Quiz #2

FIN 301 – MW – Tu Nguyen – Quiz #2 – Solution:
1. The relevant discount rate for the following set of cash flows is 14 percent. What is the profitability index? A. 0.89
B. 0.93
C. 0.99
D. 1.03
E. 1.07

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 9‐7
Section: 9.6
Topic: Profitability index

2. A firm evaluates all of its projects by using the NPV decision rule. At a required return of 14 percent, the NPV for the following project is _____ and the firm should _____ the project.

A. $5,684.22; reject
B. $7,264.95; accept
C. $7,264.95; reject
D. $9,616.93; accept
E. $9,616.93; reject

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 9‐1
Section: 9.1
Topic: Net present value

3. 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.

A. 23.67 percent; reject
B. 24.26 percent; accept
C. 24.26 percent; reject
D. 26.30 percent; accept
E. 26.30 percent; reject

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
Learning Objective: 9‐5
Section: 9.5
Topic: Internal rate of return

4. A 4‐year project has an initial asset investment of $306,600, and initial net working capital investment of $29,200, and an annual operating cost of $46,720. At the end of year 4, you can sell the asset and get back $29,200. The required return is 15 percent. What is the project's equivalent annual cost, or EAC?
A. ‐$158,491
B. ‐$152,309
C. ‐$147,884
D. ‐$145,509
E. ‐$142,212

AACSB: Analytic
Bloom's: Application
Difficulty: Basic
EOC #: 10‐16
Learning Objective: 10‐4
Section: 10.6
Topic: Equivalent annual cost