Quiz.chapter.9.solutions.april 2006

Quiz.Chapter.9.Solutions.April 2006
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Accounting 202 Quiz 9 Spring 2006 Chapter 9 April 13, 2006 ANSWERS Last Name:______________________ First Name: ____________________ 1. A project will require an initial investment of $750,000 and will return $200,000 each year for five years. If taxes are ignored and the required rate of return is 9%, what is the project’s net present value? Based on this analysis, should the company proceed with the project? Answer ($200,000 * 3.8897) - $750,000 = $27,940 Yes, since the net present value is greater than zero, the company should proceed with the project. 2. A project will require an initial investment of $600,000 and is expected to generate the following cash flows: Year 1 $100,000 Year 2 $250,000 Year 3 $250,000 Year 4 $200,000 Year 5 $100,000 a) What is the project’s payback period? Answer $100,000 + $250,000 + $250,000 = $600,000, so the payback period is three years. b) If the required rate of return is 20% and taxes are ignored, what is the project’s net present value? Answer:
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