Q&A Hero

Q: Nominal interest rates incorporate the expected rate of inflation. A) True B) False

Q: When analyzing a project, if the expected future cash flows are denominated in nominal dollars, then the discount rate should represent a nominal rate as well. A) True B) False

Q: BioGeological Pharmaceuticals invested $100 million on a heart drug that does not prevent heart disease. BioGeological has since found that the drug does prevent diabetes. When considering whether to market the drug as a diabetic panacea, the firm should consider the $100 million spent while investigating the heart-related effects. A) True B) False

Q: Since our perspective when evaluating a project is that of all the shareholders only, then we should evaluate the after-tax cash flows produced by a project. A) True B) False

Q: Since our perspective when evaluating a project is that of all of the investors in the firm, creditors as well as stockholders, then we should evaluate the pretax cash flows produced by a project. A) True B) False

Q: The research and development costs to date of a project should be considered when analyzing the cash flows of a prospective project. A) True B) False

Q: Opportunity costs should always be included in the cash flow calculations of a project. A) True B) False

Q: The impact of a project on another project's cash flows should be ignored. A) True B) False

Q: Allocated costs such as corporate overhead should be included in cash flow calculations. A) True B) False

Q: If taken without accompanying changes in cash flow, changes in a company's accounting earnings do not impact the overall value of the firm. A) True B) False

Q: Accounting earnings are a reliable measure of the costs and benefits of a project. A) True B) False

Q: Increases in working capital are considered cash flows associated with investments. A) True B) False

Q: Free cash flow equals cash flow from operations minus required investments. A) True B) False

Q: If you start with incremental net operating profits after tax (NOPAT) and add depreciation and amortization to it, then you will obtain incremental cash flow from operations. A) True B) False

Q: The stand-alone principle says that we can treat a project as if it were a stand-alone firm that has its own revenue, expenses, and investment requirements. A) True B) False

Q: If a firm expects to increase its investment in inventory due to a prospective project, then this is an example of an incremental capital expenditure. A) True B) False

Q: The purchase of a factory building for a prospective project is an example of an incremental addition to working capital. A) True B) False

Q: Incremental cash flow from operations is the cash flow from a project that is expected to be generated after all operating expenses and taxes have been paid. A) True B) False

Q: Conceptually, free cash flows are what is left over for distribution to creditors and stockholders after the firm has made the necessary investments in working capital and long-term assets. A) True B) False

Q: The term incremental in the context of incremental after-tax free cash flows refers to the fact that the firm's total after-tax free cash flows will change if the new project is adopted. A) True B) False

Q: Crossover Point/Rate: Packard Electronics Corp. is evaluating the two mutually exclusive projects shown below.Boundless Corp. Project A Project BPeriod Cash Flows Cash Flows0 $ (100,000) $ (150,000)1 50,000 15,0002 40,000 30,0003 30,000 50,0004 20,000 70,0005 10,000 80,000What is the "crossover rate" of the two projects? (Round off to the nearest (0.01%))A) 10.82%B) 8.24%C) 13.76%D) 16.38%

Q: Explain under what circumstances the NPV and IRR could provide different decisions.

Q: What are the advantages of the net present value technique?

Q: What difficulties are associated with valuing real assets compared to financial assets?

Q: Strange Manufacturing Company is purchasing a production facility at a cost of $21 million. The firm expects the project to generate annual cash flows of $7 million over the next five years. Its cost of capital is 18 percent. What is the internal rate of return on this project? (Do not round intermediate computations. Round final answer to the nearest percent.)A) 17%B) 18%C) 19%D) 20%

Q: Jamaica Corp. is adding a new assembly line at a cost of $8.5 million. The firm expects the project to generate cash flows of $2 million, $3 million, $4 million, and $5 million over the next four years. Its cost of capital is 16 percent. What is the MIRR on this project? (Round to the nearest percent.)A) 18%B) 19%C) 20%D) 21%

Q: Jamaica Corp. is adding a new assembly line at a cost of $8.5 million. The firm expects the project to generate cash flows of $2 million, $3 million, $4 million, and $5 million over the next four years. Its cost of capital is 16 percent. What is the internal rate of return that Jamaica can earn on this project? (Do not round intermediate computations. Round final answer to the nearest percent.) A) 18% B) 19% C) 20% D) 21%

Q: Turnbull Corp. is in the process of constructing a new plant at a cost of $30 million. It expects the project to generate cash flows of $13,000,000, $23,000,000, and 29,000,000 over the next three years. The cost of capital is 20 percent. What is the MIRR on this project? (Do not round intermediate computations. Round final answer to the nearest percent.)A) 36%B) 37%C) 38%D) 39%

Q: Turnbull Corp. is in the process of constructing a new plant at a cost of $30 million. It expects the project to generate cash flows of $13,000,000, $23,000,000, and 29,000,000 over the next three years. The cost of capital is 20 percent. What is the internal rate of return that Turnbull can earn on this project? (Do not round intermediate computations. Round final answer to the nearest percent.) A) 41% B) 42% C) 43% D) 44%

Q: Lowell Communications, Inc., has been installing a fiber-optic network at a cost of $18 million. The firm expects annual cash flows of $3.7 million over the next 10 years. What is this project's internal rate of return? (Do not round intermediate computations. Round final answer to the nearest percent.)A) 10%B) 12%C) 14%D) 16%

Q: Casa Del Sol Property Development Company is refurbishing a 200-unit condominium complex at a cost of $1,875,000. It expects that this will lead to expected annual cash flows of $415,350 for the next seven years. What internal rate of return can the firm earn from this project? (Do not round intermediate computations. Round final answer to the nearest percent.)A) 10%B) 12%C) 14%D) 16%

Q: Signet Pipeline Co. is looking to install new equipment that will cost $2,750,000. The cash flows expected from the project are $612,335, $891,005, $1,132,000, and $1,412,500 for the next four years. What is Signet's internal rate of return? (Do not round intermediate computations. Round final answer to the nearest percent.) A) 11% B) 13% C) 15% D) 17%

Q: Modern Federal Bank is setting up a brand new branch. The cost of the project will be $1.2 million. The branch will create additional cash flows of $235,000, $412,300, $665,000 and $875,000 over the next four years. The firm's cost of capital is 12 percent. What is the internal rate of return on this branch expansion? (Do not round intermediate computations. Round final answer to the nearest percent.) A) 20% B) 23% C) 25% D) 27%

Q: Quick Sale Real Estate Company is planning to invest in a new development. The cost of the project will be $23 million and is expected to generate cash flows of $14,000,000, $11,750,000, and $6,350,000 over the next three years. The company's cost of capital is 20 percent. What is the internal rate of return on this project? (Do not round intermediate computations. Round final answer to the nearest percent.) A) 22% B) 20% C) 24% D) 28%

Q: Which of the following cash flow patterns is NOT an unconventional cash flow pattern? A) A positive initial cash flow is followed by negative future cash flows. B) A cash flow pattern in which there are alternate inflows and outflows. C) A negative initial cash flow is followed by positive future cash flows. D) A cash flow stream looks similar to a conventional cash flow stream except for a final negative cash flow.

Q: In evaluating capital projects, the decisions using the NPV method and the IRR method may disagree if A) the projects are independent. B) the cash flows pattern is unconventional. C) the projects are mutually exclusive. D) Both b and c are correct.

Q: When evaluating capital projects, the decisions using the NPV method and the IRR method will agree if A) the projects are independent. B) the cash flow pattern is conventional. C) the projects are mutually exclusive. D) Both a and b are correct.

Q: The internal rate of return is A) the discount rate that makes the NPV greater than zero. B) the discount rate that makes the NPV equal to zero. C) the discount rate that makes the NPV less than zero. D) Both a and c are correct.

Q: Which of the following statements about IRR is NOT true? A) The IRR is the discount rate that makes the NPV greater than zero. B) The IRR is a discounted cash flow method. C) The IRR is an expected rate of return. D) None of the above

Q: Stump Storage Co. is expecting to generate after-tax income of $155,708, $159,312, and $161,112 for each of the next three years. The equipment used will have an average book value of $251,575 over that period. What is the ARR? (Do not round intermediate computations. Round final answer to one decimal place.)A) 65.7%B) 69.4%C) 63.1%D) 66.8%

Q: LaGrange Corp. has forecasted that over the next four years the average annual after-tax income will be $45,731. The average book value of the manufacturing equipment that is used is $167,095. What is the accounting rate of return? (Round your answer to one decimal place.)A) 33.3%B) 27.4%C) 29.8%D) 22.3%

Q: You have been asked to analyze an investment project. The project's cost is $180,000. Cash inflows are projected to be: year 1 = $55,000, year 2 = $65,000; year 3 = $75,000; year 4 = $85,500; year 5 = $95,000.What is the investment project's payback? (Round off to the nearest 0.1 years)A) 4.1 yearsB) 1.6 yearsC) 3.5 yearsD) 2.8 years

Q: Strange Manufacturing Company is purchasing a production facility at a cost of $21 million. The firm expects the project to generate annual cash flows of $7 million over the next five years. Its cost of capital is 18 percent.What is the payback period for this project?A) 2.8 yearsB) 3.0 yearsC) 3.2 yearsD) 3.4 years

Q: Jamaica Corp. is adding a new assembly line at a cost of $8.5 million. The firm expects the project to generate cash flows of $2 million, $3 million, $4 million, and $5 million over the next four years. Its cost of capital is 16 percent. What is the payback period for this project? (Round your answer to one decimal place.)A) 2.7 yearsB) 2.9 yearsC) 3.1 yearsD) 3.4 years

Q: Turnbull Corp. is in the process of constructing a new plant at a cost of $30 million. It expects the project to generate cash flows of $13,000,000, $23,000,000, and 29,000,000 over the next three years. The cost of capital is 20 percent. What is the payback period for this project? (Round your answer to one decimal place.)A) 1.7 yearsB) 2.2 yearsC) 1.2 yearsD) 2.7 years

Q: Kathleen Dancewear Co. has bought some new machinery at a cost of $1,250,000. The impact of the new machinery will be felt in the additional annual cash flows of $375,000 over the next five years. The firm's cost of capital is 10 percent. What is the discounted payback period for this project? If its acceptance period is three years, will this project be accepted? (Do not round intermediate computations. Round your answer to one decimal place.)A) 2.7 years; yesB) 4.7 years; noC) 2.3 years; yesD) 4.3 years; no

Q: Carmen Electronics bought new machinery for $5 million. This is expected to result in additional cash flows of $1.2 million over the next seven years. The firm's cost of capital is 12 percent. What is the discounted payback period for this project? If the firm's acceptance period is five years, will this project be accepted? (Do not round intermediate computations. Round your answer to one decimal place.)A) 5.4 years; noB) 6.1 years; noC) 6.1 years; yesD) 4.2 years; yes

Q: Roswell Energy Company is installing new equipment at a cost of $10 million. Expected cash flows from this project over the next five years will be $1,045,000, $2,550,000, $4,125,000, $6,326,750, and $7,000,000. The company's discount rate for such projects is 14 percent. What is the project's discounted payback period? (Do not round intermediate computations. Round your answer to one decimal place.)A) 4.2 yearsB) 4.4 yearsC) 4.8 yearsD) 5.0 years

Q: Carmen Electronics bought new machinery for $5 million. This is expected to result in additional cash flows of $1.2 million over the next seven years. What is the payback period for this project? If its acceptance period is five years, will this project be accepted? (Round your answer to two decimal places.)A) 4.17 years; yesB) 4.17 years; noC) 3.83 years; yesD) 3.83 years; no

Q: Kathleen Dancewear Co. has bought some new machinery at a cost of $1,250,000. The impact of the new machinery will be felt in the additional annual cash flows of $375,000 over the next five years. What is the payback period for this project? If its acceptance period is three years, will this project be accepted? (Round your answer to two decimal places.)A) 2.67 years; yesB) 2.67 years; noC) 3.33 years; yesD) 3.33 years; no

Q: Creighton, Inc. has invested $2,165,800 on equipment. The firm uses payback period criteria of not accepting any project that takes more than four years to recover costs. The company anticipates cash flows of $424,386, $512,178, $561,755, $764,997, $816,500, and $825,375 over the next six years. What is the payback period, and does this investment meet the firm's payback criteria? (Round your answer to two decimal places.)A) 4.13 years; noB) 4.13 years; yesC) 3.87 years; yesD) 3.87 years; no

Q: Elmer Sporting Goods is getting ready to produce a new line of golf clubs by investing $1.85 million. The investment will result in additional cash flows of $525,000, $812,500, and 1,200,000 over the next three years. What is the payback period for this project? (Round your answer to two decimal places.)A) 3.55 yearsB) 2.43 yearsC) 1.57 yearsD) More than 3 years

Q: Binder Corp. has invested in new machinery at a cost of $1,450,000. This investment is expected to produce cash flows of $640,000, $715,250, $823,330, and $907,125 over the next four years. What is the payback period for this project? (Round your answer to two decimal places.)A) 2.12 yearsB) 1.88 yearsC) 4.00 yearsD) 3.00 years.

Q: Which of the following is a disadvantage of the payback method? A) It ignores the time value of money. B) It is inconsistent with the goal of maximizing shareholder wealth. C) It ignores cash flows beyond the payback period. D) All of the above.

Q: Which of the following is an advantage of the payback method? A) The technique is simple for managers to compute and interpret. B) It is a good measure of liquidity risk. C) Both a and b D) None of the above

Q: Which one of the following statements about the discounted payback method is NOT true? A) The discounted payback method represents the number of years it takes a project to recover its initial investment. B) The discounted payback method calls for a project to be accepted if the payback period is greater than a target period. C) The discount payback method is a risk indicator. D) The expected cash flows from a project are discounted at the cost of capital.

Q: Which of the following statements about the payback method is true? A) The payback method is consistent with the goal of shareholder wealth maximization B) The payback method represents the number of years it takes a project to recover its initial investment plus a required rate of return. C) There is no economic rational that links the payback method to shareholder wealth maximization. D) None of the above statements are true.

Q: Which of the following is true about the Net Present Value method? A) The NPV does not utilize time value of money concepts. B) The NPV assumes that all cash flows are reinvested at the firm's discount rate. C) The NPV allows projects to be ranked by rate of return. D) The NPV is a rate of return that is acceptable to the firm.

Q: Strange Manufacturing Company is purchasing a production facility at a cost of $21 million. The firm expects the project to generate annual cash flows of $7 million over the next five years. Its cost of capital is 18 percent. What is the net present value of this project? (Do not round intermediate computations. Round final answer to nearest dollar.)A) $890,197B) $1,213,909C) $905,888D) $777,713

Q: Jamaica Corp. is adding a new assembly line at a cost of $8.5 million. The firm expects the project to generate cash flows of $2 million, $3 million, $4 million, and $5 million over the next four years. Its cost of capital is 16 percent. What is the net present value of this project? (Do not round intermediate computations. Round final answer to nearest dollar.) A) $645,366 B) $1,213,909 C) $905,888 D) $777,713

Q: Turnbull Corp. is in the process of constructing a new plant at a cost of $30 million. It expects the project to generate cash flows of $13,000,000, $23,000,000, and 29,000,000 over the next three years. The cost of capital is 20 percent. What is the net present value of this project? (Do not round intermediate computations. Round final answer to nearest million dollars.)A) $10 millionB) $12 millionC) $14 millionD) $16 million

Q: Jenkins Corporation is investing in a new piece of equipment at a cost of $6 million. The project is expected to generate annual cash flows of $1,850,000 over the next six years. The firm's cost of capital is 20 percent. What is the project's NPV? (Do not round intermediate computations. Round final answer to nearest dollar.)A) $722,604B) $351,097C) $152,194D) $261,008

Q: Gao Enterprises plans to build a new plant at a cost of $3,250,000. The plant is expected to generate annual cash flows of $1,225,000 for the next five years. If the firm's required rate of return is 18 percent, what is the NPV of this project? (Do not round intermediate computations. Round final answer to nearest dollar.)A) $2,875,000B) $3,830,785C) $580,785D) $2, 225,875

Q: Johnson Entertainment Systems is setting up to manufacture a new line of video game consoles. The cost of the manufacturing equipment is $1,750,000. Expected cash flows over the next four years are $725,000, $850,000, $1,200,000, and $1,500,000. Given the company's required rate of return of 15 percent, what is the NPV of this project? (Do not round intermediate computations. Round final answer to nearest dollar.)A) $1,169,806B) $2,919,806C) $4,669,806D) $3,122, 607

Q: Cortez Art Gallery is adding to its existing buildings at a cost of $2 million. The gallery expects to bring in additional cash flows of $520,000, $700,000, and $1,000,000 over the next three years. Given a required rate of return of 10 percent, what is the NPV of this project? (Do not round intermediate computations. Round final answer to nearest dollar.)A) $1,802,554B) $197,446C) "$1,802,554D) "$197,446

Q: The Cyclone Golf Resorts is redoing its golf course at a cost of $2,744,320. It expects to generate cash flows of $1,223,445, $2,007,812, and $3,147,890 over the next three years. If the appropriate discount rate for the firm is 13 percent, what is the NPV of this project? (Do not round intermediate computations. Round final answer to nearest dollar.)A) $7,581,072B) $2,092,432C) $4,836,752D) $3,112,459

Q: To accept a capital project when using NPV, A) the project NPV should be less than zero. B) the project NPV should be greater than zero. C) Both a and b D) None of the above

Q: The net present value A) uses the discounted cash flow valuation technique. B) will provide a direct measure of how much a firm's value will change because of the capital project. C) is consistent with shareholder wealth maximization goal. D) All of the above

Q: In computing the NPV of a capital budgeting project, one should NOT A) estimate the cost of the project. B) discount the future cash flows over the project's expected life. C) ignore the salvage value. D) make a decision based on the project's NPV.

Q: Which one of the following statements is NOT true? A) Accepting a positive-NPV project increases shareholder wealth. B) Accepting a negative-NPV project decreases shareholder wealth. C) Accepting a zero NPV project has a negative impact on shareholder wealth. D) Managers are indifferent about accepting or rejecting a zero NPV project.

Q: Which one of the following statements is NOT true? A) Accepting a positive-NPV project increases shareholder wealth. B) Accepting a negative-NPV project has no impact on shareholder wealth. C) Accepting a negative-NPV project decreases shareholder wealth. D) Managers are indifferent about accepting or rejecting a zero NPV project.

Q: Capital rationing implies that A) funding resources exceed funding needs. B) funding needs exceed funding resources. C) funding needs equal funding resources. D) None of the above

Q: Capital rationing implies that A) a firm has constraint to fund all of the available projects. B) funding needs is equal to funding resources. C) the available capital will be allocated equally to all available projects. D) None of the above

Q: The cost of capital is A) the minimum return that a capital project must earn to be accepted. B) the maximum return a project can earn. C) the return that a previous project for the firm had earned. D) None of the above

Q: If both projects are positive-NPV projects, then the firm should A) accept both projects because they are independent projects. B) select the higher NPV project because they are mutually exclusive. C) accept both projects because they are contingent projects. D) Not enough information is given to make a decision.

Q: The firm's decision will be to A) accept both projects because they are independent projects. B) accept both projects because they are contingent projects. C) pick the one that adds the most value because they are mutually exclusive projects. D) pick neither project.

Q: Contingent projects would imply thatA) the acceptance of one project is dependent on the acceptance of the other.B) the projects can be either mandatory or optional.C) Both a and b.D) None of the above

Q: Two projects are considered to be contingent projects if A) selecting one would automatically eliminate accepting the other. B) the acceptance of one project is dependent on the acceptance of the other. C) rejection of one project does not eliminate the selection of the other. D) None of the above

Q: Two projects are considered to be mutually exclusive if A) the projects perform the same function. B) selecting one would automatically eliminate accepting the other. C) Both a and b D) None of the above

Q: Two projects are considered to be independent if A) selecting one would have no bearing on accepting the other. B) their cash flows are unrelated. C) Both a and b D) None of the above