Reading 6: Discounted Cash Flow Applications - LOS a, (Par following, required, manager, return, white

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Q4. The financial manager at IBFM, a farm implement distributor, is contemplating the following three mutually exclusive projects. IBFM’s required rate of return is 9.5%. Based on the information provided, which should the financial manager select and why?

Project      Investment at t = 0     Cash Flow at t = 1     IRR  NPV @ 9.5%

A     $10,000     $11,300    13.00        $320

B     $25,000     $29,000    16.00        $1,484

C     $35,000     $40,250    15.00        $1,758

A)   Project A with the lowest initial investment.

B)   Project C with the highest net present value.

C)   All of the projects, because they all earn more than 9.5%.

Q5. Financial managers should always select the project that provides the highest net present value (NPV) whenever NPV and IRR methods conflict, because maximizing:

A)   shareholder wealth is the goal of financial management.

B)   the shareholders' rate of return is the goal of financial management.

C)   revenues is the goal of financial management.

Q6. The financial manager at Johnson & Smith estimates that its required rate of return is 11%. Which of the following independent projects should Johnson & Smith accept?

A)   Project A requires an up-front expenditure of $1,000,000 and generates an NPV of -$4,600.

B)   Project B requires an up-front expenditure of $800,000 and generates a positive IRR of 10.5%.

C)   Project C requires an up-front expenditure of $600,000 and generates a positive internal rate of return of 12.0%.

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