Scribd
Upload
30 views

Unit 6 - Ch.8 Review Questions (2024)

Uploaded by

d.bharvi22
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
30 views

Unit 6 - Ch.8 Review Questions (2024)

Uploaded by

d.bharvi22
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 4

ADMS 3530 – 2024

Unit 6: (Ch.8 NPV) - Review Questions

1. A project has an initial cost today of $100,000 and cash inflows in year 1 of $35,000 year 2 of $35,000
and year 3 of 110,000; the project’s opportunity cost of capital = 10%. What is the Net Present Value of
the project?

A) $29,294
B) $33,000
C) $39,886
D) $43,388
E) $17,452

2. What is the IRR (internal rate of return) on a project that initially costs $120,000 and provides cash
inflows of $28,000 annually for 5 years starting in a year?

A) 5.37%
B) 4.00%
C) 3.79%

3. A project has an initial cost of $500,000 and an annual required return of 13%. The project has cash
inflows of $75,000 per year starting in year 1. What is the minimum number of years that the project
needs to generate this cash inflow, so it is acceptable?

A) 8.69 years
B) 17.00 years
C) 27.51 years
D) An infinite number of years.
E) Can’t solve.

4. Which of the following mutually exclusive projects A or B would you select.


Project A costs $1,000 today and Project B costs $2,100 and their discount rate is 15%;
 Project A with 3 annual cash inflows of $1,000 starting in year 1 and
 Project B, with 3 years of zero cash flow followed by 3 years of $2,500 annually?

A) Project A
B) Project B
C) You are indifferent since the NPVs are equal

5. A five-year project has initial outlay of $3,000 and will generate cash inflow of $1,200 per year for 5
years. If the discount rate is 10%, what is the payback period and the discounted payback period of the
project?

A) 2.5 years; 3 years.


B) 2.5 years; 2.5 years.
ADMS 3530 – 2024

C) 3 years; 3 years.
D) 2.4 years; 3 years.
E) 1.5 years; 2 years.

6. The LLM Company is considering whether to replace a current equipment by buying a new
equipment. The current equipment has an annual cost $8,000 for the next 5 years. The new equipment
currently costs $12,000 and has an annual cost of $5,000 for the next 5 years. The cost of capital of 15%.
What should the company do?

A) Buy the new machine and save $600 in equivalent annual costs.
B) Buy the new machine and save $388 in equivalent annual costs.
C) Keep the old machine and save $388 in equivalent annual costs.
D) Keep the old machine and save $580 in equivalent annual costs.
E) Can’t solve.

7. Emmet Inc. is considering the purchase of a production line that has expected economic life of 10
years. The production line will earn net cash inflows of $55,000/year starting in year 1. The company’s
discount rate is 12%. What is the maximum amount that the company should pay for the production
line?

A) $ 188,289
B) $ 310,762
C) $ 516,200
D) $ 263,517

8. Consider the two following mutually exclusive projects:

Year Project C Project D


0 - $1,100 -$1,200
1 200 840
2 550 945
3 708 1,350

If the firm’s cost of capital is 10%, which project(s) should you accept and why?

A) Project D because it has a higher NPV.


B) Project C because it has a higher IRR.
C) Project C because it has a higher NPV and a higher IRR.
D) Both projects because both have an IRR greater than the cost of capital.
E) Neither.

9. What is the profitability index for a project costing $450,000 today and providing a net cash inflow of
$180,000 annually for 4 years. The opportunity cost of capital of 10% per annum?
ADMS 3530 – 2024

A) -0.092
B) -0.122
C) 0.135
D) 0.148
E) 0.268

10. What is the approximate IRR for a project that costs $150,000 and provides annual cash inflows of
$35,000 for five years?

A) 5.37%
B) 6.08%
C) 2.33%
D) 8.00%
E) 4.24%

11. Tom wants to buy a car. He can buy a car today for $20,000 which will cost $2,000 annually to
operate, and he expects the car to last 10 years. The salvage value at the end of 10 years is 0.
Alternatively, he can lease the car for two years and it will cost $5,000 per year to operate the car. The
discount rate is 5%. The EAC of the purchase and the EAC of the lease are respectively:

A) $4,590; $5,000
B) $2,590; $5,000
C) $20,000; $10,000
D) $5,000; $4,000
E) $1,500; $7000

12. Consider a project with the following cash flows that has a discount rate of 15%.

Year Cash Flow


0 -10,000
1 4000
2 4000
3 5000
4 6000

The profitability index for this project is closest to:

A) 0.32
B) -0.22
C) 0.60
D) 0.85
E) 0.39
ADMS 3530 – 2024

13. ABC company wants to invest $10 million up front in a project that will generate cash flows of $3
million per year for 5 years starting in a year. In year 6 the company will incur a shut-down cost of $2
million. If the cost of capital is 11%, then what is the NPV for this project?

A) -$99,212
B) $12,304
C) $18,409
D) $82,416
E) $111,389

14. A project's discounted payback period is determined to be four years. If it is later discovered that
additional cash flows will be generated in years five and six, then:

A) the project's discounted payback period will be reduced.


B) the project's discounted payback period will be increased.
C) the project's discounted payback period will be unchanged.
D) the discount rate must be known to determine whether the payback period changes.
E) it depends on the initial cost of the project

15. Which of the following changes will increase the IRR of a project?

A) Decrease in the discount rate


B) Decrease in the size of the cash inflows
C) Increase in the initial cost of the project
D) Increase in the size cash inflows
E) Increase the initial cost of the project

16. When deciding whether to replace an old machine with a new machine, we should:

A) Choose the machine that has the lowest NPV.


B) Choose the machine which has the lowest IRR.
C) Choose the machine that has the lowest EAC (equivalent annual cost).
D) Choose the machine which has the highest profitability index.
E) Choose always the new machine

You might also like