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Exam 9: Net Present Value and Other Investment Criteria

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Question 51

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An investment project has an installed cost of $518,297.The cash flows over the 4-year life of the investment are projected to be $287,636,$203,496,$103,802,and $92,556,respectively.What is the NPV of this project if the discount rate is zero percent?

A) $47,306
B) $72,418
C) $91,110
D) $128,415
E) $169,193

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Question 52

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Kristi wants to start training her most junior assistant,Amy,in the art of project analysis.Amy has just started college and has no experience or background in business finance.To get her started,Kristi is going to assign the responsibility for all projects that have initial costs less than $1,000 to Amy to analyze.Which method is Kristi most apt to ask Amy to use in making her initial decisions?

A) discounted payback
B) profitability index
C) internal rate of return
D) payback
E) average accounting return

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Question 53

Multiple Choice

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You are considering two mutually exclusive projects with the following cash flows.Which project(s) should you accept if the discount rate is 8.5 percent? What if the discount rate is 13 percent?

Which of the following statements related to the internal rate of return (IRR) are correct? I.The IRR method of analysis can be adapted to handle non-conventional cash flows. II.The IRR that causes the net present value of the differences between two project's cash flows to equal zero is called the crossover rate. III.The IRR tends to be used more than net present value simply because its results are easier to comprehend. IV.Both the timing and the amount of a project's cash flows affect the value of the project's IRR.

You are considering two independent projects both of which have been assigned a discount rate of 15 percent.Based on the profitability index,what is your recommendation concerning these projects?

Which one of the following will decrease the net present value of a project?

The Chandler Group wants to set up a private cemetery business.According to the CFO,Barry M.Deep,business is "looking up".As a result,the cemetery project will provide a net cash inflow of $57,000 for the firm during the first year,and the cash flows are projected to grow at a rate of 7 percent per year forever.The project requires an initial investment of $759,000.The firm requires a 14 percent return on such undertakings.The company is somewhat unsure about the assumption of a 7 percent growth rate in its cash flows.At what constant rate of growth would the company just break even?

Sheakley Industries is considering expanding its current line of business and has developed the following expected cash flows for the project.Should this project be accepted based on the discounting approach to the modified internal rate of return if the discount rate is 13.4 percent? Why or why not?

Rossiter Restaurants is analyzing a project that requires $180,000 of fixed assets.When the project ends,those assets are expected to have an aftertax salvage value of $45,000.How is the $45,000 salvage value handled when computing the net present value of the project?

Applying the discounted payback decision rule to all projects may cause:

Douglass Interiors is considering two mutually exclusive projects and have determined that the crossover rate for these projects is 11.7 percent.Project A has an internal rate of return (IRR) of 15.3 percent and Project B has an IRR of 16.5 percent.Given this information,which one of the following statements is correct?

Tedder Mining has analyzed a proposed expansion project and determined that the internal rate of return is lower than the firm desires.Which one of the following changes to the project would be most expected to increase the project's internal rate of return?

You are considering an investment with the following cash flows.If the required rate of return for this investment is 15.5 percent,should you accept the investment based solely on the internal rate of return rule? Why or why not?

Motor City Productions sells original automotive art on a prepaid basis as each piece is uniquely designed to the customer's specifications.For one project,the cash flows are estimated as follows.Based on the internal rate of return (IRR) ,should this project be accepted if the required return is 9 percent?

You are considering the following two mutually exclusive projects.Both projects will be depreciated using straight-line depreciation to a zero book value over the life of the project.Neither project has any salvage value. Should you accept or reject these projects based on the average accounting return?

If a project has a net present value equal to zero,then:

You are considering the following two mutually exclusive projects.Both projects will be depreciated using straight-line depreciation to a zero book value over the life of the project.Neither project has any salvage value. Should you accept or reject these projects based on payback analysis?

The Green Fiddle is considering a project that will produce sales of $87,000 a year for the next 4 years.The profit margin is estimated at 6 percent.The project will cost $90,000 and will be depreciated straight-line to a book value of zero over the life of the project.The firm has a required accounting return of 11 percent.This project should be _____ because the AAR is _____ percent.

Which one of the following statements would generally be considered as accurate given independent projects with conventional cash flows?

J&J Enterprises is considering an investment that will cost $318,000.The investment produces no cash flows for the first year.In the second year,the cash inflow is $47,000.This inflow will increase to $198,000 and then $226,000 for the following two years,respectively,before ceasing permanently.The firm requires a 15.5 percent rate of return and has a required discounted payback period of three years.Should the project be accepted? Why or why not?