Bussiness Law

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  • Topic: Net present value, Internal rate of return, Cash flow
  • Pages : 7 (1229 words )
  • Download(s) : 563
  • Published : June 5, 2012
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1.| |
 | In actual practice, managers frequently use the:
I. average accounting return method because the information is so readily available. II. internal rate of return because the results are easy to communicate and understand. III. discounted payback because of its simplicity.

IV. net present value because it is considered by many to be the best method of analysis. | |
 | Student Response| Value|
A. | I and III only| |
B. | II and III only| |
C. | I, II, and IV only| 100% |
D. | II, III, and IV only| |
E. | I, II, III, and IV| |
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2.| |
 | Western Beef Exporters is considering a project that has an NPV of $32,600, an IRR of 15.1 percent, and a payback period of 3.2 years. The required return is 14.5 percent and the required payback period is 3.0 years. Which one of the following statements correctly applies to this project? | |

 | Student Response| Value|
A. | The net present value indicates accept while the internal rate of return indicates reject.| | B. | Payback indicates acceptance.| |
C. | The payback decision rule could override the accept decision indicated by the net present value.| 100% | D. | The payback rule will automatically be ignored since both the net present value and the internal rate of return indicate an accept decision.| | E. | The net present value decision rule is the only rule that matters when making the final decision.| |

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3.| |
 | What is the net present value of a project with the following cash flows if the required rate of return is 12 percent?

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 | Student Response| Value|
A. | -$1,574.41| |
B. | -$1,208.19| |
C. | -$842.12| 100% |
D. | $729.09| |
E. | $1,311.16| |
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4.| |
 | A project will produce cash inflows of $3,200 a year for 4 years with a final cash inflow of $5,700 in year 5. The project's initial cost is $9,500. What is the net present value of this project if the required rate of return is 16 percent? | |

 | Student Response| Value|
A. | -$311.02| |
B. | $2,168.02| 100% |
C. | $4,650.11| |
D. | $9,188.98| |
E. | $21,168.02| |
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5.| |
 | You are considering two independent projects with the following cash flows. The required return for both projects is 16 percent. Given this information, which one of the following statements is correct?

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 | Student Response| Value|
A. | You should accept Project A and reject Project B based on their respective NPVs.| | B. | You should accept Project B and reject Project A based on their respective NPVs.| | C. | You should accept Project A and reject Project B based on their respective IRRs.| | D. | You should accept Project B and reject Project A based on their respective IRRs.| | E. | You should accept both projects based on both the NPV and IRR decision rules.| 100% |

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6.| |
 | Sheakley Industries is considering expanding its current line of business and has developed the following expected cash flows for the project. Should this project be accepted based on the discounting approach to the modified internal rate of return if the discount rate is 13.4 percent? Why or why not?

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 | Student Response| Value|
A. | Yes; The MIRR is 6.50 percent.| |
B. | Yes; The MIRR is 7.59 percent.| |
C. | Yes; The MIRR is 8.23 percent.| |
D. | No; The MIRR is 6.50 percent.| |
E. | No; The MIRR is 7.59 percent.| 100% |
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7.| |
 | What is the profitability index for an investment with the following cash flows given a 14.5 percent required return?

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 | Student Response| Value|
A. | 0.94| |
B. | 0.98| |
C. | 1.02| 100% |
D. | 1.06| |
E. | 1.11| |
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8.| |
 | You are considering a project with an initial cost of $7,800. What is the payback period for this...
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