Question

SHOW CALCULATION AND EXPLANATION, PLEASE!

1- For a given amount, the lower the discount rate, the less the present value.

A) True

B) False

2- What is the NPV of a project that costs $100,000 and returns $45,000 annually for three years if the cost of capital is 14%?

A) $3,397.57

B) $4,473.44

C) $16,100.00

D) $35,000.00

3- The decision rule for net present value is to:

A) Accept all projects with cash inflows exceeding initial cost.

B) Reject all projects with rates of return exceeding the opportunity cost of capital.

C) Accept all projects with positive net present values.

D) Reject all projects lasting longer than 10 years.

4- Which of the following changes will increase the NPV of a project?

A) A decrease in the discount rate

B) A decrease in the size of the cash inflows

C) An increase in the initial cost of the project

D) A decrease in the number of cash inflow

5- What is the approximate IRR for a project that costs $100,000 and provides cash inflows of $30,000 for 6 years?

A) 19.9%

B) 30.0%

C) 32.3%

D) 80.0%

6- if the IRR for a project is 15%, then the project's NPV would be:

A) negative at a discount rate of 10%.

B) positive at a discount rate of 20%.

C) negative at a discount rate of 20%.

D) positive at a discount rate of 15%.

7- A company is considering the purchase of a new machine for $200,000. The purchase of this machine will result in an increase in earnings before interest and taxes of $45,000 per year. Because this machine is extremely efficient, its purchase would necessitate an increase in inventory of $20,000. This machine has an expected life of 10 years, after which it will have no salvage value. It would cost $5,000 to install the machine properly. Finally, to purchase the new machine, it appears that the firm would have to borrow $100,000 at 8 percent interest, resulting in additional interest cash outflows of $8,000 per year. Assume simplified straight-line depreciation and that the machine is being depreciated down to zero, a 34 percent marginal tax rate, and a required rate of return of 10 percent. Profitability Index of the project is:

A) 1.39

B) 1.41

C) 2.39

D) 2.41

8- The present value of $1,000 to be received in 5 years is ________ if the discount rate is 12.78%.

A) $368

B) $494

C) $548

D) $687

9- You decide you want your child to be a millionaire. You have a son today and you deposit $10,000 in an investment account that earns 7% per year. The money in the account will be distributed to your son whenever the total reaches $1,500,000. How old will your son be when he gets the money (rounded to the nearest year)?

A) 82 years

B) 74 years

C) 60 years

D) 49 years

10- Assuming two investments have equal lives, a high discount rate tends to favour

A) The investment with large cash flow early.

B) The investment with large cash flow late.

C) The investment with even cash flow.

D) Neither investment since they have equal lives.

11- If the future value of annuity A is greater than the future value of annuity B, then the present value of annuity A must also be greater than the present value of annuity B, considering the same discount rate.

A) True

B) False

12- Based on the information in Table, calculate the amount of dividends paid by Jones Company in 2010 (no assets were disposed of during

the year, and there was no change in interest payable or taxes payable).

December 2009 December 2010

Net Income 2,000 4,000

Accounts receivable 750 950

Accumulated depreciation 1,000 1,500

Common stock 4,500 5,000

Paid-in capital 7,500 8,500

Retained earnings 1,500 3,500

Accounts payable 750 750

A) $2,000

B) $2,500

C) $3,500

D) $4,000

13- What information does a firm's statement of cash flows provide to the viewing public?

A) A report of investments made and their cost for a specific period of time

B) A report documenting a firm's cash inflows and cash outflows from operating, financing, and investing activities for a defined period of time.

C) A report of revenues and expenses for a defined period of time

D) An itemization of all of a firm's assets, liabilities, and equity for a defined period of time

14- Use the following information to calculate the company's accounting net income for the year.

Credit Sales $800,000

Cash Sales $500,000

Operating Expenses on Credit $200,000

Cash Operating Expenses $700,000

Accounts Receivable (Beg. of Year) $50,000

Accounts Receivable (End of Year) $80,000

Accounts Payable (Beg. of Year) $50,000

Accounts Payable (End of Year) $100,000

Corporate Tax Rate 40%

A) $300,000

B) $240,000

C) $125,000

D) $120,000

15- Project Alpha has an internal rate of return (IRR) of 15 percent. Project Beta has an IRR of 14 percent. Both projects have a required return of 12 percent. Which of the following statements is MOST correct?

A) Both projects have a positive net present value (NPV).

B) Project Alpha must have a higher NPV than Project Beta.

C) If the required return were less than 12 percent, Project Beta would have a higher IRR than Project Alpha.

D) Project Beta has a higher profitability index than Project Alpha.

16- The net present value method

A) Is consistent with the goal of shareholder wealth maximization.

B) Recognizes the time value of money.

C) Uses all of a project's cash flows.

D) All of the above.

17- Arguments against using the net present value and internal rate of return methods include that

A) They fail to use accounting profits.

B) They require detailed long-term forecasts of the incremental benefits and costs.

C) They fail to consider how the investment project is to be financed.

D) They fail to use the cash flow of the project.

18- Consider a project with the following information:

After-tax Accounting After-tax Cash Flow

Year Profits from Operations

1 $799 $750

2 150 1000

3 200 1200

Initial outlay = $1,500

Compute the profitability index if the company's discount rate is 10%.

A) 15.8

B) 1.61

C) 1.81

D) 0.62

19- If the NPV (Net Present Value) of a project with one sign reversal is positive, then the project's IRR (Internal Rate of Return) _______ the required rate of return.

A) Must be less than

B) Must be greater than

C) Could be greater or less than

D) Cannot be determined without actual cash flows

20- The Bolster Company is considering two mutually exclusive projects:

Year Initial Outlay NPV

0 -$100,000 -$100,000

1 31,250 0

2 31,250 0

3 31,250 0

4 31,250 0

5 31,250 200,000

The required rate of return on these projects is 12 percent.

a. What is each project's payback period?

b. What is each project's discounted payback period?

c. What is each project's net present value?

d. What is each project's internal rate of return?

e. Fully explain the results of your analysis. Which project do you prefer, and why?

Answer 1

1- False. Because lower the discount rate less amount will be reduced hence higher amount will be resultant. For eg: 100 when discounted with 5℅ gives 95 while 100 when discounted with 10℅ gives 90

2- NPV = -100000 + 45000/1.14 + 45000/1.14^2 + 45000/1.14^3

= -100000 + 39473.68 + 34626.04 + 30373.72

= 4473.44

3- C. Because if NPV is positive then project is earning more than its initial outflow.

4- A. Because decrease in discount rate will lead higher amount of cash inflows.