Needing assistance with #7 on the worksheet. Thank you.

BUS 8003 Mid-term Exam FaA16-v1 1. The net present value of a cash flow stream: a. decreases as the required rate of return increases. b. increases as the required rate of return decreases. c. is equal to the initial investment when the internal rate of return is equal to the required return. d. is directly related to the discount rate. e. is unaffected by the timing of an investment's cash flows. 2. Which one of the following is an indicator that an investment is acceptable? a. b. c. d. e. Modified internal rate of return equal to zero Profitability index of zero Internal rate of return that exceeds the required return Payback period that exceeds the required period Negative average accounting return 3. Which one of the following will occur when the internal rate of return equals the required return? a. The profitability index will equal b. The profitability index will equal c. The profitability index will equal d. The profitability index will equal return. e. The average accounting return will -1.0. 0. 1.0. the average accounting equal 1.0. 4. The profitability index reflects the value created per dollar: a. b. c. d. e. invested. of sales. of net income. of taxable income. of shareholders' equity. 5. You were recently hired by a firm as a project analyst. The owner of the firm is unfamiliar with financial analysis and wants to know only what the expected dollar return is per dollar spent on a given project. Which financial method of analysis will provide the information that the owner requests? a. b. c. d. e. Internal rate of return Modified internal rate of return Net present value Profitability index Payback Next page, please 6. Which one of the following indicates that a project is definitely acceptable? a. Profitability index greater than 1.0 b. Negative net present value c. Modified internal rate return that is lower than the requirement d. Zero internal rate of return e. Positive average accounting return 7. What is the net present value of a project with the following cash flows if the discount rate is 8 percent? a. b. c. d. e. -$5,433.67 -$2,350.99 -$3,089.16 $142,649.01 $70,149.01 8. The Greasy Spoon Restaurant is considering a project with an initial cost of $625,000. The project will not produce any cash flows for the first three years. Starting in year 4, the project will produce cash inflows of $752,100 a year for three years. This project is risky, so the firm has assigned it a discount rate of 14 percent. What is the project's net present value? a. b. c. d. e. $417,294.85 $424,591.11 $451,786.86 $512,408.23 $553,567.39 9. A proposed project requires an initial cash outlay of $769,0000 for equipment and an additional cash outlay of $58,5001 in year 1 to cover operating costs. During years 2 through 4, the project will generate cash inflows of $354,0002, 254,0003, 254,0004 per year respectively. What is the net present value of this project at a discount rate of 13 percent? Round your answer to the nearest whole dollar. a. b. c. d. e. -$66,391 -$139,272 -$152,232 -$211,718 -$270,218 Next page, please 10. Simple Simon is considering investing $56,000 in a project that is expected to provide him with cash inflows of $22,000 in each of the first two years and $25,000 for the following year. At a discount rate of zero percent this investment has a net present value of ____, but at the relevant discount rate of 22 percent the project's net present value is ____. a. b. c. d. e. $0; -$5,739 $0; -$3,406 $6,000; -$5,739 $6,000; $1,897 $13,000; -$9,419 11. Zak and Archie are both considering investing in a project with the following cash flows. Zak is content earning a 9 percent return, but Archie desires a return of 16 percent. Who, if either, should accept this project? a. b. c. d. e. as Both Zak and Archie Zak, but not Archie Archie, but not Zak Neither Zak nor Archie Zak, and possibly Archie, who will be neutral on this decision his net present value will equal zero 12. You are making a $152,300 investment and feel that a 15 percent rate of return is reasonable given the nature of the risks involved. You feel you will receive $78,500 in the first year, $62,300 in the second year, and $60,000 in the third year. You expect to pay out $12,000 as an additional investment in the fourth year. What is the net present value of this investment given your expectations? a. b. c. d. e. -$15,879.63 -$4,341.44 $15,879.63 $16,233.33 $18,534.25 13. Today, Cup Kake Shak is investing $491,000 in a new oven. As a result, the company expects its cash flows to increase by $64,000 a year for the next two years and by $98,000 a year for the following three years. The oven is discarded at the end of Year 5. How long must the firm wait until it recovers all of its initial investment? a. b. c. d. e. 3.97 years 4.18 years 5.70 years 6.00 years The project never pays back. Next page, please 14. Warehouse Services would like to spend warehouse. However, the company has a loan repaid in 2.5 years and thus will need the warehouse expansion project is expected to $58,000 in the first year, $139,000 in the year for the following 2 years. Should the Why or why not? $221,000 to expand its outstanding that must be $221,000 at that time. The increase the cash inflows by second year, and $210,000 a firm expand at this time? a. No, because the project never pays back b. No, because the money will not be recovered the loan c. Yes, because the money will be recovered in d. Yes, because the money will be recovered in e. Yes, because the money will be recovered in in time to repay 1.69 years 1.87 years 2.11 years 15. Delta Alpha Delta is considering purchasing some new equipment costing $400,000. The equipment will be depreciated on a straight-line basis to a zero book value over the four-year life of the project. Projected net income for the four years is $18,900, $21,300, $26,700, and $25,000. What is the average accounting rate of return? a. b. c. d. e. 11.49 11.63 12.01 12.49 13.20 percent percent percent percent percent 16. Woodcrafters requires an average accounting return (AAR) of at least 17 percent on all fixed asset purchases. Currently, it is considering some new equipment costing $178,000. This equipment will have a four-year life over which time it will be depreciated on a straight-line basis to a zero book value. The annual net income from this equipment is estimated at $10,100, $10,300, $17,900, and $19,600 for the four years. Should this purchase occur based on the accounting rate of return? Why or why not? a. b. c. d. e. Yes, because the AAR is less than 17 percent Yes, because the AAR is equal to 17 percent Yes, because the AAR is greater than 17 percent No, because the AAR is less than 17 percent No, because the AAR is greater than 17 percent 17. You are considering the following two mutually exclusive projects. What is the crossover point? a. b. c. d. e. 10.76 13.72 15.89 18.79 22.56 18. A project has expected cash inflows, starting with year 1, of $2,200, $2,900, $3,500, and finally in year 4, $4,000. The profitability index is 1.14 and the discount rate is 12 percent. What is the initial cost of the project? a. b. c. d. e. $7,899.16 $8,098.24 $8,166.19 $9,211.06 $9,250.00 19. You are considering the following two mutually exclusive projects. The required return on each project is 14 percent. Which project should you accept and what is the best reason for that decision? a. b. c. d. e. Project Project Project Project Project A, A, B, A, B, because because because because because it it it it it pays back faster has the higher profitability index has the higher profitability index has the higher net present value has the higher net present value 20. Baker's Supply imposes a payback cutoff of 3.5 years for its international investment projects. If the company has the following two projects available, should it accept either of them? a. Accept both Projects b. Accept Project A but c. Accept Project B but d. Both Project A and B one project e. Reject both Projects A and B not Project B not Project A are acceptable but you can select only A and B