NET PRESENT VALUE
61.What is the net present value of a project with the following cash flows and a required
return of 12 percent?
YearCash Flow
0 -$28,900
1 $12,450
2 $19,630
3 $ 2,750
a.-$287.22
b.-$177.62
c.$177.62
d.$204.36
e.$287.22
NET PRESENT VALUE
62.What is the net present value of a project that has an initial cash outflow of $12,670
and the following cash inflows? The required return is 11.5 percent.
YearCash Inflows
1 $4,375
2 $ 0
3 $8,750
4 $4,100
a.$218.68
b.$370.16
c.$768.20
d.$1,249.65
e.$1,371.02
NET PRESENT VALUE
63.A project will produce cash inflows of $1,750 a year for four years. The project
initially costs $10,600 to get started. In year five, the project will be closed and as a
result should produce a cash inflow of $8,500. What is the net present value of this project if the required rate of return is 13.75 percent?
a.-$5,474.76
b.-$1,011.40
c.-$935.56
d.$1,011.40
e.$5,474.76
NET PRESENT VALUE
64.You are considering the following two mutually exclusive projects. The required rate of return is 11.25 percent for project A and 10.75 percent for project B. Which project
should you accept and why?
YearProject AProject B
0-$48,000-$126,900
1 $18,400$ 69,700
2 $31,300$ 80,900
3 $11,700 $ 0
a.project A; because its NPV is about $335 more than the NPV of project B
b.project A; because it has the higher required rate of return
c.project B; because it has the largest total cash inflow
d.project B; because it returns all its cash flows within two years
e.project B; because it is the largest sized project
INTERNAL RATE OF RETURN ANDNET PRESENT VALUE
68.You are considering two independent projects with the following cash flows. The
required return for both projects is 10 percent. Given this information, which one of
the following statements is correct?
YearProject AProject B
0-$950,000-$125,000
1 $330,000$ 55,000
2 $400,000$ 50,000
3 $450,000$ 50,000
a.You should accept project B since it has the higher IRR and reject project A because
youcan not accept both projects.
b.You should accept project A because it has the lower NPV and reject project B.
c.You should accept project A because it has the higher NPV and you can not accept
both projects.
d.You should accept project B because it has the higher IRR and reject project A.
e.You should accept both projects if the funds are available to do so.
PROFITABILITY INDEX
70.What is the profitability index for an investment with the following cash flows given a
9 percent required return?
YearCash Flow
0-$21,500
1$ 7,400
2$ 9,800
3$ 8,900
a..96
b..98
c.1.00
d.1.02
e.1.04
PROFITABILITY INDEX
71.Based on the profitability index (PI) rule, should a project with the following cash
flows be accepted if the discount rate is 8 percent? Why or why not?
YearCash Flow
0 -$18,600
1 $10,000
2 $ 7,300
3 $ 3,700
a.yes; because the PI is 1.008
b.yes; because the PI is .992
c.yes; because the PI is .999
d.no; because the PI is 1.008
e.no; because the PI is .992
PAYBACK PERIOD
74.It will cost $2,600 to acquire a small ice cream cart. Cart sales are expected to be
$1,400 a year for three years. After the three years, the cart is expected to be worthless
as that is the expected remaining life of the cooling system. What is the payback period
of the ice cream cart?
a..86 years
b.1.46 years
c.1.86 years
d.2.46 years
e.2.86 years
PAYBACK PERIOD
75.You are considering a project with an initial cost of $4,300. What is the payback
period for this project if the cash inflows are $550, $970, $2,600, and $500 a year over
the next four years, respectively.
a.2.04 years
b.2.36 years
c.2.89 years
d.3.04 years
e.3.36 years
PAYBACK PERIOD
76.A project has an initial cost of $1,900. The cash inflows are $0, $500, $900, and $700
over the next four years, respectively. What is the payback period?
a.2.71 years
b.2.98 years
c.3.11 years
d.3.71 years
e.never
AVERAGE ACCOUNTING RETURN
82.Larry’s Lanterns is considering a project which will produce sales of $240,000 a year
for the next five years. The profit margin is estimated at 6 percent. The project will
cost $290,000 and be depreciated straight-line to a book value of zero over the life of
the project. Larry’s has a required accounting return of 8 percent. This project should be _____ because the AAR is _____
a.rejected; 4.14 percent.
b.rejected; 6 percent.
c.rejected; 8.28 percent.
d.accepted; 8.28 percent.
e.accepted; 9.93 percent.
RELEVANT CASH FLOWS
47.Marshall’s & Co. purchased a corner lot in EglonCity five years ago at a cost of
$640,000. The lot was recently appraised at $810,000. At the time of the purchase, the
company spent $50,000 to grade the lot and another $4,000 to build a small building
on the lot to house a parking lot attendant who has overseen the use of the lot for daily
commuter parking. The company now wants to build a new retail store on the site. The
building cost is estimated at $1.2 million. What amount should be used as the initial
cash flow for this building project?
a.$1,200,000
b.$1,840,000
c.$1,890,000
d.$2,010,000
e.$2,060,000
RELEVANT CASH FLOWS
48.Jamestown Ltd. currently produces boat sails and is considering expanding its
operations to include awnings for homes and travel trailers. The company owns land
beside its current manufacturing facility that could be used for the expansion. The
company bought this land ten years ago at a cost of $250,000. Today, the land is
valued at $425,000. The grading and excavation work necessary to build on the land
will cost $15,000. The company currently has some unused equipment which it
currently owns valued at $60,000. This equipment could be used for producing
awnings if $5,000 is spent for equipment modifications. Other equipment costing
$780,000 will also be required. What is the amount of the initial cash flow for this
expansion project?
a.$800,000
b.$1,050,000
c.$1,110,000
d.$1,225,000
e.$1,285,000
OPPORTUNITY COST
51.Your firm purchased a warehouse for $335,000 six years ago. Four years ago, repairs
were made to the building which cost $60,000. The annual taxes on the property are
$20,000. The warehouse has a current book value of $268,000 and a market value of $295,000. The warehouse is totally paid for and solely owned by your firm. If the
company decides to assign this warehouse to a new project, what value, if any, should
be included in the initial cash flow of the project for this building?
a.$0
b.$268,000
c.$295,000
d.$395,000
e.$515,000
EROSION COST
54.Jamie’s Motor Home Sales currently sells 1,000 Class A motor homes, 2,500 Class C
motor homes, and 4,000 pop-up trailers each year. Jamie is considering adding a mid-
range camper and expects that if she does so she can sell 1,500 of them. However, if
the new camper is added, Jamie expects that her Class A sales will decline to 950 units
while the Class C campers decline to 2,200. The sales of pop-ups will not be affected.
Class A motor homes sell for an average of $125,000 each. Class C homes are priced
at $39,500 and the pop-ups sell for $5,000 each. The new mid-range camper will sell
for $47,900. What is the erosion cost?
a.$6,250,000
b.$18,100,000
c.$53,750,000
d.$93,150,000
e.$118,789,500
OCF
55.Ernie’s Electrical is evaluating a project which will increase sales by $50,000 and
costs by $30,000. The project will cost $150,000 and be depreciated straight-line to a
zero book value over the 10 year life of the project. The applicable tax rate is 34
percent. What is the operating cash flow for this project?
a.$3,300
b.$5,000
c.$8,300
d.$13,300
e.$18,300
PROJECT NPV
70.A project is expected to create operating cash flows of $22,500 a year for three years.
The initial cost of the fixed assets is $50,000. These assets will be worthless at the
end of the project. An additional $3,000 of net working capital will be required throughout the life of the project. What is the project’s net present value if the required
rate of return is 10 percent?
a.$2,208.11
b.$2,954.17
c.$4,306.09
d.$5,208.11
e.$5,954.17
PROJECT NPV
71.A project will produce operating cash flows of $45,000 a year for four years. During
the life of the project, inventory will be lowered by $30,000 and accounts receivable
will increase by $15,000. Accounts payable will decrease by $10,000. The project
requires the purchase of equipment at an initial cost of $120,000. The equipment will
be depreciated straight-line to a zero book value over the life of the project. The
equipment will be salvaged at the end of the project creating a $25,000 after-tax cash flow. At the end of the project, net working capital will return to its normal level.
What is the net present value of this project given a required return of 14 percent?
a.$3,483.48
b.$16,117.05
c.$27,958.66
d.$32,037.86
e.$49,876.02
COST-CUTTING
74.The Wolf’s Den Outdoor Gear is considering replacing the equipment it uses to
produce tents. The equipment would cost $1.4 million and lower manufacturing costs by an estimated $215,000 a year. The equipment will be depreciated using straight-line
depreciation to a book value of zero. The life of the equipment is 8 years. The required
rate of return is 13 percent and the tax rate is 34 percent. What is the net income from
this proposed project?
a.$13,600
b.$26,400
c.$32,400
d.$40,000
e.$53,600
NET WORKING CAPITAL
81.Kay’s Nautique is considering a project which will require additional inventory of
$128,000 and will also increase accounts payable by $45,000 as suppliers are willing
to finance part of these purchases. Accounts receivable are currently $80,000 and are
expected to increase by 10% if this project is accepted. What is the initial project cash
flow needed for net working capital?
a.$75,000
b.$91,000
c.$99,000
d.$136,000
e.$181,000
CHAPTER 11
Use this information to answer questions 58 through 62.
The Adept Co. is analyzing a proposed project. The company expects to sell 2,500
units, give or take 10 percent. The expected variable cost per unit is $8 and the expected fixed costs are $12,500. Cost estimates are considered accurate within a plus or minus 5 percent range. The depreciation expense is $4,000. The sale price is estimated at $16 a unit, give or take 2 percent. The company bases their sensitivity analysis on the base case scenario.
SCENARIO ANALYSIS
58.What is the sales revenue under the best case scenario?
a.$40,000
b.$43,120
c.$44,000
d.$44,880
e.$48,400
SCENARIO ANALYSIS
59.What is the contribution margin under the base case scenario?
a.$2.67
b.$3.00
c.$7.92
d.$8.00
e.$8.72
SCENARIO ANALYSIS
60.What is the amount of the fixed cost per unit under the worst case scenario?
a.$4.55
b.$5.00
c.$5.83
d.$6.02
e.$6.55
SENSITIVITY ANALYSIS
61.The company is conducting a sensitivity analysis on the sales price using a sales
price estimate of $17. Using this value, the earnings before interest and taxes will be:
a.$4,000
b.$6,000
c.$8,500
d.$10,000
e.$18,500
MARGINAL COST
72.Ted’s Sleds produces sleds at an average variable cost per unit of $39.18 when
production quantity is 1,250 units. When production increases to 1,251 units the
average variable cost declines to $39.16. What is the minimal price that Ted’s Sleds
can charge for the 1,251st sled without affecting their net profits?
a.$13.89
b.$14.16
c.$14.21
d.$14.37
e.$14.44
CONTRIBUTION MARGIN
73.Wilson’s Meats has computed their fixed costs to be $.60 for every pound of meat
they sell given an average daily sales level of 500 pounds. They charge $3.89 per pound of top-grade ground beef. The variable cost per pound is $2.99. What is the contribution margin per pound of ground beef sold?
a.$.30
b.$.60
c.$.90
d.$2.99
e.$3.89
SENSITIVITY ANALYSIS
62.The company conducts a sensitivity analysis using a variable cost of $9. The total
variable cost estimate will be:
a.$21,375
b.$22,500
c.$23,625
d.$24,125
e.$24,750
VARIABLE COST
68.A firm is reviewing a project with labor cost of $8.90 per unit, raw materials cost of
$21.63 a unit, and fixed costs of $8,000 a month. Sales are projected at 10,000 units
over the three-month life of the project. What are the total variable costs of the project?
a.$216,300
b.$297,300
c.$305,300
d.$313,300
e.$329,300
VARIABLE COST
69.A project has earnings before interest and taxes of $5,750, fixed costs of $50,000, a
selling price of $13 a unit, and a sales quantity of 11,500 units. Depreciation is $7,500.
What is the variable cost per unit?
a.$6.75
b.$7.00
c.$7.25
d.$7.50
e.$7.75
FIXED COST
70.At a production level of 5,600 units a project has total costs of $89,000. The variable cost per unit is $11.20. What is the amount of the total fixed costs if the production
level is increased to 6,100 units without increasing the total fixed assets?
a.$24,126
b.$26,280
c.$27,090
d.$27,820
e.$28,626
ACCOUNTING BREAK-EVEN
78.A proposed project has fixed costs of $3,600, depreciation expense of $1,500, and a
sales quantity of 1,300 units. What is the contribution margin if the projected level of
sales is the accounting break-even point?
a.$3.92
b.$4.14
c.$4.50
d.$4.80
e.$5.00
CASH BREAK-EVEN
79.The Wiltmore Co. would like to add a new product to complete their lineup. They want
to know how many units they must sell to limit their potential loss to their initial
investment. What is this quantity if their fixed costs are $12,000, the depreciation
expense is $2,500, and the contribution margin is $1.30? (Round to whole units)
a.9,231 units
b.9,903 units
c.10,002 units
d.10,629 units
e.11,154 units
OPERATING LEVERAGE
86.The fixed costs of a project are $8,000. The depreciation expense is $3,500 and the
operating cash flow is $20,000. What is the degree of operating leverage for this
project?
a..40
b..71
c..87
d.1.40
e.2.50