FIN 575 Final Exam 2017 Answers | FIN/575 Project Budget and Finance
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25. What is the primary weakness commonly associated with the use of the payback<br />
method to evaluate a proposed investment?<br />
• This approach fails to take into account the time factor in the time value of money.<br />
• The payback method uses the discounted cash flow process.<br />
• The payback method is able to recognize cash flows that occur after the payback<br />
period.<br />
• The payback method is not appropriate for evaluating small projects.<br />
26. Fijisawa, Inc. is considering a major expansion of its product line <strong>and</strong> has estimated<br />
the following free cash flows associated with such an expansion. The initial outlay<br />
associated with the expansion would be $1,950,000, <strong>and</strong> the project would generate free<br />
cash flows of $450,000 per year for 6 years. The appropriate required rate of return is 9%.<br />
Calculate the net present value <strong>and</strong> the internal rate of return.<br />
• NPV=$66,098, IRR=10.5<br />
• NPV=$72,097, IRR=9.5<br />
• NPV=$68,663, IRR=10.2<br />
• NPV=$69,368, IRR=10
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