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FIN 445 Net Present Value Worksheet

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Accounting

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Answer to Group A Questions
1. Which one of the following increases the net present value of a project?
A. an increase in the required rate of return
B. an increase in the initial capital requirement
C. a deferment of some cash inflows until a later year
D. an increase in the after-tax salvage value of the fixed assets
2. The internal rate of return is:
A. the discount rate that makes the present value of a project equal to the initial cash
outlay.
B. equivalent to the discount rate that makes the net present value equal to one.
C. highly dependent upon the current interest rates offered in the marketplace.
D. a better methodology than net present value when dealing with unconventional cash
flows.
3. Tedder Mining has analyzed a proposed expansion project and determined that the
internal rate of return is lower than the firm desires. Which one of the following changes
to the project would be most expected to increase the project’s internal rate of return?
A. decreasing the required discount rate
B. increasing the initial investment in fixed assets
C. condensing the firm’s cash inflows into fewer years without lowering the total
amount of those inflows
D. eliminating the salvage value
4. A project with financing type cash flows is typified by a project that has which one of the
following characteristics?
A. conventional cash flows
B. cash flows that extend beyond the acceptable payback period
C. a year or more in the middle of a project where the cash flows are equal to zero
D. a cash inflow at time zero

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5.
Southern Chicken is considering two projects. Project A consists of creating an outdoor
eating area on the unused portion of the restaurant's property. Project B would use that
outdoor space for creating a drive-thru service window. When trying to decide which project
to accept, the firm should rely most heavily on which one of the following analytical
methods?
A.
profitability index
B.
internal rate of return
C.
payback
D.
net present value
6.
A.
$1,500 of lost sales because an item was out of stock
B.
$1,200 paid to repair a machine last year
C.
$20,000 project that must be forfeited if another project is accepted
D.
$4,500 reduction in current shoe sales if a store commences selling sandals
7.
Three years ago, Knox Glass purchased a machine for a 3-year project. The machine is being
depreciated straight-line to zero over a 5-year period. Today, the project ended and the
machine was sold. Which one of the following correctly defines the aftertax salvage value of
that machine? (T represents the relevant tax rate)
A.
Sale price + (Sales price - Book value) × T
B.
Sale price + (Sales price - Book value) × (1 - T)
C.
Sale price + (Book value - Sale price) × T
D.
Sale price + (Book value - Sale price) × (1 - T)
8.
When a firm
suffers losses, it is ethical for managers to use the reserve funds to cover the
operating expenses to reduce losses.
A. True
B. False

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