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Exam 9: Net Present Value and Other Investment Criteria

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Question 1

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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

F) All of the above
G) B) and C)

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Question 2

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Roger's Meat Market is considering two independent projects.The profitability index decision rule indicates that both projects should be accepted.This result most likely does which one of the following?

A) conflicts with the results of the net present value decision rule
B) assumes the firm has sufficient funds to undertake both projects
C) agrees with the decision that would also apply if the projects were mutually exclusive
D) bases the accept/reject decision on the same variables as the average accounting return
E) fails to provide useful information as the firm must reject at least one of the projects

F) B) and E)
G) A) and C)

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Question 3

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A project has an initial cost of $27,400 and a market value of $32,600.What is the difference between these two values called?

Which two methods of project analysis were the most widely used by CEO's as of 1999?

How does the net present value (NPV)decision rule relate to the primary goal of financial management,which is creating wealth for shareholders?

You are analyzing a project and have gathered the following data: $\begin{array} { c r c } \frac { \text { Year } } { 0 } & \frac { \text { Cash flow } } { } & \\1 & - \$ 175,000 & \\2 & \$ 56,400 & \\3 & \$ 61,800 & \\4 & \$ 72,000 & \\\text { Required payback period } & 2.5 \text { years } \\\text { Required AAR } & 11.5 \text { percent } \\\text { Required return } & 14.5 \text { percent }\end{array}$ Based on the payback period of _____ years for this project,you should _____ the project.

A project has an initial cost of $32,000 and a 3-year life.The company uses straight-line depreciation to a book value of zero over the life of the project.The projected net income from the project is $1,200,$2,300,and $1,800 a year for the next 3 years,respectively.What is the average accounting return?

What is the net present value of a project that has an initial cash outflow of $34,900 and the following cash inflows? The required return is 15.35 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?

Why is payback often used as the sole method of analyzing a proposed small project?

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?

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.

Rosa's Designer Gowns creates exquisite gowns for special occasions on a prepaid basis only.The required return is 8 percent.Rosa has estimated the cash flows for one gown as follows.Should Rosa sell this gown at the price she is currently considering based on the estimated internal rate of return (IRR) ?

Which one of the following is an advantage of the average accounting return method of analysis?

Home Décor & More is considering a proposed project with the following cash flows.Should this project be accepted based on the combination approach to the modified internal rate of return if both the discount rate and the reinvestment rate are 16 percent? Why or why not? $\begin{array} { c c } \underline { \text { Year } } & { \text { Cash Flow } } \\\hline 0 & - \$ 375,000 \\1 & 133,500 \\2 & - 35,600 \\3 & 244,700 \\4 & 271,000\end{array}$

An investment has the following cash flows and a required return of 13 percent.Based on IRR,should this project be accepted? Why or why not?

Which two methods of project analysis are the most biased towards short-term projects?

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?

When the present value of the cash inflows exceeds the initial cost of a project,then the project should be:

Boston Chicken is considering two mutually exclusive projects with the following cash flows.What is the crossover rate? If the required rate of return is lower than the crossover rate,which project should be accepted? $\begin{array} { c c c } & \text { Project A } & \text { Project B } \\\frac { \text { Year } } { 0 } & \underline { \text { Cash Flow } } & \text { Cash Flow } \\1 & - \$ 50,000 & - \$ 50,000 \\2 & \$ 31,000 & \$ 42,000 \\3 & \$ 26,000 & \$ 21,000 \\& \$ 27,000 & \$ 18,000\end{array}$