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Exam 9: Making Capital Investment Decisions

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Question 61

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You are considering the following two mutually exclusive projects.Both projects will be depreciated using straight-line depreciation to a zero book value over the life of the project.Neither project has any salvage value. Should you accept or reject these projects based on IRR analysis?

A) accept Project A and reject Project B
B) reject Project A and accept Project B
C) accept both Projects A and B
D) reject both Projects A and B
E) You cannot make this decision based on internal rate of return analysis.

F) A) and D)
G) D) and E)

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Question 62

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Blue Water Systems is analyzing a project with the following cash flows.Should this project be accepted based on the discounting approach to the modified internal rate of return if the discount rate is 14 percent? Why or why not?

A) Yes; The MIRR is 13.48 percent.
B) Yes; The MIRR is 17.85 percent.
C) Yes; The MIRR is 21.23 percent.
D) No; The MIRR is 5.73 percent.
E) No; The MIRR is 17.85 percent.

F) A) and B)
G) A) and C)

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Question 63

Multiple Choice

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Roger's Meat Market is considering two independent projects.The profitability index decision rule indicates that both projects should be accepted.This result most likely does which one of the following?

Isaac has analyzed two mutually exclusive projects of similar size and has compiled the following information based on his analysis.Both projects have 3- year lives. Isaac has been asked for his best recommendation given this information.His recommendation should be to accept:

Why is payback often used as the sole method of analyzing a proposed small project?

The final decision on which one of two mutually exclusive projects to accept ultimately depends upon which one of the following?

The length of time a firm must wait to recoup, in present value terms, the money it has in invested in a project is referred to as the:

Kristi wants to start training her most junior assistant, Amy, in the art of project analysis.Amy has just started college and has no experience or background in business finance.To get her started, Kristi is going to assign the responsibility for all projects that have initial costs less than $1,000 to Amy to analyze.Which method is Kristi most apt to ask Amy to use in making her initial decisions?

The Green Fiddle is considering a project that will produce sales of $87,000 a year for the next 4 years.The profit margin is estimated at 6 percent.The project will cost $90,000 and will be depreciated straight-line to a book value of zero over the life of the project.The firm has a required accounting return of 11 percent.This project should be _____ because the AAR is _____ percent.

Which two methods of project analysis were the most widely used by CEO's as of 1999?

What is the net present value of a project with the following cash flows if the required rate of return is 9 percent?

An investment project costs $21,500 and has annual cash flows of $6,500 for 6 years.If the discount rate is 15 percent, what is the discounted payback period?