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Stump Storage Co. is expecting to generate after-tax income of $155,708, $159,312, and $161,112 for each of the next three years. The equipment used will have an average book value of $251,575 over that period. What is the ARR? (Do not round intermediate computations. Round final answer to one decimal place.)


A) 65.7%
B) 69.4%
C) 63.1%
D) 66.8%

Correct Answer

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When evaluating two projects that require different outlays, the IRR does not recognize the difference in the size of the investments.

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Which one of the following statements is NOT true?


A) Accepting a positive-NPV project increases shareholder wealth.
B) Accepting a negative-NPV project has no impact on shareholder wealth.
C) Accepting a negative-NPV project decreases shareholder wealth.
D) Managers are indifferent about accepting or rejecting a zero NPV project.

Correct Answer

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Jamaica Corp. is adding a new assembly line at a cost of $8.5 million. The firm expects the project to generate cash flows of $2 million, $3 million, $4 million, and $5 million over the next four years. Its cost of capital is 16 percent. What is the net present value of this project? (Do not round intermediate computations. Round final answer to nearest dollar.)


A) $645,366
B) $1,213,909
C) $905,888
D) $777,713

Correct Answer

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Which of the following cash flow patterns is NOT an unconventional cash flow pattern?


A) A positive initial cash flow is followed by negative future cash flows.
B) A cash flow pattern in which there are alternate inflows and outflows.
C) A negative initial cash flow is followed by positive future cash flows.
D) A cash flow stream looks similar to a conventional cash flow stream except for a final negative cash flow.

Correct Answer

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Which of the following is NOT true about capital budgeting?


A) It involves identifying projects that will add to a firm's value.
B) It involves investing large capital.
C) It allows a firm to reverse the decision of large capital investments at any time.
D) It allows a firm's management to analyze potential business opportunities and decide on which ones to undertake.

Correct Answer

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Signet Pipeline Co. is looking to install new equipment that will cost $2,750,000. The cash flows expected from the project are $612,335, $891,005, $1,132,000, and $1,412,500 for the next four years. What is Signet's internal rate of return? (Do not round intermediate computations. Round final answer to the nearest percent.)


A) 11%
B) 13%
C) 15%
D) 17%

Correct Answer

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Carmen Electronics bought new machinery for $5 million. This is expected to result in additional cash flows of $1.2 million over the next seven years. What is the payback period for this project? If its acceptance period is five years, will this project be accepted? (Round your answer to two decimal places.)


A) 4.17 years; yes
B) 4.17 years; no
C) 3.83 years; yes
D) 3.83 years; no

Correct Answer

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Which of the following is an advantage of the payback method?


A) The technique is simple for managers to compute and interpret.
B) It is a good measure of liquidity risk.
C) Both a and b
D) None of the above

Correct Answer

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