Chapter 9 Practice Questions and Answers

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the
question.

1) Calculate the NPV of a 20-year project with a cost of $400,000 and annual cash flows 1)
of $50,000 in years 1-10 and $25,000 in years 11-20. The company's required rate of
return is 10%.
A) ($18,547)
B) ($33,547)
C) $18,547
D) $33,547
E) $0

2) You are considering a project that costs $300 and has expected cash flows of $110, 2)
$121, and $133.10 over the next three years. If the appropriate discount rate for the
project's cash flows is 10%, what is the net present value of this project?
A) ($8.58) B) $0.00 C) $19.79 D) $64.10 E) $0.71

3) A project costs $12,500 to initiate. Cash flows are estimated as $2,500 a year for the 3)
first two years and $3,100 a year for the next three years. The discount rate is 11.25%.
The net present value for this project is ________ and the internal rate of return is
________ the discount rate.
A) $1,800.00; more than
B) $2,138.52; less than
C) -$2,138.52; less than
D) $1,800.00; less than
E) -$2,138.52; more than

4) For a project with an initial investment of $40,000 and cash inflows of $11,000 a year 4)
for five years, calculate NPV given a required return of 11.65%.
A) $567 B) $1,218 C) -$1,103 D) -$1.23 E) -$1,205

5) Calculate the NPV of the following project using a discount rate of 12%: Yr 0 = -$500; 5)
Yr 1 = -$50; Yr 2 = $50; Yr 3 = $200; Yr 4 = $400; Yr 5 = $400
A) $269.21 B) $118.75 C) $15.00 D) $208.04 E) $61.22

1
6) A project is expected to produce cash inflows of $6,500 for three years. What is the 6)
maximum amount that can be spent on costs to initiate this project and still consider the
project as acceptable, given an 11% discount rate?
A) $19,500.00
B) $15,900.00
C) $15,967.39
D) $15,884.15
E) $15,897.97

7) What is the net present value of a project that has an initial cash outflow of $21,000 and 7)
the following cash inflows? The required return is 12 percent.

A) -$29.67
B) -$130.09
C) $228.16
D) $28.16
E) $130.09

8) What is the NPV of the following set of cash flows if the required return is 14%? 8)

A) $3,034 B) ($1,286) C) $9,525 D) $10,376 E) $41,410

9) It will cost $14,900 to acquire a hot dog cart. Cart sales are expected to be $16,200 a 9)
year for three years. After the three years, the cart is expected to be worthless as that is
the expected life of the heating system. What is the payback period of the hot dog cart?
A) .87 year
B) 1.09 year
C) 1.03 year
D) .92 year
E) 1.14 year

2
10) You are considering a project with an initial cost of $27,900. What is the payback 10)
period for this project if the cash inflows are $14,650, $16,190, $12,480, and $9,500 a
year over the next four years, respectively?
A) 1.82 years
B) 0.90 year
C) 1.11 years
D) 0.82 year
E) 1.90 years

11) What is the profitability index of the following investment if the required return = 14%? 11)

A) 0.92 B) 1.11 C) 1.27 D) 1.13 E) 1.93

12) A 30-year project is estimated to cost $35 million dollars and provide annual cash flows 12)
of $5 per year in years 1-5; $4 million per year in years 6-20 and $2 million per year in
years 21-30. Given this information, determine the IRR of the project.
A) 9.85% B) 12.85% C) 8.85% D) 10.85% E) 11.85%

13) What is the internal rate of return for a project with the following cash flows? 13)

A) 12.3 percent
B) 12.7 percent
C) 11.9 percent
D) 12.1 percent
E) 12.5 percent

3
14) "Net present value" can be defined as: 14)
A) The net costs of a project subtracted from the net income generated from the
project.
B) The rate of return that causes the present value of all cash flows associated with a
project to equal zero.
C) The cash outflows from a project subtracted from the cash inflows for the project.
D) The discount rate that causes the current value of cash inflows to exceed the
current value of cash outflows.
E) A measure of the value created or added today by undertaking a project.

15) Without using formulas, provide a definition of "net present value" (NPV). 15)
A) A project analysis tool that measures the acceptability of a project by determining
the amount of profit that can be expected based on an investment made.
B) A project analysis tool that determines the amount of time required for an
investment to generate cash flows to recover its initial cost.
C) A ranking method used to assess projects. PI greater than 1 signify positive NPV
projects, while PI less than 1 signify negative NPV projects.
D) A project analysis tool that measures the acceptability of a project by determining
the length of time required for an investment's discounted cash flows to equal its
initial cost.
E) A project analysis tool that measures the acceptability of a project through the
difference between a project's initial investment and whether the present value of
its cash flow will repay the investment.

16) Without using formulas, provide a definition of "payback period." 16)

A) A project analysis tool that determines the amount of time required for an
investment to generate cash flows to recover its initial cost.
B) A project analysis tool that measures the acceptability of a project by determining
the amount of profit that can be expected based on an investment made.
C) A project analysis tool that measures the acceptability of a project by determining
the length of time required for an investment's discounted cash flows to equal its
initial cost.
D) A ranking method used to assess projects. PI greater than 1 signify positive NPV
projects, while PI less than 1 signify negative NPV projects.
E) A project analysis tool that measures the acceptability of a project through the
difference between a project's initial investment and whether the present value of
its cash flow will repay the investment.

4
17) Which one of the following statements is correct? 17)
A) A project with a net present value of zero is earning exactly the required rate of
return.
B) A profitability index that is less than 1.0 indicates that a project is acceptable.
C) When the internal rate of return is less than the required rate, the project should be
accepted.
D) A negative net present value indicates that a project is acceptable.
E) If the accounting rate of return exceeds the required discount rate, the project
should be accepted.

18) A negative net present value indicates that: 18)

A) The discount rate applied to the project is less than the project's internal rate of
return.
B) A project's initial cash outflow is greater than the present value of the project's
cash inflows.
C) The discount rate is greater than the current market rate of return.
D) A project's cash inflows must be less than the project's initial cost.
E) A project is acceptable.

19) You are going to choose between two investments. Both cost $80,000, but investment 19)
A pays $35,000 a year for four years while investment B pays $30,000 a year for five
years. If your required return is 13%, which should you choose?
A) A, because the pays back sooner.
B) B, because the IRR exceeds 13%.
C) B, because it has a higher NPV.
D) A, because the IRR exceeds 13%.
E) A, because the project has a higher IRR.

5
Answer Key
Testname: CHAPTER 9 PRACTICE QUESTIONS

1) B
2) B
3) C
4) D
5) B
6) D
7) A
8) A
9) D
10) A
11) B
12) E
13) A
14) E
15) E
16) A
17) A
18) B
19) C