Top of Form  1. The difference between the present value of an investment?s future cash flows and its initial cost is the: net present value. internal rate of return. payback period. profitability index. discounted payback period. References Multiple Choice Section: 5.1 Net Present Value and Other Investment Rules  2. Which statement concerning the net present value (NPV) of an investment or a financing project is correct? A financing project should be accepted if, and only if, the NPV is exactly equal to zero. An investment project should be accepted only if the NPV is equal to the initial cash flow. Any type of project should be accepted if the NPV is positive and rejected if it is negative. Any type of project with greater total cash inflows than total cash outflows, should always be accepted. An investment project that has positive cash flows for every time period after the initial investment should be accepted. References Multiple Choice Section: 5.1 Net Present Value and Other Investment Rules  3. The primary reason that company projects with positive net present values are considered acceptable is that: they create value for the owners of the firm. the project's rate of return exceeds the rate of inflation. they return the initial cash outlay within three years or less. the required cash inflows exceed the actual cash inflows. the investment's cost exceeds the present value of the cash inflows. References Multiple Choice Section: 5.1 Net Present Value and Other Investment Rules  4. Accepting a positive net present value (NPV) project: indicates the project will pay back within the required period of time. means the present value of the expected cash flows is equal to the project’s cost. ignores the inherent risks within the project. guarantees all cash flow assumptions will be realized. is expected to increase the stockholders’ value by the amount of the NPV. References Multiple Choice Section: 5.1 Net Present Value and Other Investment Rules  5. The net present value method of capital budgeting analysis does all of the following except: incorporate risk into the analysis. consider all relevant cash flow information. use all of a project's cash flows. discount all future cash flows. provide a specific anticipated rate of return. References Multiple Choice Section: 5.1 Net Present Value and Other Investment Rules  6. What is the net present value of a project with an initial cost of $36,900 and cash inflows of $13,400, $21,600, and $10,000 for Years 1 to 3, respectively? The discount rate is 13 percent. −$287.22 −$1,195.12 −$1,350.49 $204.36 $797.22 References Multiple Choice Section: 5.1 Net Present Value and Other Investment Rules  7. Maxwell Software, Inc., has the following mutually exclusive projects. Year Project A Project B   0  –$29,000     –$32,000      1 16,500    17,500      2 13,000    11,500      3 3,800    13,000    a-1. Calculate the payback period for each project. (Do not round interme ...

1. Top of Form
1.
The difference between the present value of an investment?s
future cash flows and its initial cost is the:
net present value.
internal rate of return.
payback period.
profitability index.
discounted payback period.
References
Multiple Choice
Section: 5.1 Net Present Value and Other Investment Rules
2.
Which statement concerning the net present value (NPV) of an
investment or a financing project is correct?
A financing project should be accepted if, and only if, the NPV
is exactly equal to zero.
An investment project should be accepted only if the NPV is
equal to the initial cash flow.
Any type of project should be accepted if the NPV is positive
and rejected if it is negative.
Any type of project with greater total cash inflows than total
cash outflows, should always be accepted.
An investment project that has positive cash flows for every
time period after the initial investment should be accepted.
References
Multiple Choice

2. Section: 5.1 Net Present Value and Other Investment Rules
3.
The primary reason that company projects with positive net
present values are considered acceptable is that:
they create value for the owners of the firm.
the project's rate of return exceeds the rate of inflation.
they return the initial cash outlay within three years or less.
the required cash inflows exceed the actual cash inflows.
the investment's cost exceeds the present value of the cash
inflows.
References
Multiple Choice
Section: 5.1 Net Present Value and Other Investment Rules
4.
Accepting a positive net present value (NPV) project:
indicates the project will pay back within the required period of
time.
means the present value of the expected cash flows is equal to
the project’s cost.
ignores the inherent risks within the project.
guarantees all cash flow assumptions will be realized.
is expected to increase the stockholders’ value by the amount of
the NPV.
References
Multiple Choice
Section: 5.1 Net Present Value and Other Investment Rules
5.

3. The net present value method of capital budgeting analysis does
all of the following
except:
incorporate risk into the analysis.
consider all relevant cash flow information.
use all of a project's cash flows.
discount all future cash flows.
provide a specific anticipated rate of return.
References
Multiple Choice
Section: 5.1 Net Present Value and Other Investment Rules
6.
What is the net present value of a project with an initial cost of
$36,900 and cash inflows of $13,400, $21,600, and $10,000 for
Years 1 to 3, respectively? The discount rate is 13 percent.
−$287.22
−$1,195.12
−$1,350.49
$204.36
$797.22
References
Multiple Choice
Section: 5.1 Net Present Value and Other Investment Rules
7.
Maxwell Software, Inc., has the following mutually exclusive
projects.
Year
Project A

4. Project B
0
–$29,000
–$32,000
1
16,500
17,500
2
13,000
11,500
3
3,800
13,000
a-1.
Calculate the payback period for each project.
(Do not round intermediate calculations and round your answers
to 3 decimal places, e.g., 32.161.)
Payback period
Project A
Project B

5. a-2.
Which, if either, of these projects should be chosen?
b-1.
What is the NPV for each project if the appropriate discount
rate is 14 percent?
(A negative answer should be indicated by a minus sign. Do not
round intermediate calculations and round your answers to 2
decimal places, e.g., 32.16.)
NPV
Project A
Project B
b-2.
Which, if either, of these projects should be chosen if the
appropriate discount rate is 14 percent?
References
Worksheet
Section: 5.2 The Payback Period Method
Maxwell Software, Inc., has the following mutually exclusive
projects.

6. Year
Project A
Project B
0
–$29,000
–$32,000
1
16,500
17,500
2
13,000
11,500
3
3,800
13,000
a-1.
Calculate the payback period for each project.
(Do not round intermediate calculations and round your answers
to 3 decimal places, e.g., 32.161.)
Payback period
Project A

7. [removed]
years
Project B
[removed]
years
a-2.
Which, if either, of these projects should be chosen?
b-1.
What is the NPV for each project if the appropriate discount
rate is 14 percent?
(A negative answer should be indicated by a minus sign. Do not
round intermediate calculations and round your answers to 2
decimal places, e.g., 32.16.)
NPV
Project A
$
[removed]
Project B
$
[removed]

8. b-2.
Which, if either, of these projects should be chosen if the
appropriate discount rate is 14 percent?
8.
Down Under Boomerang, Inc., is considering a new three-year
expansion project that requires an initial fixed asset investment
of $2.61 million. The fixed asset will be depreciated straight-
line to zero over its three-year tax life, after which it will be
worthless. The project is estimated to generate $2,050,000 in
annual sales, with costs of $745,000. The tax rate is 30 percent
and the required return is 15 percent.
What is the project’s NPV?
(Do not round intermediate calculations and round your answer
to 2 decimal places, e.g., 32.16.)
NPV
References
Worksheet
Section: 6.2 The Baldwin Company: An Example
Down Under Boomerang, Inc., is considering a new three-year
expansion project that requires an initial fixed asset investment
of $2.61 million. The fixed asset will be depreciated straight-
line to zero over its three-year tax life, after which it will be

9. worthless. The project is estimated to generate $2,050,000 in
annual sales, with costs of $745,000. The tax rate is 30 percent
and the required return is 15 percent.
What is the project’s NPV?
(Do not round intermediate calculations and round your answer
to 2 decimal places, e.g., 32.16.)
NPV
$
[removed]
9.
The Best Manufacturing Company is considering a new
investment. Financial projections for the investment are
tabulated here. The corporate tax rate is 40 percent. Assume all
sales revenue is received in cash, all operating costs and income
taxes are paid in cash, and all cash flows occur at the end of the
year. All net working capital is recovered at the end of the
project.
Year 0
Year 1
Year 2
Year 3
Year 4
Investment

10. $
34,000
Sales revenue
$
17,500
$
18,000
$
18,500
$
15,500
Operating costs
3,700
3,800
3,900
3,100
Depreciation

11. 8,500
8,500
8,500
8,500
Net working capital spending
400
450
500
400
?
a.
Compute the incremental net income of the investment for each
year.
(Do not round intermediate calculations.)
Year 1
Year 2
Year 3
Year 4
Net income

12. b.
Compute the incremental cash flows of the investment for each
year.
(Do not round intermediate calculations.
A negative answer should be indicated by a minus sign.)
Year 0
Year 1
Year 2
Year 3
Year 4
Cash flow
c.
Suppose the appropriate discount rate is 10 percent. What is the
NPV of the project?
(Do not round intermediate calculations and round your answer
to 2 decimal places, e.g., 32.16.)
NPV
References
Worksheet
Section: 6.1 Incremental Cash Flows: The Key to Capital
Budgeting
Section: 6.2 The Baldwin Company: An Example

13. The Best Manufacturing Company is considering a new
investment. Financial projections for the investment are
tabulated here. The corporate tax rate is 40 percent. Assume all
sales revenue is received in cash, all operating costs and income
taxes are paid in cash, and all cash flows occur at the end of the
year. All net working capital is recovered at the end of the
project.
Year 0
Year 1
Year 2
Year 3
Year 4
Investment
$
34,000
Sales revenue
$
17,500
$
18,000
$
18,500
$

14. 15,500
Operating costs
3,700
3,800
3,900
3,100
Depreciation
8,500
8,500
8,500
8,500
Net working capital spending
400
450
500
400
?
a.

15. Compute the incremental net income of the investment for each
year.
(Do not round intermediate calculations.)
Year 1
Year 2
Year 3
Year 4
Net income
$
[removed]
$
[removed]
$
[removed]
$
[removed]
b.
Compute the incremental cash flows of the investment for each
year.
(Do not round intermediate calculations.
A negative answer should be indicated by a minus sign.)
Year 0
Year 1
Year 2

16. Year 3
Year 4
Cash flow
$
[removed]
$
[removed]
$
[removed]
$
[removed]
$
[removed]
c.
Suppose the appropriate discount rate is 10 percent. What is the
NPV of the project?
(Do not round intermediate calculations and round your answer
to 2 decimal places, e.g., 32.16.)

17. NPV
$
[removed]