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YourResultsfor:"Multiplechoicequestions"
SiteTitle: FundamentalsofFinancial
Management,thirteenthedition

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BookTitle: FundamentalsofFinancial
Management,thirteenthedition
BookAuthor: VanHorne/Wachowicz
Locationon StudentResources>Chapter13>
Site: Multiplechoicequestions

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Date/Time September19,2015at6:19AM
Submitted: (UTC/GMT)

1.

Aprofitabilityindex(PI)of.92foraprojectmeansthat__________.
YourAnswer: theproject'scosts(cashoutlay)are(is)lessthanthe
presentvalueoftheproject'sbenefits
CorrectAnswer: theprojectreturns92centsinpresentvalueforeach
currentdollarinvested(cost)

Thepresentvalueoftheproject'sbenefitsarelessthantheproject'scosts
(cashoutlay).

2.

TheLMNCorporationisconsideringaninvestmentthatwillcost$80,000and
haveausefullifeof4years.Duringthefirst2years,thenetincremental
aftertaxcashflowsare$25,000peryearandforthelasttwoyearstheyare
$20,000peryear.Whatisthepaybackperiodforthisinvestment?
YourAnswer: Cannotbedeterminedfromthisinformation.
CorrectAnswer: 3.5years.

.
Thecumulativecashinflowsforthefourperiodsare$25K,$50K,$70K,and
$90Krespectively.Thus,3fullyearsplus$10Kof$20Kinthefourthyear
leadstoapaybackof3.5years.

3.

BulgingStomachRestaurants,Inc.,hasestimatedthataproposedproject's
8yearnetcashbenefitwillbe$4,000peryearforyears1through8,with
anadditionalterminalbenefitof$8,000attheendoftheeighthyear.
AssumingthatthesecashinflowssatisfyexactlyBulging'srequiredrateof
returnof8percent,theproject'sinitialcashoutflowisclosesttowhichofthe
followingfourpossibleanswers?
YourAnswer: $27,309

4.
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Whichofthefollowingstatementsisincorrectregardinganormalproject?
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YourAnswer: IftheIRRofaprojectisgreaterthanthediscountrate,
k,thenitsPIwillbegreaterthan1.
CorrectAnswer: IfthePIofaprojectequals0,thentheproject'sinitial
cashoutflowequalsthePVofitscashflows.

AnIRRthatexceedsthediscountrateimpliesapositiveNPVprojectwhich
meansthePIexceeds1ifitisanormalproject.

5.

Assumethatafirmhasaccuratelycalculatedthenetcashflowsrelatingto
twomutuallyexclusiveinvestmentproposals.Ifthenetpresentvalueofboth
proposalsexceedzeroandthefirmisnotundertheconstraintofcapital
rationing,thenthefirmshould__________.
YourAnswer: calculatetheIRRsoftheseinvestmentstobecertain
thattheIRRsaregreaterthanthecostofcapital
CorrectAnswer: accepttheproposalthathasthelargestNPVsincethe
goalofthefirmistomaximizeshareholderwealthand,
sincetheprojectsaremutuallyexclusive,wecanonly
takeone

Themaximizinggoalofthefirmsuggestschoosingtheproposalwiththe
largestNPVsincetheprojectsaremutuallyexclusive(i.e.,wecanonlytake
one).

6.

Whatdowecallaformalcomparisonoftheactualcostsandbenefitsofa
projectwithoriginalestimates?
YourAnswer: Businessscorecardreport.
CorrectAnswer: Postcompletionaudit.

Theformalcomparisonisreferredtoasapostcompletionaudit.

7.

Aprojectwhoseacceptancedoesnotpreventorrequiretheacceptanceof
oneormorealternativeprojectsisreferredtoas__________.
YourAnswer: acontingentproject
CorrectAnswer: anindependentproject

Thisisthesameasadependentprojectandrequirestheacceptanceofone
ormoreotherprojects.

8.

Whenoperatingunderasingleperiodcapitalrationingconstraint,youmay
firstwanttotryselectingprojectsbydescendingorderoftheir__________
inordertogiveyourselfthebestchancetoselectthemixofprojectsthat
addsmosttofirmvalue.
YourAnswer: paybackperiod(PBP)

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YourResultsfor"Multiplechoicequestions"

CorrectAnswer: profitabilityindex(PI)

Thisstatementregardingtheprofitabilityindex(PI)wouldbe

9.

Whichofthefollowingstatementsregardingcashflowpatterns(fortime
periods0,1,2,3,and4)iscorrect?
YourAnswer: Thesequenceof$50,$50,$70,$60,and$150hasat
mosttwointernalratesofreturn.

10.

Whichofthefollowingstatementsiscorrectregardingtheinternalrateof
return(IRR)method?
YourAnswer: Theinternalrateofreturnisrarelyusedbyfirmstoday
becauseoftheeaseatwhichnetpresentvalueis
calculated.
CorrectAnswer: Aslongasyouarenotdealingwithmutuallyexclusive
projects,capitalrationing,orunusualprojectshaving
multiplesignchangesinthecashflowstream,the
internalrateofreturnmethodcanbeusedwith
reasonableconfidence.

TheIRRisstillwidelyusedbecausefirmsstillliketouseratesratherthan
dollarfigureswhendiscussingprojects.

11.

Whichofthefollowingisnotapotentialforarankingproblembetweentwo
mutuallyexclusiveprojects?
YourAnswer: Thetwoprojectshavecashflowpatternsthatdiffer
dramatically.
CorrectAnswer: Oneofthemutuallyexclusiveprojectsinvolves
replacementwhiletheotherinvolvesexpansion.

Thisisoneofthethreemaindifferencesthatcancauserankingconflicts.

12.

ThediscountrateassociatedwiththesingleintersectionoftheNPVprofilesof
twomutuallyexclusiveprojectsrepresents__________.
YourAnswer: Gordon'srateofreturn
CorrectAnswer: Fisher'srateofintersection

ThisisreferredtoasFischer'srateofintersection.

13.

AnNPVprofileforasingleproject__________.

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YourResultsfor"Multiplechoicequestions"

YourAnswer: isgenerallyupwardsloping
CorrectAnswer: displaystheexpectedNPVforaprojectatavarietyof
differentdiscountrates

Itisgenerallydownwardsloping.

14.

Aprojectwhoseacceptanceprecludestheacceptanceofoneormore
alternativeprojectsisreferredtoas__________.
YourAnswer: amutuallyexclusiveproject.

15.

Twomutuallyexclusiveprojectsarebeingconsidered.Neitherprojectwillbe
repeatedagaininthefutureaftertheircurrentlivesarecomplete.There
existsapotentialproblemthoughtheexpectedlifeofthefirstprojectis
oneyearandtheexpectedlifeofthesecondprojectisthreeyears.Thishas
causedtheNPVandIRRmethodstosuggestdifferentprojectpreferences.
Whattechniquecanbeusedtohelpmakeabetterdecisioninthisscenario?
YourAnswer: IgnoretheNPVtechniqueandsimplychoosethehighest
IRRsincemanagersareconcernedaboutmaximizing
returns.
CorrectAnswer: RelyontheNPVmethodandmakeyourchoiceasitwill
tellyouwhichoneisbest.

SimplyrelyontheNPVmethod.

16.

Tothenearestdollar,whatisthenetpresentvalueofareplacementproject
whosecashflowsare$104,000$34,444$39,877$25,000and
$52,800foryears0through4,respectively?Thefirmhasdecidedtoassume
thattheappropriatecostofcapitalis10%andtheappropriateriskfreerate
is6%.
YourAnswer: $15,115

17.

Aprojecthasthefollowingcashinflows$34,444$39,877$25,000and
$52,800foryears1through4,respectively.Theinitialcashoutflowis
$104,000.Whichofthefollowingfourstatementsiscorrectconcerningthe
projectinternalrateofreturn(IRR)?
YourAnswer: TheIRRislessthan10%.
CorrectAnswer: TheIRRisgreaterthanorequalto14%,butlessthan
18%.

18.

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$104,000=$34,444/(1+IRR)1+$39,877/(1+IRR)2+$25,000/(1+
IRR)3+$52,800/(1+IRR)4.Thus,theIRR=16.23%.

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18.

YourResultsfor"Multiplechoicequestions"

Youmustdecidebetweentwomutuallyexclusiveprojects.ProjectAhascash
flowsof$10,000$5,000$5,000and$5,000foryears0through3,
respectively.ProjectBhascashflowsof$20,000$10,000$10,000and
$10,000foryears0through3,respectively.Thefirmhasdecidedtoassume
thattheappropriatecostofcapitalis10%forbothprojects.Whichproject
shouldbechosen?Why?
YourAnswer: BProjectB'sNPV>ProjectA'sNPV.

19.

Therearetwomutuallyexclusiveprojectsthathavedifferentlives.ProjectA
hasa4yearlifeandProjectBhasa5yearlife.Inreplacementchain
analysis,theearliestcommonlifewilloccurwhenProjectAisreplicated
__________timesandProjectBisreplicated__________times.
YourAnswer: Itisnotpossibletodeterminetheanswersforthis
problem.
CorrectAnswer: 54

Replicating5and4timesrespectivelywillprovidea20yearcommonlife.

20.

Aprojectwhoseacceptancerequirestheacceptanceofoneormore
alternativeprojectsisreferredtoas__________.
YourAnswer: Noneoftheaboveare
CorrectAnswer: adependentproject

Adependentprojectrequirestheacceptanceofoneormoreadditional
projects.

21.

UtilizethefollowingNPVsensitivityanalysistabletoanswerthequestion
below:

Variable
change

SV

PP

10%

20

28

36

5%

29

33

Base

30

30

30

5%

61

31

27

10%

103

32

24

NPVismostsensitivetoachangeinwhichofthethreeinputvariables
productprice(P),salvagevalue(SV),orpurchasepriceoftheasset(PP)?
YourAnswer: "P"

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