“The LEARNERS of TODAY are the LEADERS of TOMORROW.”
COMPETENCE. COMPASSION. COMMITMENT.
Name: ________________________ Section: ____________ Date: __________
ID: A
Financial Criteria- NPV, Payback and Profitability Index
Multiple Choice
Identify the choice that best completes the statement or answers the question.
____
1. Resnick Inc. is considering a project that has the following cash flow data. What is the project's payback?
Year
Cash flows
a.
____
2.39 years
a.
b.
2
$200
1.94 years
3
$200
c.
1.71 years
d.
2.25 years
1.98 years
0
-$350
1
$150
b.
2.00 years
2
$200
3
$300
c.
1.50 years
d.
2.46 years
3. Mansi Inc. is considering a project that has the following cash flow data. What is the project's payback?
Year
0
1
2
3
Cash flows -$750
$300
$325
$350
a.
____
1
$200
2. Susmel Inc. is considering a project that has the following cash flow data. What is the project's payback?
Year
Cash flows
____
0
-$450
2.19 years
b.
2.36 years
c.
2.69 years
d.
1.93 years
4. Cornell Enterprises is considering a project that has the following cash flow and WACC data. What is the
project's NPV? Note that a project's projected NPV can be negative, in which case it will be rejected.
WACC: 10.00%
Year
0
1
2
3
Cash flows -$825
$450
$460
$470
a.
$396.72
b.
$317.37
c.
1
$336.42
d.
$323.72
Name: ________________________
____
ID: A
5. Barry Company is considering a project that has the following cash flow and WACC data. What is the
project's NPV? Note that a project's projected NPV can be negative, in which case it will be rejected.
WACC: 9.25%
Year
0
Cash flows -$1,100
a.
$349.07
1
$400
b.
$442.91
2
$390
3
$380
c.
4
$370
$375.34
d.
5
$360
$311.54
Thompson Creations
Thompson Creations is considering an investment in a computer that is capable of producing various images
that are useful in the production of commercial art. The computer would cost $20,000 and have an expected
life of eight years. The computer is expected to generate additional annual net cash receipts (before-tax) of
$6,000 per year. The computer will be depreciated according to the straight-line method and the firm's
marginal tax rate is 25 percent.
____
6. Refer to Thompson Creations. What is the after-tax payback period for the computer project?
a. 7.62 years
b. 3.90 years
c. 4.44 years
d. 3.11 years
____
7. Refer to Thompson Creations. What is the after-tax net present value of the proposed project (using a 16
percent discount rate)? Present value tables or a financial calculator are required.
a. $2,261
b. $(454)
c. $6,062
d. $(4,797)
Houston Corporation
Houston Corporation is considering an investment in a labor-saving machine. Information on this machine
follows:
Cost
Salvage value in five years
Estimated life
Annual depreciation
Annual reduction in existing costs
$30,000
$0
5 years
$6,000
$8,000
____
8. Refer to Houston Corporation. What is the internal rate of return on this project (round to the nearest 1/2%)?
Present value tables or a financial calculator are required.
a. 37.5%
b. 25.0%
c. 10.5%
d. 13.5%
____
9. Refer to Houston Corporation. Assume for this question only that Hefty Co. uses a discount rate of 16
percent to evaluate projects of this type. What is the project's net present value? Present value tables or a
financial calculator are required.
a. $(6,283)
b. $(3,806)
c. $(23,451)
d. $(22,000)
2
Name: ________________________
ID: A
____ 10. Refer to Houston Corporation. What is the payback period on this investment?
a. 4 years
b. 2.14 years
c. 3.75 years
d. 5 years
Paulsen Corporation
Paulsen Corporation is involved in the evaluation of a new computer-integrated manufacturing system. The
system has a projected initial cost of $1,000,000. It has an expected life of six years, with no salvage value,
and is expected to generate annual cost savings of $250,000. Based on Paulsen Corporation's analysis, the
project has a net present value of $57,625.
____ 11. Refer to Paulsen Corporation. What discount rate did the company use to compute the net present value?
Present value tables or a financial calculator are required.
a. 10%
b. 11%
c. 12%
d. 13%
____ 12. Refer to Paulsen Corporation. What is the project's profitability index?
a. 1.058
b. .058
c. .945
d.
3
1.000
ID: A
Financial Criteria- NPV, Payback and Profitability Index
Answer Section
MULTIPLE CHOICE
1. ANS: D
Year
Cash flows
Cumulative CF
0
-$450
-$450
-
1
$200
-$250
-
2
$200
-$50
-*
3
$200*
$150*
2.25
Payback 2.25
* Payback = last year before cum CF turns
* positive + abs. val. last neg. cum CF/CF
* in payback year.
PTS: 1
DIF: EASY
NAT: Analytic skills
LOC: Students will acquire knowledge of capital budgeting and the cost of capital.
2. ANS: B
Year
0
1
2
3
Cash flows -$350 $150
$200
$300*
Cumulative CF -$350 -$200
-$0
$300*
2
-*
Payback 2.00
* Payback = last year before cum CF turns
* positive + abs. val. last neg. cum CF/CF
* in payback year.
PTS: 1
DIF: EASY
NAT: Analytic skills
LOC: Students will acquire knowledge of capital budgeting and the cost of capital.
3. ANS: B
Year
0
1
2
3
Cash flows -$750 $300
$325
$350*
Cumulative CF -$750 -$450 -$125 $225*
2.36*
Payback 2.36
* Payback = last year before cum CF turns
* positive + abs. val. last neg. cum CF/CF
* in payback year.
PTS: 1
DIF: EASY
NAT: Analytic skills
LOC: Students will acquire knowledge of capital budgeting and the cost of capital.
1
ID: A
4. ANS: B
WACC: 10.00%
Year
0
Cash flows -$825
1
$450
2
$460
3
$470
NPV = $317.37
PTS: 1
DIF: EASY | MEDIUM
NAT: Analytic skills
LOC: Students will acquire knowledge of capital budgeting and the cost of capital.
5. ANS: C
WACC:
9.25%
Year
0
1
2
3
4
5
Cash flows
-$1,100
$400
$390
$380
$370
$360
NPV = $375.34
PTS: 1
DIF: EASY | MEDIUM
NAT: Analytic skills
LOC: Students will acquire knowledge of capital budgeting and the cost of capital.
6. ANS: B
Payback Period = Investment/After-Tax Cash Flows
After Tax Cash Flows = [(6,000 *0.75) + (2,500 *0.25)] = $5,125
Payback Period = $20,000/$5,125 = 3.90 years
PTS: 1
DIF: Moderate
OBJ: 15-2 | 15-5
7. ANS: A
Use PV of Annuity Table 16%, 8 years; Constant = 4.3436
After-tax inflows =$5,125 * 4.3436 = $ 22,261
$22,261 - $20,000 = $2,261
PTS: 1
DIF: Moderate
OBJ: 15-3
8. ANS: C
IRR = $30,000 / $8,000 = 3.75
Using PV of Annuity Table 5 years. The constant of 3.75 corresponds to a rate of 10.5%
PTS: 1
DIF: Moderate
OBJ: 15-4
9. ANS: B
Use PV of Annuity Table 16%, 5 years. Corresponding constant is 3.2743
Annual reduction in costs $8,000 * 3.2743
$ 26,194
Investment
(30,000)
Net Present Value
( 3,806)
=======
PTS: 1
DIF:
Moderate
OBJ: 15-3
2
ID: A
10. ANS: C
Payback Period = Initial Investment/Cash Savings
= $30,000/$8,000
= 3.75 years
PTS: 1
DIF: Moderate
OBJ: 15-2
11. ANS: B
NPV =
$ 57,625
Initial Cost =
$1,000,000
PV of Cash Inflows = $1,057,625
Annual Cost Savings =$ 250,000
$1,057,625/$250,000 = 4.2305 PV of Annuity Constant
At 6 years, the constant corresponds to a discount rate of 11%.
PTS: 1
DIF: Moderate
12. ANS: A
PI = $1,057,625/1,000,000 = 1.058
PTS: 1
DIF:
Moderate
OBJ: 15-3
OBJ: 15-3
3