Question :
Thompson Manufacturing
Thompson Manufacturing considering two investment proposals. The first involves : 1325700
Thompson Manufacturing
Thompson Manufacturing is considering two investment proposals. The first involves a quality improvement project, and the second is about an advertising campaign. The cash flows associated with each project appear below.
Quality
ImprovementAdvertising
Campaign
Initial cash outflow$100,000$100,000
Cash Inflows
Year 110,00080,000
Year 230,00045,000
Year 3125,00010,000
28.Refer to Tompson Manufacturing. Suppose the hurdle rate of the firm is 10%. Calculate the cash flows of the “incremental project” by subtracting the cash flows of the second project from the cash flows of the first project. What is the IRR of the incremental project?
a.20.7%
b.23.1%
c.17.9%
d.10.0%
29.Refer to Tompson Manufacturing. Suppose the hurdle rate of the firm is 10%. If the two projects are mutually exclusive, which project should be chosen? What is the problem that the firm should be concerned with in making this decision?
a.Quality improvement project; project scales
b.Advertising campaign; project scales
c.Quality improvement project; the timing of cash flows
d.Advertising campaign; the timing of cash flows
e.Advertising campaign; discount rate
30.An entrepreneur is offered a service contract that will cost him $600,000 initially. The contract has a 5 years of life and will generate an after tax cash inflow of $160,000 per year. The cost of capital of this project is 12%. What’s the NPV of the project? Should the entrepreneur accept the contract?
a.-$23,236; reject
b.$23,236; accept
c.-$20,746; reject
d.$576,764; reject
e.$41,050; accept
31.The following information is given on three mutually exclusive projects. Assume a cost of capital of 15%. Which project has the highest PI?
Project 1Project 2Project 3
Cash flow
Year 0-$400,000-$500,000-$1,000,000
Year 1200,000300,000500,000
Year 2300,000300,000700,000
Year 3300,000350,000700,000
a.Project 1
b.Project 2
c.Project 3
d.All projects
32.You are provided with the following data on two mutually exclusive projects. The cost of capital is 15%.
Project 1Project 2
Initial cash outflow-$5,000-$1,000
Year 1 cash inflow$5,000$1,000
Year 2 cash inflow$2,500$ 850
NPV$1,238$ 512
PI1.251.51
Which project should you accept? What is the problem that you should be concerned with in making this decision?
a.Project 1; the timing of cash flows
b.Project 2; the timing of cash flows
c.Project 1; project scale
d.Project 2; project scale
33.The profitability index is most useful
a.when the NPV method and the IRR method give conflicting signals on mutually exclusive projects
b.in capital rationing situations
c.when the cash flow pattern is unusual
d.when project scales are of concern
34.You have a $1 million capital budget and must make the decision about which investments your firm should undertake for the coming year. There are three projects available and the cash flows of each project appear below. Assume a cost of capital of 12%. Which project or projects do you select?
Project 1Project 2Project 3
Cash flow
Year 0-$400,000-$500,000-$1,000,000
Year 1200,000300,000500,000
Year 2300,000350,000700,000
Year 3300,000350,000700,000
a.Project 1
b.Project 2
c.Project 3
d.Project 1 & Project 2
35.You must know the discount rate of an investment project to compute its
a.NPV, IRR, PI, and discount payback period
b.NPV, PI, discount payback period
c.NPV, PI, IRR
d.NPV, accounting rate of return, PI, discount payback period
36.You must know all the cash flows of an investment project to compute its
a.NPV, IRR, PI, and discount payback period
b.NPV, IRR, PI, payback period, and discount payback period,
c.NPV, PI, IRR
d.NPV, accounting rate of return, IRR, PI
