Chapter 09 Quiz A
Student Name _________________________
Student ID ____________
Use the following information to answer questions 1 through 4.
You are analyzing a proposed project and have compiled the following information:
Year
Cash flow
0
-$135,000
1
$ 28,600
2
$ 65,500
3
$ 71,900
Required payback period
3 years
Required return
8.50 percent
________ 1.
What is the net present value of the proposed project?
a. $3,289.86
b. $3,313.29
c. $4,289.06
d. $4,713.71
________ 2.
What is the discounted payback period?
a. 2.57 years
b. 2.64 years
c. 2.87 years
d. 2.94 years
________ 3.
Should the project be accepted based on the internal rate of return (IRR)? Why or why not?
a. yes; The project IRR is greater than the required return.
b. yes; The project IRR is equal to zero.
c. no; The project IRR is greater than the required return.
d. no; The project IRR is greater than zero.
________ 4.
Should the proposed project be accepted based on the profitability index (PI)? Why or why not?
a. yes; The PI is less than 1.0.
b. yes; The PI is greater than 1.0.
c. no; The PI is less than 1.0.
d. no; The PI is greater than 1.0.
________ 5.
Winslow, Inc. is considering opening a new plant to produce snow skis. The initial cost of the project is $1.8
million. This cost will be depreciated straight-line to a zero book value over the 10-year life of the project.
The net income of the project is expected to be a loss of $250,000 a year for the first four years. The net
income is projected at $50,000, $230,000, $390,000, $480,000, $750,000, and $800,000 for years 5 through
10, respectively. What is the average accounting return on this project?
a. 3.15 percent
b. 9.44 percent
c. 15.77 percent
d. 18.89 percent
________ 6.
You are evaluating projects that are independent and have conventional cash flows. Rank each of the
following analysis methods in order of preference from a financial viewpoint in relation to these projects. List
the most valuable method first.
I.
internal rate of return
II.
payback
III
average accounting return
IV.
net present value
a. IV, II, III, I
b. II, IV, III, I
c. IV, I, II, III
d. III, IV, I, II
________ 7.
Which of the following statements are correct concerning the internal rate of return (IRR)?
I.
IRR is used to determine which one of two mutually exclusive projects should be accepted.
II.
IRR is the discount rate that makes the net present value equal to zero.
III.
There can be multiple IRRs if the cash flows are unconventional.
IV.
You should accept a project when the IRR is less than the required return.
a. I and III only
b. II and IV only
c. II and III only
d. I and II only