Q&A Hero

Q: A project will produce an operating cash flow of $56,200 a year for 5 years. The initial fixed asset investment in the project will be $238,900. The net aftertax salvage value is estimated at $67,000 and will be received during the last year of the project's life. What is the net present value of the project if the required rate of return is 15.2 percent? A) −$20,627.54 B) −$18,374.86 C) $5,120.52 D) $18,374.86 E) $20,627.54

Q: The Lunch Counter is expanding and expects operating cash flows of $49,500 a year for nine years as a result. This expansion requires $36,500 in new fixed assets. These assets will be worthless at the end of the project. In addition, the project requires $2,200 of net working capital throughout the life of the project. What is the net present value of this expansion project at a required rate of return of 15.6 percent? A) $194,736.05 B) $201,033.33 C) $192,536.05 D) $188,569.91 E) $193,132.81

Q: Cool Comfort currently sells 340 Class A spas, 465 Class C spas, and 125 deluxe model spas each year. The firm is considering adding a mid-class spa and expects that, if it does, it can sell 360 of them. However, if the new spa is added, Class A sales are expected to decline to 235 units while the Class C sales are expected to decline to 275 units. The sales of the deluxe model will not be affected. Class A spas sell for an average of $10,700 each. Class C spas are priced at $18,700 and the deluxe model sells for $27,000 each. The new mid-range spa will sell for $13,500. What is the value of the erosion effect? A) −$3,510,500 B) −$4,166,500 C) −$3,827,000 D) −$4,676,500 E) −$3,657,000

Q: Nelson Mfg. owns a manufacturing facility that is currently sitting idle and is debt-free. The facility is located on a piece of land that originally cost $159,000. The facility itself cost $1,390,000 to build. As of now, the book value of the land and the facility are $159,000 and $458,000, respectively. The firm received a bid of $1,700,000 for the land and facility last week. The firm's management rejected this bid even though they were told that it is a reasonable offer in today's market. If the firm was to consider using this land and facility in a new project, what cost, if any, should it include in the project analysis? A) $0 B) $617,000 C) $1,083,000 D) $1,700,000 E) $1,619,000

Q: The maintenance expenses on a rental house you own average $200 a month and property taxes are $4,800 annually. The house cost $238,500 when you purchased it four years ago. The house was recently appraised at $247,600. If you sell the house you will incur $12,900 in costs. What value should you place on this house should you opt to use it as your professional office? A) $251,400 B) $247,600 C) $234,700 D) $238,500 E) $242,300

Q: Mason Farms purchased a building for $689,000 and made repairs costing $136,000. The annual taxes on the property are $8,200. The building has a current market value of $730,000 and a current book value of $394,000. The building is mortgage-free. If the company decides to use this building for a new project, what value, if any, should be included in the initial cash flow of the project for this building? A) $0 B) $394,000 C) $730,000 D) $159,000 E) $721,800

Q: Currently, GH Co. sells 42,600 handbags annually at an average price of $149 each. It is considering adding a lower-priced line of handbags that sell for $79 each. The firm estimates it can sell 21,000 of the lower-priced handbags but expects to sell 7,200 less of the higher-priced handbags by doing so. What is the amount of the annual sales that should be used when evaluating the addition of the lower-priced handbags? A) $586,200 B) $659,000 C) $6,933,600 D) $5,839,000 E) $780,200

Q: W&M paid $179,000, in cash, for equipment three years ago and spent $18,000 for equipment upgrades last year. The company no longer uses this equipment and has received a cash offer of $68,000 from a buyer. The current book value of the equipment, including all updates, is $54,500. What value, if any, should the company assign to this equipment should it decide to use the equipment for a new project? A) $0 B) $54,500 C) $68,000 D) $74,500 E) $129,000

Q: High Breeze is considering expanding on some land that it currently owns. The initial cost of the land was $364,500 and it is currently valued at $357,900. The company has some unused equipment that it currently owns valued at $29,000 that could be used for this project if $8,200 is spent for equipment modifications. Other equipment costing $157,900 will also be required. What is the amount of the initial cash flow for this expansion project? A) −$530,600 B) −$158,720 C) −$553,000 D) −$585,600 E) −$559,600

Q: Kelly's Corner Bakery purchased a lot in Oil City six years ago at a cost of $98,700. Today, that lot has a market value of $128,900. At the time of the purchase, the company spent $6,500 to level the lot and another $12,000 to install storm drains. The company now wants to build a new facility on the site at an estimated cost of $494,200. What amount should be used as the initial cash flow for this project? A) −$611,400 B) −$623,100 C) −$641,600 D) −$592,900 E) −$582,400

Q: Winn Corp. currently sells 9,820 motor homes per year at $45,500 each, and 3,680 luxury motor coaches per year at $89,700 each. The company wants to introduce a new portable camper to fill out its product line. It hopes to sell 4,000 of these campers per year at $14,750 each. An independent consultant has determined that if the new campers are introduced, sales of its existing motor homes will most likely increase by 250 units per year while the sales of its motor coaches will probably decline by 368 units per year. What is the amount that should be used as the annual sales figure when evaluating the portable camper project? A) $59,000,000 B) $103,384,600 C) $64,141,800 D) $37,365,400 E) $103,325,600

Q: Decreasing which one of the following will increase the acceptability of a project? A) Sunk costs B) Salvage value C) Depreciation tax shield D) Equivalent annual cost E) Accounts payable requirement

Q: Which one of the following would make a mutually exclusive project unacceptable? A) Cash inflow for net working capital at Time 0 B) Requiring fixed assets that would have no salvage value C) An equivalent annual cost that exceeds that of an alternative project D) Lack of revenue generation E) A depreciation tax shield that exceeds the value of the interest expense

Q: The bid price always assumes which one of the following? A) A project has a one-year life. B) The aftertax net income of the project is zero. C) The net present value of the project is zero. D) Any assets purchased will have a positive salvage value at the end of the project. E) Assets will be depreciated based on MACRS.

Q: The equivalent annual cost considers all of the following except the: A) required rate of return. B) operating costs. C) need for replacement. D) economic life. E) costs of research conducted to identify equipment choices.

Q: Assume you are considering two mutually exclusive machines and need to select one for a cost-cutting project. Which one of these sets of characteristics best indicates the use of the equivalent annual cost method of analysis? A) Differing costs with no replacement at end of life B) Differing lives and planned replacement at end of life C) Differing lives with no replacement at end of life D) Differing manufacturers and differing operating costs E) Differing required returns with no replacement at end of life

Q: The equivalent annual cost method is useful in determining: A) which one of two machines to purchase if the machines are mutually exclusive, have differing lives, and are a one-time purchase. B) the operating cash flow for mutually exclusive projects ignoring any fixed asset acquisitions or dispositions. C) the minimum price that should be bid to earn a specified rate of return. D) which one of two investments to accept when the investments have differing required rates of return, differing costs, and will not be replaced once they wear out. E) which one of two machines should be purchased when the machines are mutually exclusive, have differing lives, and will be replaced at the end of their lives.

Q: Dan is comparing three machines to determine which one to purchase. The machines sell for differing prices, have differing operating costs and machine lives, and will be replaced when worn out. Which one of the following computational methods should Dan use as the basis for his decision? A) Internal rate of return B) Net present value C) Equivalent annual cost D) Depreciation tax shield E) Bottom-up operating cash flow

Q: Which one of the following statements is correct concerning bid prices? A) The bid price is the maximum price that a firm should bid. B) A firm can submit a bid that is higher than the computed bid price and still break even. C) A bid price ignores taxes. D) A bid price should be computed based solely on the operating cash flows of the project. E) A bid price should be computed based on a zero percent required rate of return.

Q: Which one of the following statements is correct? A) Project analysis should only include the cash flows that affect the income statement. B) A project can create a positive operating cash flow without affecting sales. C) The depreciation tax shield creates a cash outflow for a project. D) Interest expense should always be included when analyzing cost-cutting projects. E) A bid price maximizes profits on a project for the bidding firm.

Q: The operating cash flow of a cost-cutting project: A) is equal to the depreciation tax shield. B) is equal to zero because there is no incremental sales. C) can only be analyzed by projecting the sales and costs for a firm's entire operations. D) includes any changes that occur in the current accounts. E) can be positive even though there are no sales.

Q: Which one of the following will increase a bid price? A) A decrease in the fixed costs B) A reduction in the net working capital requirement C) A reduction in the firm's tax rate D) An increase in the salvage value E) An increase in the required rate of return

Q: The bid price is the: A) price you must charge to break even at a zero discount rate. B) the aftertax contribution margin. C) the highest price you should charge if you want to win the bid. D) the only price you can bid if the project is to be profitable. E) the minimum price that will provide your target rate of return.

Q: You are considering the purchase of a new machine. Your analysis includes the evaluation of two machines that have differing initial and ongoing costs and differing lives. Whichever machine is purchased will be replaced at the end of its useful life. You should select the machine that has the: A) longest life. B) highest annual operating cost. C) lowest annual operating cost. D) highest equivalent annual cost. E) lowest equivalent annual cost.

Q: The annual annuity stream of payments that has the same present value as a project's costs is referred to as which one of the following? A) Yearly incremental costs B) Sunk costs C) Opportunity costs D) Annuitized erosion cost E) Equivalent annual cost

Q: Dexter Smith & Co. is replacing a machine simply because it has worn out. The new machine will not affect either sales or operating costs and will not have any salvage value at the end of its five-year life. The firm has a tax rate of 22 percent, uses straight-line depreciation over an asset's life, ignores bonus depreciation options, and has a positive net income. Given this, which one of the following statements is correct? A) As a project, the new machine has a net present value equal to minus one times the machine's purchase price. B) The new machine will have a zero rate of return. C) The new machine will generate positive operating cash flows. D) The new machine will create a cash outflow when the firm disposes of the machine at the end of its life. E) The new machine creates erosion effects.

Q: The depreciation tax shield is best defined as the: A) amount of tax that is saved when an asset is purchased. B) tax that is avoided when an asset is sold as salvage. C) amount of tax that is due when an asset is sold. D) amount of tax that is saved because of the depreciation expense. E) amount by which the aftertax depreciation expense lowers net income.

Q: Increasing which one of the following will increase the operating cash flow of a profitable, tax paying company assuming that the bottom-up approach is used to compute the operating cash flow? A) Erosion effects B) Taxes C) Fixed expenses D) Salaries E) Depreciation expense

Q: The top-down approach to computing the operating cash flow: A) ignores noncash expenses. B) applies only if a project affects sales. C) applies only to cost cutting projects. D) is equal to sales − costs − taxes + depreciation. E) is used solely to compute a bid price.

Q: The bottom-up approach to computing the operating cash flow applies only when: A) both the depreciation expense and the interest expense are equal to zero. B) the interest expense is equal to zero. C) the project is a cost-cutting project. D) no fixed assets are required for a project. E) both taxes and the interest expense are equal to zero.

Q: The operating cash flow for a project should exclude which one of the following? A) Taxes B) Variable costs C) Fixed costs D) Interest expense E) Depreciation tax shield

Q: Which one of the following is a correct method for computing the operating cash flow of a project assuming that the interest expense is equal to zero? A) EBIT + Depreciation B) EBIT(1 + Taxes) C) Net income + Depreciation D) (Sales − Costs)(1 − Depreciation)(1 − Taxes) E) (Sales − Costs)(1 − Taxes)

Q: A company that utilizes the MACRS system of depreciation but does not use bonus depreciation: A) will have equal depreciation costs each year of an asset's life. B) will have a greater depreciation tax shield in Year 2 than in Year 1. C) can depreciate the cost of land. D) will expense less than the entire cost of an asset. E) will fully depreciate a MACRS five-year asset within 5 years.

Q: Atlas Manufacturing purchased a new computer system in 2018 at a cost of $622,400. This system falls in the 5-year MACRS class that has depreciation allowance percentages of 20, 32, 19.2, 11.52, 11.52, and 5.76. What is the maximum amount of depreciation the firm can claim on this system in the first year if it selects the bonus depreciation method? A) $311,200 B) $124,480 C) $199,168 D) $622,400 E) $155,600

Q: Three years ago, Knox Glass purchased a machine for a three-year project. The machine is being depreciated straight-line to zero over a five-year period. Assume the firm decided to forego any bonus depreciation. Today, the project ended and the machine was sold. Which one of the following correctly defines the aftertax salvage value of that machine? (TCrepresents the relevant tax rate) A) Sale price + (Sale price − Book value)(TC) B) Sale price + (Sale price − Book value)(1 − TC) C) Sale price + (Book value − Sale price)(TC) D) Sale price + (Book value − Sale price)(1 − TC) E) Sale price(1 − TC)

Q: Ignoring bonus depreciation, the net book value of equipment will: A) remain constant over the life of the equipment. B) vary in response to changes in the market value of that equipment. C) decrease at a constant rate when MACRS depreciation is used. D) increase over the taxable life of an asset. E) decrease slower under straight-line depreciation than under MACRS.

Q: The current book value of a fixed asset that was purchased two years ago is used in the computation of which one of the following? A) Depreciation tax shield B) Tax due on the current salvage value of that asset C) Current year's operating cash flow D) Change in net working capital E) MACRS depreciation for the current year

Q: P.A. Petroleum just purchased some equipment at a cost of $67,000. The equipment is classified as MACRS five-year property. The MACRS rates are .2, .32, and .192 for Years 1 to 3, respectively. What is the proper methodology for computing the depreciation expense for Year 2 assuming the firm opts to forego any bonus depreciation? A) $67,000(1 − .20)(.32) B) $67,000/(1 − .20 − .32) C) $67,000(1.32) D) $67,000(1 − .32) E) $67,000(.32)

Q: Dependable Motors just purchased some MACRS five-year property at a cost of $216,000. The MACRS rates are .2, .32, and .192 for Years 1 to 3, respectively. Assume the firm opted to forego any bonus depreciation. Which one of the following will correctly give you the book value of this equipment at the end of Year 2? A) $216,000/(1 + .2 + .32) B) $216,000(1 − .2 − .32) C) $216,000(.20 + .32) D) [$216,000(1 − .20)](1 − .32) E) $216,000[(1 + .20)(1 + .32)]

Q: Changes in the net working capital requirements: A) can affect the cash flows of a project every year of the project's life. B) only affect the initial cash flows of a project. C) only affect the initial and final cash flows of a project. D) are generally excluded from project analysis due to their irrelevance to the total project. E) are excluded from project analysis as long as they are recovered when the project ends.

Q: All of the following are related to a proposed project. Which one of these should be included in the cash flow at Time 0? A) Loan obtained to finance the project B) Initial investment in inventory to support the project C) Annual depreciation tax shield D) Aftertax salvage value E) Net working capital recovery

Q: Net working capital: A) can be ignored in project analysis because any expenditure is normally recouped at the end of the project. B) requirements, such as an increase in accounts receivable, create a cash inflow at the beginning of a project. C) is rarely affected when a new product is introduced. D) can create either an initial cash inflow or outflow. E) is the only expenditure where at least a partial recovery can be made at the end of a project.

Q: Which one of the following is a project cash inflow? Ignore any tax effects. A) Decrease in accounts payable B) Increase in accounts receivable C) Decrease in inventory D) Depreciation expense E) Equipment acquisition

Q: A project's cash flow is equal to the project's operating cash flow: A) plus the project's depreciation expense minus both the project's taxes and capital spending. B) minus both the project's change in net working capital and capital spending. C) minus the project's change in net working capital plus all of the depreciation expenses. D) plus the project's depreciation expenses minus the project's taxes. E) minus the project's taxes.

Q: Pro forma statements for a proposed project should generally do all of the following except: A) be compiled on a stand-alone basis. B) include all project-related fixed asset acquisitions and disposals. C) include all the incremental cash flows related to the project. D) include taxes. E) include interest expense.

Q: Pro forma financial statements can best be described as financial statements: A) expressed in a foreign currency. B) where the assets are expressed as a percentage of total assets and costs are expressed as a percentage of sales. C) showing projected values for future time periods. D) expressed in real dollars, given a stated base year. E) where all accounts are expressed as a percentage of last year's values.

Q: Which one of the following best describes the concept of erosion? A) Expenses that have already been incurred and cannot be recovered B) Change in net working capital related to implementing a new project C) The cash flows of a new project that come at the expense of a firm's existing cash flows D) The alternative that is forfeited when a fixed asset is utilized by a project E) The differences in a firm's cash flows with and without a particular project

Q: Which one of the following should not be included in the analysis of a new product? A) Increase in accounts payable for inventory purchases of the new product B) Reduction in sales for a current product once the new product is introduced C) Market value of a machine owned by the firm which will be used to produce the new product D) Money already spent for research and development of the new product E) Increase in accounts receivable needed to finance sales of the new product

Q: Which one of the following best illustrates erosion as it relates to a hot dog stand located on the beach? A) Providing both ketchup and mustard for customers' use B) Repairing the roof of the hot dog stand because of water damage C) Selling fewer hot dogs because hamburgers were added to the menu D) Offering french fries but not onion rings E) Losing sales due to bad weather

Q: GL Plastics spent $1,200 last week repairing a machine. This week the company is trying to decide if the machine could be better utilized if they assigned it a proposed project. When analyzing the proposed project, the $1,200 should be treated as which type of cost? A) Opportunity B) Fixed C) Incremental D) Erosion E) Sunk

Q: Which one of the following is an example of a sunk cost? A) $1,500 of lost sales because an item was out of stock B) $1,200 paid to repair a machine last year C) $20,000 project that must be forfeited if another project is accepted D) $4,500 reduction in current shoe sales if a store commences selling sandals E) $1,800 increase in comic book sales if a store ceases selling puzzles

Q: The option that is forgone so that an asset can be utilized by a specific project is referred to as which one of the following? A) Salvage value B) Wasted value C) Sunk cost D) Opportunity cost E) Erosion

Q: Which one of the following costs was incurred in the past and cannot be recouped? A) Incremental B) Side C) Sunk D) Opportunity E) Erosion

Q: Frank's is a furniture store that is considering adding appliances to its offerings. Which one of the following is the best example of an incremental cash flow related to the appliances? A) Moving furniture to provide floor space for the appliances B) Paying the rent for the store C) Selling furniture to appliance customers D) Having the current store manager oversee appliance sales E) Using the store's billing system for appliance sales

Q: Kelley's Baskets makes handmade baskets and is currently considering making handmade wreaths as well. Which one of the following is the best example of an incremental operating cash flow related to the wreath project? A) Storing supplies in the same space currently used for materials storage B) Utilizing the basket manager to oversee wreath production C) Hiring additional employees to handle the increased workload should the firm accept the wreath project D) Researching the market to determine if wreath sales might be profitable before deciding to proceed E) Planning on lower interest expense by assuming the proceeds of the wreath sales will be used to reduce the firm's currently outstanding debt

Q: The stand-alone principle advocates that project analysis should be based solely on which one of the following costs? A) Sunk B) Total C) Variable D) Incremental E) Fixed

Q: The fact that a proposed project is analyzed based on the project's incremental cash flows is the assumption behind which one of the following principles? A) Underlying value principle B) Stand-alone principle C) Equivalent cost principle D) Salvage principle E) Fundamental principle

Q: The difference between a company's future cash flows if it accepts a project and the company's future cash flows if it does not accept the project is referred to as the project's: A) incremental cash flows. B) internal cash flows. C) external cash flows. D) erosion effects. E) financing cash flows.

Q: The relevant discount rate is 14 percent for a project with cash flows of −$9,200, $4,600, $3,300, and $3,800 for Years 0 to 3, respectively. What is the profitability index? A) .96 B) .99 C) .93 D) 1.04 E) 1.08

Q: A project has cash flows of −$152,000, $60,800, $62,300 and $75,000 for Years 0 to 3, respectively. The required rate of return is 13 percent. What is the profitability index? Should you accept or reject the project based on this index value? A) .93; accept B) 1.07; accept C) 1.02; accept D) .93; reject E) 1.07 reject

Q: A project has a discount rate of 15.5 percent, an initial cost of $109,200, an inflow of $56,400 in Year 1 and an inflow of $75,900 in Year 2. Your boss requires that every project return a minimum of $1.06 for every $1 invested. Based on this information, what is your recommendation on this project? A) Accept the project because the PI is .97 B) Reject the project because the PI is .97 C) Accept the project because the PI is 1.03 D) Reject the project because the PI is 1.01 E) Reject the project because the PI is 1.03

Q: Project A costs $47,800 with cash inflows of $34,200 in Year 1 and $28,700 in Year 2. Project B costs $63,200 with cash inflows of $21,900 in Year 1 and $59,200 in Year 2. These projects are independent and have an assigned discount rate of 15 percent. Based on the profitability index, what is your recommendation concerning these projects? A) Accept both projects B) Reject both projects C) Accept Project A and reject Project B D) Accept Project B and reject Project A E) Accept either, but not both projects

Q: You estimate that a project will cost $33,700 and will provide cash inflows of $14,800 in Year 1 and $24,600 in Year 3. Based on the profitability index rule, should the project be accepted if the discount rate is 14.2 percent? Why or why not? A) Yes; The PI is .87. B) Yes; The PI is .93. C) Yes; The PI is 1.06. D) No; The PI is 1.06. E) No; The PI is .87.

Q: Assume a project has cash flows of −$54,300, $18,200, $37,300, and $14,300 for Years 0 to 3, respectively. What is the profitability index given a required return of 12.6 percent? A) .946 B) .98 C) 1.02 D) 1.06 E) 1.00

Q: TL Lumber is evaluating a project with cash flows of −$12,800, $7,400, $11,600, and −$3,200 for Years 0 to 3, respectively. Given an interest rate of 8 percent, what is the MIRR using the discounted approach? A) 13.25 percent B) 14.08 percent C) 15.40 percent D) 14.36 percent E) 19.23 percent

Q: A venture will provide a net cash inflow of $57,000 in Year 1. The annual cash flows are projected to grow at a rate of 7 percent per year forever. The project requires an initial investment of $739,000 and has a required return of 15.6 percent. The company is somewhat unsure about the growth rate assumption. At what constant rate of growth would the company just break even? A) 9.48 percent B) 9.29 percent C) 7.89 percent D) 8.49 percent E) 7.75 percent

Q: A firm evaluates all of its projects by applying the IRR rule. The current proposed project has cash flows of −$37,048, $16,850, $15,700, and $19,300 for Years 0 to 3, respectively. The required return is 18 percent. What is the project IRR? Should the project be accepted or rejected? A) 18.42 percent; accept B) 16.05 percent; accept C) 16.05 percent; reject D) 18.42 percent; reject E) 21.08 percent; reject

Q: A project has cash flows of −$152,000, $60,800, $62,300, and $75,000 for Years 0 to 3, respectively. The required rate of return is 13 percent. Based on the internal rate of return of ________ percent, you should ________ the project. A) 14.67; accept B) 13.96; accept C) 14.67; reject D) 17.91; reject E) 18.46; reject

Q: You are considering two mutually exclusive projects. Project A has cash flows of −$125,000, $51,400, $52,900, and $63,300 for Years 0 to 3, respectively. Project B has cash flows of −$85,000, $23,100, $28,200, and $69,800 for Years 0 to 3, respectively. Project A has a required return of 9 percent while Project B's required return is 11 percent. Should you accept or reject these mutually exclusive projects based on IRR analysis? A) Accept Project A and reject Project B B) Reject Project A and accept Project B C) Accept both projects D) Reject both projects E) You should not use IRR; use a different method of analysis.

Q: Projects A and B are mutually exclusive. Project A has cash flows of −$10,000, $5,100, $3,400, and $4,500 for Years 0 to 3, respectively. Project B has cash flows of −$10,000, $4,500, $3,400, and $5,100 for Years 0 to 3, respectively. What is the crossover rate for these two projects? A) 0 percent B) 5.48 percent C) 6.71 percent D) 2.75 percent E) 4.94 percent

Q: HH Companies has identified two mutually exclusive projects. Project A has cash flows of −$40,000, $21,200, $16,800, and $14,000 for Years 0 to 3, respectively. Project B has a cost of $38,000 and annual cash inflows of $25,500 for 2 years. At what rate would you be indifferent between these two projects? A) 6.34 percent B) −1.72 percent C) 9.41 percent D) −4.38 percent E) 8.28 percent

Q: An investment that provides annual cash flows of $20,100 for 8 years costs $87,500 today. At what rate would you be indifferent between accepting the investment and rejecting it? A) 17.60 percent B) 15.90 percent C) 15.51 percent D) 15.93 percent E) 16.74 percent

Q: Home & More is considering a project with cash flows of −$368,000, $133,500, −$35,600, $244,700, and $258,000 for Years 0 to 4, respectively. Should this project be accepted based on the combination approach to the modified internal rate of return if both the discount rate and the reinvestment rate are 14.6 percent? Why or why not? A) Yes; The MIRR is 14.78 percent. B) Yes; The MIRR is 16.96 percent. C) Yes; The MIRR is 12.91 percent. D) No; The MIRR is 14.78 percent. E) No; The MIRR is 16.96 percent.

Q: A project has cash flows of −$161,900, $60,800, $62,300, and $75,000 for Years 0 to 3, respectively. The required rate of return is 13 percent. Based on the internal rate of return of ________ percent for this project, you should ________ the project. A) 9.67; accept B) 10.41; reject C) 11.67; accept D) 10.41; accept E) 9.67; reject

Q: A project has projected cash flows of −$148,500, $32,800, $64,200, −$7,500 and $87,300 for Years 0 to 4, respectively. Should this project be accepted based on the combination approach to the modified internal rate of return if both the discount rate and the reinvestment rate are 10.5 percent? Why or why not? A) Yes; The MIRR is 8.04 percent. B) Yes; The MIRR is 9.23 percent. C) No; The MIRR is 8.04 percent. D) No; The MIRR is 9.06 percent. E) No; The MIRR is 9.23 percent.

Q: Crystal Industries is considering an expansion project with cash flows of −$287,500, $107,500, $196,100, $104,500, and −$92,700 for Years 0 through 4. Should the firm proceed with the expansion based on the discounting approach to the modified internal rate of return if the discount rate is 13.4 percent? Why or why not? A) No; The MIRR is 9.13 percent. B) No; The MIRR is 14.45 percent. C) Yes; The MIRR is 9.13 percent. D) No; The MIRR is 11.23 percent. E) Yes; The MIRR is 14.45 percent.

Q: Drinkable Water Systems is analyzing a project with projected cash inflows of $127,400, $209,300, and $46,000 for Years 1 to 3, respectively. The project costs $251,000 and has been assigned a discount rate of 12.5 percent. Should this project be accepted based on the discounting approach to the modified internal rate of return? Why or why not? A) Yes; The MIRR is 11.85 percent. B) No; The MIRR is 11.33 percent. C) Yes; The MIRR is 11.33 percent. D) No; The MIRR is 11.68 percent. E) No; The MIRR is 11.85 percent.

Q: An investment costs $152,000 and has projected cash inflows of $71,800, $86,900, and −$11,200 for Years 1 to 3, respectively. If the required rate of return is 15.5 percent, should you accept the investment based solely on the internal rate of return rule? Why or why not? A) Yes; The IRR exceeds the required return. B) Yes; The IRR is less than the required return. C) No; The IRR is less than the required return. D) No; The IRR exceeds the required return. E) You should not apply the IRR rule in this case.

Q: You are considering two independent projects. Project A has an initial cost of $125,000 and cash inflows of $46,000, $79,000, and $51,000 for Years 1 to 3, respectively. Project B costs $135,000 with expected cash inflows for Years 1 to 3 of $50,000, $30,000, and $100,000, respectively. The required return for both projects is 16 percent. Based on IRR, you should: A) accept both projects. B) accept Project A and reject Project B. C) accept Project B and reject Project A. D) reject both projects. E) accept either one of the projects, but not both.

Q: A proposed project has an initial cost of $38,000 and cash inflows of $12,300, $24,200, and $16,100 for Years 1 through 3, respectively. The required rate of return is 16.8 percent. Based on IRR, should this project be accepted? Why or why not? A) No; The IRR exceeds the required return. B) No; The IRR is less than the required return. C) Yes; The IRR exceeds the required return. D) Yes; The IRR equals the required return. E) No; The IRR equals the required return.