1. The ideal decision-making criteria should do which of the following? Select all that apply.

• incorporate the required rate of return on the project
• be subject to management's cutoff for payoff financing
• include all cash flows that occur during the life of the project
• consider the time value of money
• none of the above

2.The decision rule for using the profitability index states that when the profitability index is greater than, then the project should be accepted.

• 0
• the initial outlay
• the IRR
• 1
• none of the above

3.If all else remains constant, the net present value of a project will increasewhen ________.

• the initial cost of a project increases
• each cash inflow is delayed by one year
• the discount rate increases
• the required rate of return decreases
• all of the above

4.You are the owner of a coffee shop and want to start a new project. Compute the payback period for a project with the following characteristics. The company's discount rate is 12%, the tax rate is 40%, and coffee sells for $22/lb.

Initial outlay = $400

Free cash flows: Year 1 = $300,Year 2 = $90, Year 3 = $100

• 0.10 year
• 1.23 years
• 2.00 years
• 3.00 years
• 2.10 years

5.A firm is starting a new project that will cost $200,000. It is projected to last fiveyears and to generate cash flows of $50,000, $70,000, $90,000, $50,000, and $30,000 foryears 1 through 5, respectively. If the discount rate is 10%, what is the PI of this project?

• 1.45
• 0.90
• 2.12
• 1.12
• 1.28

Initial Outlay-$5,000

Year 1$3,000

Year 2$3,500

Year 3$3,200

Year 4$2,800

Year 5$2,500

Given the information above, what is the NPV of the project if the discount rate is 20%?

• $1,028.16
• $10,000.00
• $4,137.41
• $3,447.84
• $4,018.78

6.You are considering a project that requires a $50,000 investment to start. This is a five-year project, and you are expecting the project to generateannual cash flows after taxes of $10,000, $50,000, $90,000, $20,000, and -$30,000 for years 1 through 5,respectively. What is the IRR of this project if the required rate of return is 8%?

• 57.08%
• 22.87%
• 180.00%
• 190.56%
• cannot be determined

Initial Outlay-$5,000

Year 1$3,000

Year 2$3,500

Year 3$3,200

Year 4$2,800

Year 5$2,500

8.Given the information above, what is the EAA for the project if the discount rate is 20%?

• $1,383.47
• $1,343.80
• $3,343.80
• $343.80
• $1,152.89

9.You are trying to determine which of two mutually exclusive projects to undertake. Project Adam has an initial outlay of $10,000, an NPV of $4,392.15, an IRR of 11.33%, and an EAA of $1,158.64. Project Evehas an initial outlay of $15,000, an NPV of $5,833.73, an IRR of 9.88%, and an EAA of $1,093.50. The cost of capital for both projects is 9%, and the projects have different lives. The projects are not repeatable. What should you do?

• You should do both projects because both have positive NPVs.
• You should do Project Adam because it has a higher EAA.
• You should do Project Eve because it has a higher NPV.
• You should do Project Adam because it has a higher IRR.
• You should do neither project because neither of them would add value to your company.

IOPIIRRLIFE

Project 1$300,0001.1214.38%15 years

Project 2$150,0001.0813.32%6 years

Project 3$100,0001.2016.46%3 years

Use the information above to answer the following question. Assume that the cost of capital is 12%.

If the firm has unlimited capital and each project is independent, which project(s) should be accepted?

10.Hint: First decides whether you should use NPV or EAA. You can find the NPV's by using PI and Initial Outlay.

• project 1
• projects 1 and 2
• projects 1 and 3
• projects 2 and 3
• projects 1, 2, and 3