Practice Questions  Chapters 9, 10, and 11
Consider the following cash flows for two mutually exclusive capital investment projects.
The required
rate of return is 12%.
Use this information for the next 5 questions.
Year
Project A Cash Flow
Project B Cash Flow
0
$32,400
$14,400
1
9,600
4,200
2
9,600
4,200
3
9,600
4,200
4
8,400
3,600
5
8,400
3,600
6
6,000
3,600
1.
What is the IRR of project A?
a) 18.69%
c) 10.05%
e) 16.58%
b) 12.97%
d) 16.32%
2.
What is the payback period of project A?
3.
What is the profitability index of project A?
4.
Calculate the net present value of project B.
5.
Which of the following statements is true concerning projects A and B?
a) Both NPV and IRR lead to the same investment decision.
b) Due to time disparity, IRR indicates that project A should be accepted and NPV indicates that
project B should be accepted.
c) Due to time disparity, IRR indicates that project B should be accepted and NPV indicates that
project A should be accepted.
d) Due to size disparity, IRR indicates that project A should be accepted and NPV indicates that
project B should be accepted.
e) Due to size disparity, IRR indicates that project B should be accepted and NPV indicates that
project A should be accepted.
This preview has intentionally blurred sections. Sign up to view the full version.
View Full Document
6.
Metro Corporation will spend $1 million for special manufacturing equipment.
Shipping and
installation charges will amount to $175,000 and an initial increase in net working capital of
$50,000 will be required.
The equipment will replace an existing machine that has a salvage
value of $85,000 and a book value of $140,000.
If Metro has a current marginal tax rate of 34%,
what is the amount of the initial outlay for this project?
7.
Shell Biotech Corporation is considering two mutually exclusive capital investment projects.
Project 1 costs $75,000, and would produce differential cash flows of $16,200 for each of the next
9 years.
Project 2 also costs $75,000, but would produce differential cash flows of $14,000 for
each of the next 12 years.
If Shell's cost of capital is 11%, which alternative should be chosen?
8.
Jefferson Corporation is purchasing equipment with a 10year life which will increase revenue by
$38,000 per year and increase expenses by $21,000 per year.
The cost of the project is $24,000,
and the equipment has a salvage value of $9,000 at the end of the tenth year.
The project will
require a $6,000 investment in net working capital immediately.
The equipment will be
depreciated for 10 years using simplified straight line.
Jefferson's marginal tax rate is 35%.
Calculate the total year 10 net cash flow, including both the last annual cash flow and the project's
terminal cash flow.
This is the end of the preview.
Sign up
to
access the rest of the document.
 Spring '10
 Goldwater,Canada,Judd,Byrd,Theniel
 Marginal Tax Rate, Net Present Value, Internal rate of return

Click to edit the document details