha.l is the average
at:ooll!lntj ng rntc of rctum the 11e-qu ired disc:oont mtc is i ]XIfcent?
a. 4. SO percent
b. i. 32 pen..--cnt
c. 8.97 percent
d. 9 .60 percent
c. 10.21 percCTit
Difficufty Med;um
AVERA(.i:E ACl.""-OIJNTI (i RETUR
d 89. A project has avcrngc irn.:omc of $2.1 00 a year ovc11 its 4-yot: ar The rosl
of the project ]s. $65.000 ""hich be depreciated "sing slrniight-l]nc to a
book value: of zero over the tc of tbc project. Tlrtc fi lim wants to CLUll a .ru Ll imal
avcmgc ocoom11n.i ng lfC:tli.ll.m of 8.5 pclirenL The lilrm should tlrtc project based o:n
the AAit of
a. 6.46 p;:rcenm.
b. accept; i) .69 percent
c. I 2.92 perocent.
d. 6.46 percent.
C.. rl.92 peTCCIIlL
Difficulty {eve/: MeJfum
AVERAGE l\CCOUNT G RETUR
a 90. Ji.furl 1n i$ a pll"uje:d t lil!' g.amlhelied ilrtc f4)11nwing nn ihis
\:\o'h:art ; ... ilrle n.,_-emge uo;;ou.nling nf rc'l um? The fillTI <lepn..--c1il!mt.-.; im n i ng
I- Ii nc dcpn::ci:all 11 u a ZcT4) bt.)l.lk mrer ihe li fc nf 11 he
Yc:a.l'
0
I
2
..,
..)
4
;,1. 13.08 pcrccnl
b. 15,77 pcrccni
c, 2 I , 8-3 pcrccni
d. 26. I 7 pcrccnl
c. 31 . 54 percent
Difficulty level: Medium
C:)!oin Fln.w
-$642,000

$240,000
$205.000

N c'l l lil t n mc
nliJJ
9500
579.500
4.500
34.500
l NCREJ\l EN'FAL JNTERNAL RA"I E ()If RI!:'I." URN
c 9]. Yoo arc analyzing tlbc tblllowi ng two nmtrnally cxdusivc Jinojccls and have dcvdopcd
tlrtc foUowing irtformatio:n. \Vnat i IRR?
Year
0
]
2
3
a. II , l l percent
b. 13.UJ. percent
c. 14.9l percent
d. 16. 7'5 percent
c. 17.90 percent
Diffil:ulty lew/: Medium
Project A
[Jo).'l
84,500
$29,000
$40,000
$27.000
Project B
Cash Flo_w
-$16,900
$25,000
$35,000
$26,000
l NCREJ\l EN"FAL JNTE.R AL RA"FE (n' REl"URN
b 92. Toe \Vin ton Co. 1s considering two nmtuaUy cxdushc projects \'\rith lhc fotlowing
c-ash flow'S. The i ll{'rcme ntal I RR is a!lld it' llhe rcqu ired rate is fhan the
c1rossovcrr rate tbcn proje<::t __ slrtould be accepted.
Projc-t A B
Year Cash flow Cash Flow
0 - 7S..OOO -$60.000
]
$30.000 $25.000
2 $3S.,OOO $30.000
3 $3S.,OOO $25.000
13.94 A
b. 13.94 B
c, A
d. 15.44 B
e, 15.8.6 A

0
]
2
3
4
R eq 11 ired PJyb:ad:: periE'Id
Required AAR
Required rerum
PROFIT A81LITY DEX
C:ash tlnw
-$ 169,00)
$ 46,200
$ 87,300
$ 41 ,000
$ 39,(MX)
2.5 }'t.'-'JIT$
1'.25 percent
S. 50 percent
b 93. Based on the proti tabi1ity of __ for thJs proJect, you -should _ _ the
projc'Cm.
a. .91'; accept
b. 1.05; acrepl
c. 1 . 1 S; a-crept
d. .9'7'; reject
e. 1.05; reject
Difficulty Easy
INTER AL RATE OF R!E R.
tl 94. 'Based on the Ji'LllC of return ot' __ for project, j'O!III the
projc'Cm.
:1. 8.95 pcrocnt; acccpm
b. 10.'7'5 percent; accept
c. 8 .44 pcrocnt; rcj ect
d. '::J .67 rej ect
-c. 10.33 percent; reject
Difficulty lew!!: Easy
NT \" AL Ull:
c 95. Based on the. net [present value of tbr this pLoj cct, you should !.!he
proje'Cm.
a. -$2.02] n:jccl
h. -$406.
c.
d. $9.1B6. m:ccpt
t: i.U.:l't:pi
few/: Ecsy
PAYBACK PER.OD
c 96. Based on the 'JX!Iyback period of __ tbr lh LS pmjcct. ) fOU shou[d __ the
prnjccr.
i.l. I . 87 :a.cccpl
h. 2.87 yem-.; ; :a.ttcpi
<.:. 2.8.7 yeat"i; rcj t:c: i
d. 3.13 yer1r<;; n:jt:c:'l
c. 3. &7 years ; rcjcot
Use ri rlf:OI'IIIJatimill to iUJlswer questions 91 l Ol ..
Yol.ll ilfC consideri ng the tbUov.i ng 1:\\ '0 m1r.ttually exclusive pmjccts. Both r;.vHl be
dtprec:i :dod -;i mi gh m-li 1i1C deprcciul ion II n a zcm ht.)llk val Ue nver ihe I i fc c)f i llc )ll'njcc m.
Ndthcr project has. any salvage vaJ.nc.
Rcqruircrl rate of return
Rcqruircrl payback per iod
Reqru.rcrl acoounli ng return
Nl1. \ ' ALU[
Project A
Year
0
[
2
Cash E!ow
-$75.000
[9,000
8,000
12,000
10%
2.0 years
8 %
B
.Year
0
1
2
3
CU5h Row
-$70,(0}
$10,04J)
$16.000
$72.(0)
13%
2.0 years
11 %
c 97. on the present value mctt.Jod of analysis and ghen tt.Je information in the
problem, }IOU
a. accept both project A and project B.
b. accept project A and reject project B.
c . accept proj ect H and rej cct proj-ect A.
d. rcjc(;tlboth project A and project B.
c . accept wihkhcvcr one )IOU wam as they rcplicscnt equal opponunitBes..
Difficulty Medium
INTIRNAL RA l'E Oli RETl RN
e 98. Based UfPOll the of return (JRR) and the ntbnnali on pro,idcd in dle
probkm, you should:
[l, 1,\(:Cepl Nlth prnjeL"I A ;,mtl prujL"CI n.
b. rujed ho11l iJ1mj,cd A ::mtl pll'njcx:t B,
<:.. U<; t."Cpl A and l!'ejec: I pmjec:l B.
d. 1,\<;cepl R und rej e.cm pmjccm A.
e. 1g111.m.: II tle IR R a111d U<lc rnr.:Htud n{ nn
PAYBACK PERIOD
b 99. t!J pon tile. ptl.yb:ack JlL"ri od uprl I he in ifm I"n\o'i de.tl in lile iJ1m'hl e.m, you
:o.llc"MJld:
u<;cepl llxlth prnjred A ;,mtl prujLocl R.
b. rujed hn11l iJ1mjeC'i A rJlll tl pmjt.'>Ct R.
<:. utoepl A and l!'e jed pmjed B.
d. m:cepl projc'Cl B and rej eel project A.
c. require that management extend lllc paybaC'k. period tor project A since it has a
i cost
PROFIT ABILITY I D:E
e 00. Ra .. upnn mile index (Pn pnw1tkd 1n lhe pmblem,
you
a. ;u:cept both project A :md project B.
b. a-ccepl project A and licjcct project B.
c. m:cept proje'Cl B and reject project A.
d. reject both project A and project B.
c. disregard the Pl method in tthis case.
Difficulty Medfum
AVERA(TIE ACCOIJNT[N(T RETUR
c Wt Based upon tbc a"'cragc a-cooLmtj ng retmm (AAR' and the infommion provJ<kd in the
problem, you:
a. hotdd accept both ]project A and project B.
b. shoold accept project A because ttle AAR e.'tcecds the requhcd rnte.
c. shoold accept A because thc AAR is less than the required rntc.
d. shoold accept wh.idle' 'eli .YOU prct<:r as they rur-c equhruent from an AAR
perspective.
c. c:.m not corn pule the AAR of either p:roje'Ct
Difficulty Medium
!PRES.E Nl' \1 ALUIJ:
d 102. A :25 hwestmenl prodl!lccs. $27.50 at the end otftthc. year \\'Jdl no rts.k. Which oi the
tblilo'Lvi n,g is trw:?
a. N PV i-s [POSitive if t.hc i ntercs.t rate kss mhan l 0%.
lb. PV is iflthc inlelfcsll'me is les.s than 10%.
c. N PV is zero if the i nlcresl rate is. equali to I 0%.
d. Both A :rnd C.
one of' mfle albove.
D(fjkulry level:
PA\"HACK
h 103. Corts.idet an iuvest rtl.enl with an oost of $20,000 ilf!ld i s expe.cred la.s. L tbl' 5
yc:urs. ' 11te cxpeotcd cash t1ow in yean 1 :md 2. arc 5 .ouu, i 111 years 3 and 4 arc $5 ,500
and in year 5 is. $ ,000. l'hc tot ali c-ash inr1m.v is. expected to be $22.WJ olf an a'\:cragc
of $4.400 per year. the pa)'back period n years.
a. 3.1 8 years
lb. 3.82 years
C. 4.00 yeaJ'S
ct 4.55 yeru-s
e. None or me
DISCO Nli'ED PAYBACK
c 104. An invcsmncnt '1.\ridJ an initial cos.t of$15.000 produces cas.h tlows. of $:5J..Jt.JV annuaily
for .5 yeat'S. If the cash tlm evenly s.pread out ove1 the year and lhe firtn can borrow
at 1 O!fi; , tile paybock period is years.
a. 3
t). 3.2
C. 3.75
d. 4
e. :S
DlSCO li'ED PAYBACK
h l O:S. An i nveslrL-.eut pmjoct has. ll1e cas.h flow strerun of S--2j{). $7 5, 125. $ HJO, and $:50.
TI1e cost of cap1tal 12'i.o . Whlli tihe dis.count payba k: period?
a. 3.15 yeru
t). 3. 3 R yeru
e. 3.45 yeru
[l 3.60 Yttll"i
e. 4. 0.5 yeru-s
NET PRI:SE T VALUE A D INTERNAL RATE OF RE RN
Ja I 06. An 10.000 wiih t!:t[llC<:ied cush nf $3,000 ft)r 5 }'t."Jlf!'. The
discount rme is 1:S.2JS2%. l lhe NPV _ allld the IR:R is._ fot the projeeL
a. $0; 1 :5.2382%..
b_ $3.33; 27.2242%_
c. $5,U(JO: 0%_
't Can nol ans.weJ ,, .. one or the other value as
c. None of the above_
IV. F.S AYS
INTF.RXAI. RATF. OF RF..TURN
ao7. list and brictly discuss the adva.Jlltag:cs and disad\ra.Jlltagcs of the jnt.crnru rate of return
{IKR) r l!llc.
The JdVcmfae." ofrh.e mJe are Jose reJarilm.'ilrip wirh NPV wld rh.e ea.\' t! wirlt rwhii..-h
ir i." tmder.fluod ami l.nmmuni ared. The hWJ e.-r Jre rlw; 1l1ere rrw,v be
.wlurio-ru wulrlut rule may lemi lo a rauki.Jrg rmflii..i iu rrwitwlly
t:.,.x lrtsiPe inves'fme111s. The srudem .dwuM add a brief expJa.narhm demcm.urorinR their
u.nderstanding t.if ea.h
PV VS. PI
1 OS. Exp 1 ai I'll the differences. aJJ:ld si t:ni1 arities. betv.een present \'alue (N PV) and l.lle
index (f 1 .,_
The NPV wrJ PI are bct.'li aHy rhe same (;a/(;ularimr. a1uf b.orlr l'ule ... lead fo1f1e .tJme
a ,eprlrejec;i Tire main dif!eren,e berweert tlu: l'wo iii thJi rhe Pi mlJy be useftd
itt whi Jr r'roje,r ... /(1 a{.- ept if. 'r.mtf.\' are linril'et f: rhe Pima,; lead
/ (J i.rl m're,t de<.isimL'i i.n c;mrsidering murually exc:lusi.w:
NPV ANn PROJF. T V AJ.UF..
109. Gi\'eJ) the. gooD-s oflfltm value aJ'Id s!h:lli'ebolder wealth \rve have
me irrnpt.xt:mce of net preseflt value (NPV)_ And yet. f!riany li oonc ia.l ill
some of l.he mosl ncnl finns. j n llJe 'i. odd conti nue to us.e les.s. des.ir-.:11ble tne.amrcs.
sucib as. the payback period and ll1e il\'el!'age accoulflling remm (AAR)_ Why do you
Lhi nk lllri s. [Jle case?
Thi." i.-r an (Jpt!H-eJrrled wlu"dt atlm ... the {..reJiive 111 uJate tm the
c:a:rh flow evafuali.t)Pl We tt:iie ir cH a .'iiln'iJrJ;fmarrl to
thai ra.limwl {i.nJm:ial nrmragen ii.tmretiml!.\' find it e.:rpeJiem 111 u ... 'e a grrmp
of For exanrple, firnr.ii may re('l rm the JRR it is ewier 10 explain ro
l10t:1Td members llr.o.n NPV. Al:io.fm 141-rge projects. AAR sharelr.o{de"ts with
some invigh.t.v lJ." io rlu! pmjec;t '.\' impJc:1 rm net ini..nme and t!lJming ., per $iwre.
] TER "AL RATE OF RETUR
]0_ The Zigg)' Tri tn and Cut Cornpa.ny C;:lJJl purchase equipment on sale. $4.300. The.
h:a.., ::t li hree-ycmr I i fc, \'-'il l [JlTHttuce .. nnw Cl r $1,200 in i be r1 11"S!I i.lJll d
:a.nd $3,000 i rt ih mhird yeu!f. The ioicrc,o;i raft: 12%. mhe
payhac.:k. c.:Jdcul :a'IC ]RR. Shnul d i he pmj cLI be li :alkeli1? Chec.:k ycmr
answer by iJhe pmje t's. NPV _
Payback - 2.63 years.
IRR = 10.41%. Do not wkeprojectas IRR < 12%
Reject 1he projecl NPV = ($136.60)
1\'fULTIPLE METHODS OF VA LUA TJON
I ll. The Ziggy Tri m and Cut Comp<'ln)' can purchase e<tuipment on sale for $4,300. The
asset has a three-year li fe, wil l produce a cash flow of$1,200 in the lirst and second
yem, and $3,000 in the third year. The interest rate is 12%. Calculme the
Discounted Payback and Proliwbi li t)' Index assuming end of )'ear cash !lows. Should
the project be taken? lf the Average Accouming Retum was positive, how would this
affect your decision'!
Time 0 - Cashjlows = $-4,300, Presefl/ Value ofCashjlows = $-4,300
Time I and 2 - Cashjlows = $1,200 each period, Presefll Value ofCashjlows =
$2,028.06for bolh periods, Stun oj'Prese11t Value ofCashj1ows = $-2,271.94 a/ the end
of lime 2
Time 3 - Cash .flows = $3,000, Presenl Value f?{Cash.flows = $2,135.34, Sum of
Presem ValueofCashj7ows = $-136.60
Discoumed Payback ca11not be calculated as NPV < 0; NPV = $-136.60
PI= CFA7/ !In ilia/ Jnves/lnen/ = $4,163.40/$4,300 = .968 = .97
801h measures i11dica1e rejeclion. A posilive accouming rale of rewm should 1101
change !he decision. DPP and PI ilulica/e liwllhe coslf?{ capilal is 1101 being covered.
MULTIPLE METHODS OF VALUATION
112. 111e Walker Landscaping Company can purchase a piece of equipmem for $3,600. The
asset has a two-year life, will produce a cash tlow of $600 in the first year and $41,200 in
the second yeru. The i merest rate is 15%. Calculate the project's payback assuming
steady cash !lows. Also calculat.e the project's IRR. Should the project be taken'!
Check your answer by computing the project's NPY.
Payback = /.714 years
Calculaled IRR = 16.67%. Accep11he projec/. NPV = $97.54.
INTERNAL RATE OF RETURN AND NET PRESENT VALUE
113. 111e IRR rule is said to be a special e<ISe of the NPY nile. Explain why this is so ;md
why it has some limitations NPV does not?
AI some K, NPV = $0; by de.finilion, whm NPV=O, K=IRR.
Problems occur due to conjlicls with muwally exclusive projec/s, liming and size
problems, mulliple sign clumges presenl problem for IRR
NPV always !he best choice
SOLUTIONS TO TEST BANK PROBLEJ\IS
Chapter 7
66 NPV = - $28900+ $
12

450
+ $
19

630
+ $
2

750
NPV = -$177.62(ne mive)
. ' (1+.12)
1
(1+.12)
2
(1+.12)
3
' g
67.
CFo
co,
FOt
co,
F0
2
col
F0
3
I = 12%
NPV CPT
-$177.62
-$28,900
$12,450
I
$19,630
I
$2,750
I
NPV = - $
12670
+ $4,375 + $0 + $8,750 + $4,100
' (1+.115)
1
(1+.115)
2
(1+.115)
3
(1+.115)
4
NPV = $218.68
CF
0
co,
FO,
co,
FO,
co)
F0
3
co,
FO,
I = 11.5%
NPVCPT
$218.68
-$12,670
$4,375
I
$0
I
$8,750
I
$4,100
I
68.
69.
70.
NPV = - $1 0,600 + .t l ,750 I '+' $1,750 , -r $1,750 3 + $1,750
0+. 1375) (I +.1 375 +. (1 +. 1375)
NPV ""' -$1.011 .40
CFo
C{) l
All
CHz
Ah
I= 13.7:5%
NPVCPT
-$10,fi00
$1 750
4
$fl ._)(){)
1
.m 1AQ (negative)
$8,500
+ .

Npv
Q
4
-o s,4()() 3 ,3(1(1 $ u, 100 . P. .,.
3
;:_
- - .p Q v + + + N V = 2. 2u.46
A (1 + .1125)
1
(l+ .J J25i (l+ .Jl25i
1
A
CFo
col
t-"0,
co!

co3
Ah
1::: n .2:5%
NPV CPT
2.326.46
-$48.000
$1SAOO
1
$31.300
.,
$1 (.700
'I
NPV = - $ 900+ .$uCJ,?Oll + SO,CJOO ;;:: 56
R (I + .1075)
1



11
I,WL
CFo
co1
A) I
co!
m
I = 10.75%
NPVCPT
1.991.56
-$126.900
$69.700
I
$80.900
I
Difference in NPV = $2.326.46 - $1,991.56 !:::! $334.90
llihc :m:s\Ver sIllt."'i thut rl hc NPV nf Pmjed A e t.: ecd:s ihe NPV nf R hy
$335.
$325.000
NPV A = - $2401000 + . PV !!!! l 7 .995.48
. (1 + .08)'
II' - $325.000
N PV"'
1
L = - "'240,000 + _ N PV t L ,, 'l- = 2.362.80 (ncgathc:-)
(l +.t l r
CFu -$240.000
co, $0
FO,
COz
Ah
1=8%
NPV CPT
17,995.4S
2
$325,000
1
1=1 ] %
NPVCPT
-$2,362.8() (ncgui i\'c)
1
_ . . . $liO,ROO $82.500 $45,000 . . _
NP\
1
H
1
-$198,000+ a + ., + NPVa.R<.T- $1 L045.:50
. " (1 + (1 + .Ot;t 0 + .Ut;)"
$11 45,000 ,
NPV,
3 11
.._ - $J + + 7 + = $L682.28
. (l +.ll) I + .1 1)- (I + . 1
Cf'o
co,
FO,
-$19S.OOO
$110.,800
I
COz
Ah
COio
FTh
1=8%
NPV CPT
[ 1.045.50

1
$45,000
I
T= II %
NPVCP'li"
$1 ,6S2.28
A11 8 pt.."J"Cc.nl. A 11hc h igher NPV.
A11 [ I p<-'1'cenl, PrujfX!i ll ihe h1g}1er IPV,
71. Cf'o -$123.400
co, $ 36.200
F0
1
I
CD:! $ 54,800
Ah I
CO;. $ 48, 'I 00
f'0:3 I
IRR CPT
5.96%
72. CF
0
-$.24,000
73.
cv1 $ s.ooo
FOI I
cv! $ 12.000
m.
co $ 9.000
'F(h II
IRR CPT
9.89 perce nt
Tih <ihould be bcc:al.il"ic 11 he l R R uf 9.89 pen:cnr cxccccls the
rcqu1red ml urn 4)f 9.5 pen.-enl.
Pmjccm A:
Cfo -$95{),000
CO I $330.{)00
F0
1
l
col $4oo.ooo
'f'O., 1
OJ, $450.000
'Ah t
IRRCPT
1l .06 percent
l= w
NPV CIPT
l8.670.17
R:
CFn -$] 25,0CIQ
col 55,000
F01 l
co 50,000
F0
1
1
IRR CPT
.79 percent
w
NPVCPT
$3,88&.05
Si nee these arc projects and both tloc JRR and IPV ndcs say accept. }'Otl
should accept both pro:jcct s f lhcrc ru-e suffidenl t\mds to do so.
74. Since CO, is a 11cgativc tbcre arc nmJtiplc IRRs. l 'hus. lhc lRK mJc does.
ool apply.
15.
76.
V $7,400 $9.800 $&.900 PV
p b!\-c< = (t .09)
1
+ {1.09)! + (L ;09) ~ ~ uol'lon. =
CFo
cu,
FOt
Ctlz
~
CUJ.
F0_1
u
$7.400
l
$9.800
l
$ ~ , 9 0 0
]
I =9
NPV CPT
2 L909.8':l
Pl- 2 L,909.89 ; l.0
2
21,500
1.m.s9
$ 1 u.ooo $7.300 .... , 700
PV mn =
1
+ , +
3
; PV;,m...,., = $]8,45S.Ol
(1.08) (LOS) - (LOS)
CF,,
()
co, $10.00U
FO, l
c o ~ $7.,300
Ah
l
CO! $3.700
fO.J l
I= 8
NPVCPT
18.455.01
Pl
$18,455.0 I
- - 99"
.$ LK,6UU - . -
77.
78.
. $20,000 $24,000
PV A. inf to .... = .
1
+ . ? PV t .. ;nn,,.,.,. = $39.094.65
(LO&) (LOSt
P.mjt::c'l A:
CFJ) $ o
co. $20,{0)
FO, l
$24,{0)
I
I= 8
NPV CPT
39,094.65
PI _ 39,094.65 t0
2
{l,- $38.500
Prnjeci B;
CF11 $ 0
co, $10.000
FO 1
CO;z $40.000

I = 8
NPVCPT
$43,552.8.1
Pl = $43,552.81 t.0
4
El 42,000
Because lhe projects. .are independent and P]s. exceed 1.0. boll1 p:rojoclS
shoo ld be accepted.
30,000 $37,000 . -
PVinflw .. -
1
+ ., $57,8:.11.24
o. 1u) u.tur
CFB $ 0
CU, $3-0 ,UOO
FD, l
$37,000
l
l = 10
rpy CPT
$57.851.24
PI = ;;::: L0
5
$55J)(10
YoU :dmuld n: i rhe pmj ed ' i nee mihc PI uf 1.05 i.o; 1 css mhun Vi ci.uriSIJ. ' rL'1-JJUircmc n I of
I. W. Tm i ' meniiuni ng rih:ai ihe NPV n.f ilrli:o.; pmjec'i 1s
79.
&0.
$2$5 1.24 nrtd mhc IRR i"i 13.71 pen.-eni, lbumh Elf \.\
1
hi ch wnuld llt)!imully irrulic:a!le
pmjeci uccepiunce, Hnwe\ler, neiiher illt NPV llt)f rhe mR meei mhe
rei urning $ I , I 0 fur c\'try $ I spen l.
$2 600- I 400
P;t \oblc k periud = J + ' ' , :::::::: I .86 ve:a;r.;
- .
P
k ' d 3 $4,300 - $.550- . 970 - $2,600 3 3 .
::l")'IU&.LC' pcno !: + = _ 6 ye,ars
$500
81.
P
k "od 3 ( 4 200 + $ - $1.200 -
a,....>ac .. pe:n . =- + $1,750
S3. The prtlj c..-c r ne\<'er i(lJl ) '' hack un " di M:oU n1cd. ha!i.i . .
ss.
OCF $2,600 .$4,900 1500 $ _ _
= (I+ _07)' + (I+ .07)1 + 0 + .07) ncF!: 7,934.20, wlnch IS les HJ:m llle
i nitial cost of $8.500
Year
I
2
4
Discounted cash t1ow
$825.69
$757.5 I

$637.58
D
- .. _..II l k 3 $825.69 - $757.51 - $694.97
1soounLUI pav )ac = . + ;;:::; 3.82 years
Ye:u-
1
2
3
4
.$637.58
C. h ... w Di:scnunl ed c::Jsh lltlW
$ 0$ 0.00
$35,000$:!8,925.62
$55,000$411,322.3
$75,000$51 ,126.0 I
0
- d b k
3
.$120,000- o -.$28,925.62-$41,322.31
1SCoume pay oc = + $
5

= 3.97 years
Ginny shouM reject the project since the payba.ck pcrh:xl of 3.97 years exceeds the
required 3 years..
87.
88.
8.9.
90.
9L
A AR
.06 X _
, : AAR = 9.93 percem; T1le proJect shoo1d be. a.cc-eptect
.5 X ( 290,000 + 0)
AAR
($ 1,000+$1,200 + 1,700) -:-4
= == 7. 11 poetrccnt
.5x ($38,000+ 0)
AAR
($9,500 + 2,500 -+ $ 5,500) -;. 3
. = 9.60 ifk-"'t'Cem
.5 X

AAR = = 6.46
.5 X ($65,000 + 0)
The finn sht ruld reje.l tbe proj oct hase.d on lhe J\A R.
AAR
($9,500 + $79,500 + $44,500 + $34,.500) + 4 13 08
- = . pel 'Cf!lll
.5 X ($642,000 + 0)
Y car Proj cct A Cash Row
0 -$8.4.500
l $19.000
2 $40,000
3 $:27,000
CFo -$7.600
co, $4,000
FO, ]
$5,000
'FO, l
co, $] ,000
Hl
3
LRRCPT
I 7 percent ;;; ] 7 _ 9%
Ptrojc:ct B Cash Flow

$2.5,(0)

$26JJOO
D
-$7,600
$4,000
$5,000
$],000
92.
93.
Year Project A Cash Jrlow H Cash flow Difference
0 -$75.000 -$60,lKl.l -$15,utl!l
J $30.00U $2:5J.K.IO $ :5,000
2 $35.01JU $30.m.IO $ :5.000
3 $3.S.OOU $2:5J100 $10,000
Cash tlows. for (AB : Cash t1mvs for A: Cash tlows for B:
CF
0
-$15.000 CF
11
.. CF
0
-$60,000
co, $ 5.01JU co, 30,000 co, $25.000
toll, 1 FO, 1 FO 1
C{):! $ s.ooo cn1 ""35,000 C{)2 $30 000

:l fU! I Jolh
]
$10.000 co:}
C<h
$25 000
FOJ
]
I JoUJ
]
IRRCPT ] =d5 I ::::; IS.
13 percent
PV CI)T NPVCFr
$565.05 $861.35
'lrhc cros.rovcr rate l3.94 At a. Tate higher thant!r.c m.te, such
as. IS. percent, Pmject B 'i.v.iU have t!hc higher Nt>V and should be acrcptcd
PV _ + $&7 300 + 4l,OOO + 39.000 ; =
irl '-"" (1 +

(1 + .085)
2
(1 +

(1 + .085)<1
l76.978.72
CFn
col
FO,
CO:t;
FOz
co,

m
F04
0
$46..200
]
$87.300
]
$41.000
]
$39.000
]
l= 8.5
NPVCPT
l 76,978.72
I
$176,Y78.72 .
P = ;;;; 1.05; You s.hould accept beca.l!.ltse the PI 1s greater than L
169,0()0 .
94.
J
95.
96.
cr:;ll -$169,(0)
co1
- 5,200
FOI I
C(h S7,300
FO! l
J . ooo

co4 39,000
ro4
I
IRRCPT
10.75
y t.lU should [lt.:Ccpt h ct.' !.lUSC llrtc IR R nr I 0.75 pTt.:C"!Ilt c ;(Cc<ls rei um elf s.so
pL"l' (;C n'l .
C n
col
f0
1
-$169,000
6.200
co,
f0
1
co1
FO ...

f-04 l
PVCPI
$7,97&.72
. 000
39.000
You should accept because the PV is posiLi\1e.
I . k . 2 J 6CJ.OOO - $46.200 - 87,300 2 07
1.' aybac penod = + ::: .o yc:ars

Bared on payback, rl1e project should he :rejocled because [])e B)a.ybad:: pe.l'lo.dl of
2.87 years exceeds. rlle :requ1 i'e.d period of 2.5 yeai's.
97.
9&.
99.
r PV = - 75,000 + 19,000 + $48,000 + 12.000 . . PV A = -$9,042.07
l\ (J + .l0)
1
0 +- .) 0)-z (1.10)
3

. J 0,000 16,000 $72ll00 . ' .
PVB = -$70,000 + I + l + l . NPV h ... S-1.279.52
Cash flows for A;
CF{} -$7 5,001)
co, 19,000
F01 l
co1. S4s.ooo
fU1 I
C11 12,000
Flh 1
l= 10
PVCPT
-$9,042.07
( 1 + .13) ( 1 + .13) (I . I 3)
Casb t1o'>vs for B;
CFfl 70.000
co, $10,000
FO I
col $t6.ooo
1
0)3 $72.000
FO, 1
[ = n
NPVCPT
$] ,279.52
Project IB should be accepted and project A s.loou[d be rcj cctcd.
arc mutually e.xdusi vc projects. IJbe [RR should! not be applicdl.
ID -L- k ,
00
,
2
$75,000- J 9,000- 48,000
2 67 .oa)'uuC pen tor A = + . years
12,000
- $70 000 - $1 -
Payback penod forB - 2 + :::: 2.61 year '
-
either project pays back within 2 years. tnu s.. the. y shouLd both be rej ected.
HMJ Because these are mutuaJiy e:-:dusivc proJects.. the PI mle s.hould not be. applied_
., 01 . Tbc AAR c-an not be computed because the oct '!.vas. not
102. NPV = ($27.50/1.1) 25JJO = $U
103. Period;;; ($5.t.M.l.l + .S.S.OOO + $:5.500;::; 5500 for 3 remai!llder $20.utM.I
$ l :5.:500 == 4..500. $4.500/$5.500 = . 818! 8 ;;; .82) ;;; Payback Period ;;; 3.81 years
'104. Dis.<'04mted A. 1.n;::: $"15.00JJ$5,utM.I = 3. PM.Ir;;; l PV=-3 FV;:::Q Jl/YJR: ;:::;IO

HJ5. $7:5/1. 2 = $66.96, I :25/L t 22 == W .65. $1 OWL 123 = $71..18, $:5011.124 = $3 L 78
3 yr. $2:50- $66.%- $99.65 - 7 l . I 8 = $U.21 +Fraction= $12.211$31.78 = .38
Dis.<"oontcill 3 + .. 38 == 3. 3 8 years.
I 06. $-2001 U 0 ;;; $-181.82: $-181 .82 + l 500 ;;; $ 1.318 Cash tlow 0 = $-1 .000: Cash li1ow
;;; $1.318. I 8