Exam+2+Practice (1)

Exam+2+Practice (1) - Sample Questions from Chapters 9 10...

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Sample Questions from Chapters 9, 10, 12, 13, and 15 Chapter 09 Use the following information to answer questions 1 through 5. You are analyzing a proposed project and have compiled the following information: Year Cash flow 0 -$145,000 1 $ 33,400 2 $ 70,500 3 $ 82,100 Required payback period 3 years Required return 9.50 percent ________ 1. What is the net present value of the proposed project? a. $6,239.12 b. $6,831.84 c. $8,221.29 d. $8,376.91 ________ 2. What is the discounted payback period? ________ 3. Should the project be accepted based on the internal rate of return (IRR)? Why or why not? ________ 4. Should the proposed project be accepted based on the profitability index (PI)? Why or why not? ________ 5. Should the proposed project be accepted based on the payback period? Why or why not? a. yes; The payback period is greater than the required payback period. b. yes; The payback period is less than the required payback period. c. no; The payback period is greater than the required payback period. d. no; The payback period is less than the required payback period. ________ 6. Dew Little Co. is considering opening a new plant to produce lawn mowers. The initial cost of the project is $6 million. This cost will be depreciated straight-line to a zero book value over the 15-year life of the project. The net income of the project is expected to be $137,000 a year for the first four years and $538,000 for years 5 through 15, respectively. What is the average accounting return on this project? ________ 7. Which one of the following indicates a project should be accepted? ________ 8. The point where the net present values of two mutually exclusive projects are equal is referred to as the: ACHIEVE. LEAD. SUCCEED. | THE BUSINESS SCHOOL AT GEORGIA TECH Barry Marchman, Ph.D. Room 407 (404) 894-5110 Page 1
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Sample Questions from Chapters 9, 10, 12, 13, and 15 ________ 9. What is the project’s Modified IRR? _________________ _______ 10. For an independent project, NPV: a. is the difference between the project’s cost and its market value. b.generally conflicts with the IRR accept / reject decision. c. is the least favored method of project analysis from a finance point of view. d. indicates an accept decision when it is negative. Chapter 09 Answers 1. b 3 2 1 ) 095 . 1 ( 100 , 82 $ ) 095 . 1 ( 500 , 70 $ ) 095 . 1 ( 400 , 33 $ 000 , 145 $ NPV + + + + + + - = ; NPV = $6,831.84 CF 0 -$145,000 C0 1 $33,400 F0 1 1 C0 2 $70,500 F0 2 1 C0 3 $82,100 F0 3 1 I = 9.5 NPV CPT $6,831.84 2. c Year Cash flow Discounted cash flow 1 $33,400 $30,502.28 2 $70,500 $58,797.77 3 $82,100 $62,531.78 78 . 531 , 62 $ 28 . 502 , 30 $ 77 . 797 , 58 $ 000 , 145 $ 2 payback Discounted - - + = = 2.89 years 3. c CF 0 -$145,000 C0 1 $33,400 F0 1 1 C0 2 $70,500 F0 2 1 C0 3 $82,100 F0 3 1 I = 9.5 IRR CPT 11.81 percent The project should be accepted because the IRR of 11.81 percent is greater than the required return of 9.5 percent.
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