Business Finance (FIN 312)
Quiz 4
Show your work for each question to get full credit.
Student Name ______
Student ID ______
Use the following information to answer questions 1 through 3.
You are analyzing a proposed project and have compiled the following information:
YearCash flow
0-$120,000
1 $ 14,900
2 $ 86,200
3 $ 41,500
Required payback period 3 years
Required return 10 percent
______1.What is the net present value of the proposed project?
a. -$5,122.30b. -$4,035.31c. $2,162.91d. $3,908.02
1.b; NPV = -$4,035.31
CF0-$120,000
C01$14,900
F011
C02$86,200
F021
C03$41,500
F031
I = 10
NPV CPT
-$4,035.31
______2.What is the discounted payback period?
a. 2.46 yearsb. 2.67 yearsc. 2.97 yearsd. never
2.dYearCash flowDiscounted cash flow
1 $14,900$ 13,545.45
2 $86,200$ 71,239.67
3 $41,500$ 31,179.56
Total$115,964.68
On a discounted basis, this project never pays back.
______3.Should the project be accepted based on the internal rate of return (IRR)? Why or why not?
a. yes; The project IRR is less than the required return.
b. yes; The project IRR is equal to zero.
c. no; The project IRR is less than the required return.
d. no; The project IRR is greater than zero.
3.cCF0-$120,000
C01 $14,900
F011
C02$86,200
F021
C03$41,500
F031
I = 10
IRR CPT
8.27 percent
The project should be rejected because the IRR of 8.27 percent is less than the required return of 10 percent.
You are analyzing a project and have prepared the following data:
Year Cash flow
0 -$169,000
1 $ 46,200
2 $ 87,300
3 $ 41,000
4 $ 39,000
Required payback period (cutoff point) 2.5 years
4.Based on the payback period of _____for this project, you should _____ the
project.
a.1.87 years; accept
b.2.87 years; accept
c.2.87 years; reject
d.3.13 years; reject
e.3.87 years; reject
4.Payback period = 2.87 years
Based on payback, the project should be rejected because the payback period of
2.87 years exceeds the required period of 2.5 years.
______5.Which of the following statements are correct concerning the internal rate of return (IRR)?
I.IRR is used to determine which one of two mutually exclusive projects should be accepted.
II.IRR is the discount rate that makes the net present value equal to zero.
III.There can be multiple IRRs if the cash flows are unconventional.
IV.You should accept a project when the IRR is less than the required return.
a. I and III only
b. II and IV only
c. II and III only
d. I and II only
5.c
______6.The point where the net present values of two projects are equal is referred to as the:
a. internal rate of return.
b. crossover point.
c. point of profitability.
d. payback point of equivalency.
6. b
7.You are analyzing the following two mutually exclusive projects and have developed
the following information. What is the crossover rate?
Project AProject B
YearCash FlowCash Flow
0-$84,500-$76,900
1 $29,000 $25,000
2 $40,000 $35,000
3 $27,000 $26,000
a.11.113 percent
b.13.008 percent
c.14.901 percent
d.16.750 percent
e.17.899 percent
ANS:D
To determine the crossover rate, find the differential cash flows between the 2 projects and then calculate the IRR of those differential cash flows.
Project , A - B0 / -50,000
1 / 55,000
2 / 40,000
3 / -40,000
IRR = 21.7%