Chapter 5 Sample Questions.docx

# Chapter 5 Sample Questions.docx - Chapter 5 Sample...

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Chapter 5 Sample Questions Questions and Problems 1 Calculating Payback Period and NPV Maxwell Software, Inc., has the following mutually exclusive projects. BASIC (Questions 1–8) Year Project A Project B 0 −\$20,000 −\$24,000 1 13,200 14,100 2 8,300 9,800 3 3,200 7,600 a Suppose the company’s payback period cutoff is two years. Which of these two projects should be chosen? a Suppose the company uses the NPV rule to rank these two projects. Which project should be chosen if the appropriate discount rate is 15 percent? 1 Calculating Payback An investment project provides cash inflows of \$790 per year for eight years. What is the project payback period if the initial cost is \$3,200? What if the initial cost is \$4,800? What if it is \$7,300? 1 Calculating Discounted Payback An investment project has annual cash inflows of \$5,000, \$5,500, \$6,000, and \$7,000, and a discount rate of 12 percent. What is the discounted payback period for these cash flows if the initial cost is \$8,000? What if the initial cost is \$12,000? What if it is \$16,000? 1 Calculating Discounted Payback An investment project costs \$17,500 and has annual cash flows of \$4,300 for six years. What is the discounted payback period if the discount rate is 0 percent? What if the discount rate is 10 percent? If it is 17 percent? 1 Calculating IRR Vital Silence, Inc., has a project with the following cash flows:

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Year Cash Flows (\$) 0 −\$24,000 1 9,700 2 13,700 3 6,400 2 Page 163 3 The company evaluates all projects by applying the IRR rule. If the appropriate interest rate is 9 percent, should the company accept the project?

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