Practice Problems

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Finance 3303Business Finance Chapter 11 Practice Problems

1. Two investment opportunities have the following expected cash flows. If your minimum required return is 27%, which proposal would be the best based on the Net Present Value evaluation method?
Investment A Investment B
Year 0$( 567,000)$( 577,000)
Year 1$ 254,000$ 256,000
Year 2$ 287,000$ 281,000
Year 3 $ 260,000$ 290,000
Year 4$ 155,000$ 145,000
A)Neither proposal would add value.
B)Choose Proposal A because it has the highest IRR.
C)Choose Proposal A because it has the highest NPV.
D)Choose Proposal B because it has the highest IRR.
E)Choose Proposal B because it has the highest NPV.
Answer: A [NPV for A: $(2,548); NPV for B: $(3,892)]

2. You’re evaluating a proposed business project and you want to know what is the Internal Rate of Return. Based on the following estimated Free Cash Flows and the IRR method, would this project be accepted? Your required return is 16%.

Year 0 1 2 3 4
Cash Flow$(963,500)$420,899$510,000$312,200$144,000
A)No, because the IRR is less than 16%, it’s 18.94%.
B)Yes, because the NPV is $57,900.
C)No, because the IRR is lower than 16%, it’s 11.98%
D)Yes, because the IRR is higher than 16%, it’s 19.46%
E)No, because the IRR is less than 16%, it’s 5.09%.
Answer: D [IRR = 19.46% and NPV = +$57,900]

3. A business owner is considering the following investment and requires a 3-year maximum payback period. Would this be an acceptable investment based on the Payback Period Method?
Year 0 1 2 3 4 56
Cash Flows ($675,000) $185,300 $275,010 $280,700 $172,202 $135,040 $32,000
A) No, the payback is 2.76 years.
B) No, the payback is 3.27 years.
C) Yes, the payback is 2.76 years.
D) Yes, the payback is 3.27 years.
E) No, the...
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