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Exam 9: Making Capital Investment Decisions

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Question 1

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You are considering the following two mutually exclusive projects.Both projects will be depreciated using straight-line depreciation to a zero book value over the life of the project.Neither project has any salvage value. Should you accept or reject these projects based on the profitability index?

A) accept Project A and reject Project B
B) reject Project A and accept Project B
C) accept both Projects A and B
D) reject both Projects A and B
E) You cannot make this decision based on the profitability index.

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

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Question 2

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The present value of an investment's future cash flows divided by the initial cost of the investment is called the:

A) net present value.
B) internal rate of return.
C) average accounting return.
D) profitability index.
E) profile period.

F) A) and E)
G) None of the above

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Question 3

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Tedder Mining has analyzed a proposed expansion project and determined that the internal rate of return is lower than the firm desires.Which one of the following changes to the project would be most expected to increase the project's internal rate of return?

Samuelson Electronics has a required payback period of three years for all of its projects.Currently, the firm is analyzing two independent projects.Project A has an expected payback period of 2.8 years and a net present value of $6,800.Project B has an expected payback period of 3.1 years with a net present value of $28,400.Which projects should be accepted based on the payback decision rule?

Which one of the following methods determines the amount of the change a proposed project will have on the value of a firm?

Which one of the following correctly applies to the average accounting rate of return?

A firm evaluates all of its projects by applying the IRR rule.The required return for the following project is 21 percent.The IRR is _____ percent and the firm should ______ the project.

Day Interiors is considering a project with the following cash flows.What is the IRR of this project?

A project that provides annual cash flows of $12,600 for 12 years costs $65,000 today.At what rate would you be indifferent between accepting the project and rejecting it?

A project with financing type cash flows is typified by a project that has which one of the following characteristics?

Colin is analyzing a project and has gathered the following data.Based on this data, what is the average accounting rate of return? The project's assets will be depreciated using straight-line depreciation to a zero book value over the life of the project.

You are analyzing a project and have gathered the following data: Based on the payback period of _____ years for this project, you should _____ the project.

Based on the profitability index rule, should a project with the following cash flows be accepted if the discount rate is 14 percent? Why or why not?

You are analyzing the following two mutually exclusive projects and have developed the following information.What is the crossover rate?

You are viewing a graph that plots the NPVs of a project to various discount rates that could be applied to the project's cash flows.What is the name given to this graph?

Home Décor & More is considering a proposed project with the following cash flows.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 16 percent? Why or why not?

Southern Chicken is considering two projects.Project A consists of creating an outdoor eating area on the unused portion of the restaurant's property.Project B would use that outdoor space for creating a drive-thru service window.When trying to decide which project to accept, the firm should rely most heavily on which one of the following analytical methods?

You're trying to determine whether to expand your business by building a new manufacturing plant.The plant has an installation cost of $12 million, which will be depreciated straight-line to zero over its 4-year life.The plant has projected net income of $1,095,000, $902,000, $1,412,000, and $1,724,000 over these 4 years.What is the average accounting return?

Which one of the following methods of project analysis is defined as computing the value of a project based upon the present value of the project's anticipated cash flows?

Alicia is considering adding toys to her gift shop.She estimates that the cost of inventory will be $7,500.The remodeling expenses and shelving costs are estimated at $1,800.Toy sales are expected to produce net cash inflows of $2,300, $2,900, $3,200, and $3,400 over the next four years, respectively.Should Alicia add toys to her store if she assigns a three-year payback period to this project? Why or why not?