Exam 13: Fundamentals of Project Evaluation

The present value of a future payment or series of payments represents the amount that would be accumulated at some future date if we invested that sum of money now at a particular rate of interest.

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

The net present value NPV) of an investment is the present value of its net cash inflows.

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%.

A project has an anticipated stream of annual net receipts of $25,000. Its life is 10 years. No salvage value is expected at the end of the 10 years. Compute the net present value of the project, if its price is $150,000 and the applicable discount rate is 9%.

Compounding is the process of computing the present value of sums of money to be received in the future.

Highways, Inc. is trying to decide whether to purchase a new pavement melting machine, purchase a new mobile cement mixer or to computerize its entire estimating, ordering and inventory system. 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 9 percent is appropriate for evaluating the alternatives. Data are as follows: After examining the project prices, management finds it has sufficient capital budget to complete two of them. Assuming that the cash inflows from the project are independent of one another, which two projects should be undertaken?

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. If the price of the project is $80,000 and the applicable discount rate is 10%, the net present value of the project is $7,106.

The marginal cost of capital MCC) is the discount rate which represents the marginal cost of investment funds to the firm, and is calculated as a weighted average of the after-tax cost of funds from each source.

The analysis of alternative investment opportunities by a firm is the focus of:

The discount rate is the rate of interest used to compute present value.

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 9%.