296 correct answer a delaying the cash outflow for a

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296. Correct answer a. Delaying the cash outflow for a major overhaul from Year 4 to Year 5 will decrease its present value and result in an increase in the net present value of the project. All of the other options would result in a decrease the net present value. 297. Correct answer c. The internal rate of return method is easier to understand (interpret) than the net present value method. All of the other options are disadvantages of the internal rate of return method. 298. Correct answer d. Since the company has already evaluated the cash flows (net present value) of the project using a hurdle rate of 14%, the next logical step would be to compare the internal rate of return to the hurdle and the cost of capital. 299. Correct answer c. Hobart would accept the project under both the internal rate of return of 20% which exceeds the hurdle rate of 15% and the payback period of 2.7 years ($200,000 ÷ $74,000) which is less than the company’s 3-year benchmark. 300. Correct answer c. BGN Industries should select Option Z as it has the highest net present value ($2,825,000 - $2,000,000) and the internal rate of return is greater than the hurdle rate. 301. Correct answer b. The internal rate of return is the discount rate that equates the present value of future net cash flows from an investment project with project’s initial cash outflow. 302. Correct answer c. The approximate internal rates of return are 19.5% and 25.5% as shown. Project A: 77 + 26 = 103; 77 ÷ 103 = .75%; .75% x 2 = 1.5%; 18% + 1.5% = 19.5% Project B: 30 + 11 = 41; 30 ÷ 41 - .73%: .73% x 2 = 1.5%; 24% + 1.5% = 25.5% 303. Correct answer c. The internal rate of return is the discount rate that equates the present value of future net cash flows from an investment project with project’s initial cash outflow. 304. Correct answer c. Options a, b, and d are correct as shown below. NPV Project A: $100,000 – ($40,000 x .909) + ($50,000 x .826) + ($60,000 x .751) = $22,720 NPV Project B: $150,000 – ($80,000 x .893) + ($70,000 x .797) + ($40,000 x .712) = $19,950 Payback Project A: $100,000 - $40,000 - $50,000 = $10,000 ÷ $65,000 - .167 .167 years + 2 years ≈ 2.2 years Payback Project B: $150,000 - $80,000 - $70,000 = 0 Payback = 2 years
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318 305. Correct answer c. The approximate internal rate of return is 9%. A net present value of zero is approximately half way between $460 and ($440) and 9% is half way between 8% and 10%. 306. Correct answer c. An internal rate of return equates Foster’s cash flows to the initial investment as shown below. ($6,000 x .877) + ($6,000 x .769) + ($8,000 x .675) + ($8,000 x .592) = $20,012 Initial cash outflow o f $20,000 ≈ $20,012 307. Correct answer d. Both the internal rate of return method and the net present value method utilize discounted flow techniques taking into consideration the time value of money. Payback and average rate of return do not consider the time value of money. 308. Correct answer d. Statements III and IV are correct. Since the company has no capital rationing, all projects with positive net present values will enhance the value of Molar. Projects with negative internal rates of return will cost more than they will return to the company and should be rejected.
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