Exam 13: Fundamentals of Project Evaluation

Spot Corporation has decided to undertake a capital project that has a useful life of eight years and estimated annual net cash inflows of $28,500. At a discount rate of 10 percent, what is the present value of the eight-year receipts stream?

A project has an anticipated stream of annual net receipts of $20,000. Its life is 6 years. No salvage value is expected at the end of the 6 years. Compute the net present value of the project, if its price is $80,000 and the applicable discount rate is 10%.

The Flat Tile Company is contemplating an investment in a new 2500 pound per square inch press. The estimate of the project's price is $250,000. The press will have a life of 8 years and have a salvage value of $25,000. Annual net cash flows from the eight years of operations are expected to be $45,000. If Flat's applicable discount rate is 12%, is the project acceptable? Why or why not?

An annuity is a variable amount payable at the beginning of each year for an indeterminate number of years.

The net cash flow of a project is equal to any increase in revenues brought about by the project less any increase in operating expenses and depreciation brought about by the project, multiplied by 1 - T), where T is the firm's marginal income tax rate, plus the incremental depreciation associated with the project.

The net cash flow of a project is equal to any increase in revenues brought about by the project less any increase in operating expenses and depreciation brought about by the project, multiplied by 1 - T), where T is the firm's marginal income tax rate.

A project should be accepted as long as the present value of the expected net receipts it generates is less than its price the net outlay required).

Capital budgeting is:

Afterthought Construction Co. is about to sell some used equipment to ABC Leasing. ABC has offered the following two payment schemes: a) $50,000 now and $200,000 at the end of seven years or b) $50,000 now, $50,000 at the end of two years, $50,000 at the end of five years, and $150,000 at the end of ten years. If the applicable discount rate for either transaction is 8%, the better payment scheme is scheme a).

The process of computing the value of a current sum of money at some future date is called:

An annuity is a constant amount payable at the end of each year for a specified number of years.

In determining the price or initial cash outlay of a project, it is necessary to consider the following items:

Pave-It, Inc. is trying to decide whether to purchase a new paving machine, a new mixer or to upgrade the cement finishing machine. All of the alternatives are viewed as having the same ten year project life and none are expected to have any salvage value. However, different project prices are applicable to each and each has a different expected stream of annual net cash inflows. The firm's managers believe that a discount rate of 12 percent is appropriate for evaluating the alternatives. Data are as follows: Annual Project Price Net Inflows After examining the project prices, management finds it has sufficient capital budget to complete two of them. Which two projects will be undertaken and what is their net present value?

Pronto Delivery is contemplating an investment in a delivery truck. The estimate of the project's price is $22,000. The delivery truck will have a life of 5 years and have a salvage value of $2,000. Annual net cash flows from the five years of operations are expected to be $6,000. If Pronto's applicable discount rate is 10%, what is the net present value of this project? Is the project acceptable?

Discounting is the process of computing the value of a current sum of money at some future date.

A project has an anticipated stream of annual net receipts of $1,000. Its life is 12 years. No salvage value is expected. If the project's price is $6,000 and the applicable discount rate is 12%, the net present value of the project is $194.40.

A project has an anticipated stream of annual net receipts of $20,000. Its life is 6 years. No salvage value is expected at the end of the 6 years. Compute the net present value of the project, if its price is $80,000 and the applicable discount rate is 12%.

The internal rate of return IRR) for a project is the discount rate that will result in a net present value of zero for the project.

The present value of a future payment or series of payments represents the amount received today that would be equivalent in value to the future payment or payments.

An investment project is acceptable if its NPV is greater than or equal to zero.