Olinick Corporation is considering a project that would require an investment of $322,000 and would last for 8 years. The incremental annual revenues and expenses generated by the project during those 8 years would be as follows (Ignore income taxes.):

Sales	$	284,000
Variable expenses		18,000
Contribution margin		266,000
Fixed expenses:
Salaries		29,000
Rents		42,000
Depreciation		37,000
Total fixed expenses		108,000
Net operating income	$	158,000

The scrap value of the project's assets at the end of the project would be $19,000. The cash inflows occur evenly throughout the year. The payback period of the project is closest to:

• 1.7 years

• 1.6 years

• 1.8 years

• 2.0 years

4. If the net present value of a project is zero based on a discount rate of 16%, then the internal rate of return is:

Multiple Choice

• less than 16%.

• greater than 16%.

• equal to 16%.

• cannot be determined from this data.

5.

The project profitability index and the internal rate of return:

Multiple Choice

• will always result in the same preference ranking for investment projects.

• are less dependable than the payback method in ranking investment projects.

• are less dependable than net present value in ranking investment projects.

• will sometimes result in different preference rankings for investment projects.

Rennin Dairy Corporation is considering a plant expansion decision that has an estimated useful life of 20 years. This project has an internal rate of return of 15% and a payback period of 9.6 years. How would a decrease in the expected salvage value from this project in 20 years affect the following for this project?

	Internal Rate of Return	Payback Period
A)	Decrease	Decrease
B)	No effect	Decrease
C)	Decrease	No effect
D)	Increase	No effect
E)	No effect	No effect

Multiple Choice

• Choice C

• Choice E

• Choice A

• Choice B

• Choice D

In calculating the "investment required" for the project profitability index, the amount invested should not be reduced by any salvage recovered from the sale of old equipment.

a. True

b.False