1. Assume that the cash flows of a project are an equal amount each period. Which of the following formulas computes the payback period of the project?

a.Payback Period = Annual Cash Flows / Original Investment

b.Payback Period = Initial Investment / Average Income

c.Payback Period = Net Income / Annual Cash Flows

d.Payback Period = Original Investment / Annual Cash Flows

2. Which of the following statements is true about a postaudit?

a.A postaudit analyzes the project using the accounting rate of return model.

b.A postaudit is cheap compared to other analyses.

c.A postaudit compares the actual benefits with the estimated benefits of a project.

d.A postaudit provide useful information for making capital budgeting decisions regarding a new project.

3. Which of the following statements is a limitation of the net present value (NPV) model while making a capital investment decision?

a.The NPV model assumes that each cash inflow received is reinvested at the internal rate of return, which is not a realistic assumption.

b.The NPV method measures profitability in relative terms, and in the final analysis, what counts are the total dollars earnedthe absolute profit not the relative profits.

c.The NPV model ignores the time value of money while making a capital investment decision.

d.The NPV model allows firms to use a higher discount rate than its cost of capital because of uncertain future cash flows.

4. Ebony Inc., a tire manufacturing company, is planning to invest $900,000 for the production of soft compound tires. The investment is expected to provide an annual return of $100,000. The estimated life of the project is 10 years. Additionally, working capital is expected to increase by $100,000. The firm expects to recover the investment in working capital at the end of the project's life. If the required rate of return for the project is 7%, what is the net present value (NPV) of the project?

Period	1	2	3	4	5
7%	0.93458	0.87344	0.81630	0.76290	0.71299
Period	6	7	8	9	10
7%	0.66634	0.62275	0.58201	0.54393	0.50835

a.$-246,806

b.$-923,671

c.$-441,677

d.$700,000