42) The net present value method of capital budgeting analysis does all of the following except:

42) The net present value method of capital budgeting analysis does all of the following except:

A) incorporate risk into the analysis. B) consider all relevant cash flow information. C) provide a specific anticipated rate of return. D) discount all future cash flows. E) use all of a project’s cash flows.

42)

43) The payback method of analysis: A) applies an industry-standard recoupment period. B) discounts cash flows. C) always uses all project cash flows. D) has a timing bias. E) ignores the initial cost.

43)

44) The payback method: A) applies mainly to projects where the actual results will be known relatively soon. B) generally results in decisions that conflict with the decision suggested by NPV

analysis. C) is a more sophisticated method of analysis than the profitability index. D) is the most frequently used method of capital budgeting analysis. E) considers the time value of money.

44)

45) A mutually exclusive project is a project whose: A) NPV is always negative. B) acceptance or rejection has no effect on other projects. C) cash flow pattern exhibits more than one sign change. D) acceptance or rejection affects other projects. E) IRR is always negative.

45)

46) Which one of the following statements is true? A) You must know the discount rate to compute the NPV but you can compute the

IRR without having a discount rate. B) Discounted payback is a better method than payback and is more frequently used

in practice. C) Financing projects can only ever have one IRR. D) Payback uses the same discount rate as that applied in the NPV calculation. E) You must have a discount rate to compute, NPV, IRR, PI, and discounted

payback.

46)

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47) What is the net present value of a project with an initial cost of $36,900 and cash inflows of $13,400, $21,600, and $10,000 for Years 1 to 3, respectively? The discount rate is 13 percent.

A) −$1,195.12 B) −$287.22 C) $204.36 D) $797.22 E) −$1,350.49

47)

48) What is the net present value of a project that has an initial cash outflow of $7,670 and cash inflows of $1,280 in Year 1, $6,980 in Year 3, and $2,750 in Year 4? The discount rate is 12.5 percent.

A) $371.02 B) $86.87 C) $249.65 D) $68.20 E) $270.16

48)

49) Wilson’s Market is considering two mutually exclusive projects that will not be repeated. The required rate of return is 13.9 percent for Project A and 12.5 percent for Project B. Project A has an initial cost of $54,500, and should produce cash inflows of $16,400, $28,900, and $31,700 for Years 1 to 3, respectively. Project B has an initial cost of $69,400, and should produce cash inflows of $0, $48,300, and $42,100, for Years 1 to 3, respectively. Which project, or projects, if either, should be accepted and why?

A) Project A; because its NPV is positive while Project B’s NPV is negative B) Project A; because it has the higher required rate of return C) neither project; because neither has an NPV equal to or greater than its initial cost D) Project B; because it has the largest total cash inflow E) Project B; because it has a negative NPV which indicates acceptance

49)

50) Bernstein’s proposed project has an initial cost of $128,600 and cash flows of $64,500, $98,300, and −$15,500 for Years 1 to 3 respectively. If all negative cash flows are moved to Time 0 at a discount rate of 10 percent, what is the modified internal rate of return?

A) 9.82% B) 9.69% C) 10.00% D) 10.04% E) 9.97%

50)

51) Blue Bird Café is considering a project with an initial cost of $46,800, and cash flows of $8,500, $25,000, $19,000, and −$4,500 for Years 1 to 4, respectively. How many internal rates of return do you expect this project to have?

A) 3 B) 4 C) 2 D) 0 E) 1

51)

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52) It will cost $3,000 to acquire a small ice cream cart. Cart sales are expected to be $1,400 a year for three years. After the three years, the cart is expected to be worthless as that is the expected remaining life of the cooling system. What is the payback period of the ice cream cart?

A) 1.83 years B) 1.14 years C) 2.83 years D) .83 years E) 2.14 years

52)

53) A project has an initial cost of $2,250. The cash inflows are $0, $500, $900, and $700 for Years 1 to 4, respectively. What is the payback period?

A) 3.98 years B) never C) 2.84 years D) 2.97 years E) 3.92 years

53)

54) Homer is considering a project with cash inflows of $950 a year for Years 1 to 4, respectively. The project has a required discount rate of 11 percent and an initial cost of $2,100. What is the discounted payback period?

A) never B) 3.05 years C) 2.68 years D) 3.39 years E) 2.21 years

54)

55) Ginny is considering an investment costing $55,000 that has cash flows of $35,000 in Year 2, $36,000 in Year 3, and −$5,000 in Year 4. Ginny requires a rate of return of 8 percent and has a required discounted payback period of three years. Based on the discounted payback method should she make this investment? All things considered, do you agree with this decision? Why or why not?

A) no; because the discounted payback period is too short B) yes; discounted payback indicates acceptance but that is not a wise decision as the

NPV is negative and the final cash outflow is ignored by payback C) yes; because the NPV is positive and the project pays back on a discounted basis

within the assigned time period D) no; although the project earns more than 8 percent, there is no situation where the

project can pay back on a discounted basis within three years E) yes; but only because the discounted payback requirement is met

55)

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56) Consider an investment with an initial cost of $20,000 that expected to last for 5 years. The expected cash flows in Years 1 and 2 are $5,000 each, in Years 3 and 4 are $5,500 each, and the Year 5 cash flow is $1,000. Assume each annual cash flow is spread evenly over its respective year. What is the payback period?

A) 4.55 years B) 3.82 years C) 4.00 years D) 3.18 years E) None of these

56)

57) The changes in a firm’s future cash flows that are a direct consequence of accepting a project are called _____ cash flows.

A) erosion B) incremental C) stand-alone D) net present value E) opportunity

57)

58) A cost that has already been paid, or the liability to pay has already been incurred, is a(n):

A) sunk cost. B) salvage value expense. C) opportunity cost. D) erosion cost. E) net working capital expense.

58)

59) The most valuable investment given up if an alternative investment is chosen is a(n): A) salvage value expense. B) net working capital expense. C) opportunity cost. D) erosion cost. E) sunk cost.

59)

60) A decrease in a firm’s current cash flows resulting from the implementation of a new project is referred to as:

A) salvage value expenses. B) net working capital expenses. C) opportunity costs. D) erosion costs. E) sunk costs.

60)

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61) The depreciation method currently allowed under U.S. tax law governing the accelerated write-off of property under various lifetime classifications is called _____ depreciation.

A) straight-line B) curvilinear C) MACRS D) sum-of-years digits E) FIFO

61)

62) The cash flow tax savings generated as a result of a firm’s tax-deductible depreciation expense is called the:

A) operating cash flow. B) aftertax salvage value. C) depreciable basis. D) depreciation tax shield. E) aftertax depreciation savings.

62)