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Exam 8: Net Present Value and Other Investment Criteria

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Question 41

Multiple Choice

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Which one of the following is generally considered to be the best form of analysis if you have to select a single method to analyze a variety of investment opportunities?

A) Payback
B) Profitability index
C) Accounting rate of return
D) Internal rate of return
E) Net present value

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Question 42

Multiple Choice

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The Budget Place is considering opening a new store at a start up cost of $700,000. The initial investment will be depreciated straight line to zero over the 15-year life of the project. What is the average accounting rate of return?

A) 13.05 percent
B) 13.68 percent
C) 14.01 percent
D) 14.59 percent
E) 14.76 percent

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Question 43

Multiple Choice

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Soft and Cuddly is considering a new toy that will produce the following cash flows. Should the company produce this toy if the firm requires a 15 percent rate of return?

Which one of the following statements is correct?

Which one of the following analytical methods is based on net income?

Which one of the following methods of analysis ignores cash flows?

Which one of the following can be defined as a benefit-cost ratio?

Which one of the following is true if the managers of a firm only accept projects that have a profitability index greater than 1.5?

Which one of the following statements is correct?

Lester's Feed Mill is spending $230,000 to update its facility. The company estimates that this investment will improve its cash inflows by $46,500 a year for 10 years. What is the payback period?

The payback period is the length of time it takes an investment to generate sufficient cash flows to enable the project to:

Which one of the following indicators offers the best assurance that a project will produce value for its owners?

You're trying to determine whether or not to expand your business by building a new manufacturing plant. The plant has an installation cost of $26 million, which will be depreciated straight-line to zero over its three-year life. If the plant has projected net income of $2,348,000, $2,680,000, and $1,920,000 over these three years, what is the project's average accounting return (AAR) ?

What is the net present value of a project that has an initial cost of $40,000 and produces cash inflows of $8,000 a year for 11 years if the discount rate is 15 percent?

The average net income of a project divided by the project's average book value is referred to as the project's:

Which one of the following methods of analysis is most appropriate to use when two investments are mutually exclusive?

Charles Henri is considering investing $36,000 in a project that is expected to provide him with cash inflows of $12,000 in each of the first two years and $18,000 for the following year. At a discount rate of zero percent this investment has a net present value of _____, but at the relevant discount rate of 17 percent the project's net present value is _____.

Which one of the following indicates that a project is definitely acceptable?

The Auto Shop is buying some new equipment at a cost of $218,900. This equipment will be depreciated on a straight line basis to a zero book value its 8-year life. The equipment is expected to generate net income of $36,000 a year for the first four years and $22,000 a year for the last four years. What is the average accounting rate of return?

The Blue Goose is considering a project with an initial cost of $42,700. The project will produce cash inflows of $8,000 a year for the first two years and $12,000 a year for the following three years. What is the payback period?