Exam 9: Net Present Value and Other Investment Criteria

Draw a graph that illustrates two mutually exclusive investments, A and B, with a crossover rate of return equal to 10%, and with A having the higher NPV at a discount rate of zero %. Explain the graph, including under which conditions project A or project B would be chosen using NPV and then using IRR.

The length of time required for an investment to generate cash flows sufficient to recover the initial cost of the investment is called the:

A project will produce cash inflows of $3,650 a year for four years. The start-up costs are $15,000. In year five, the project will be closed and as a result should produce a cash inflow of $7,500. What is the net present value of this project if the required rate of return is 11.5 %?

A project is expected to produce cash inflows of $6,500 for three years. What is the maximum amount that can be spent on costs to initiate this project and still consider the project as acceptable, given an 11% discount rate?

Corey is considering two projects both of which have an initial cost of $20,000 and total cash inflows of $25,000. The cash inflows of project A are $3,000, $5,000, $8,000, and $9,000 over the next four years, respectively. The cash inflows for project B are $9,000, $8,000, $5,000, and $3,000 over the next four years, respectively. Which one of the following statements is correct if Corey requires a 10 % rate of return and has a required discounted payback period of 3 years?

The Commodore Co. is trying to decide between the following two mutually exclusive projects: The only requirement the company has is that any project that is accepted must produce a minimum rate of return of 11%. What should the company do and why?

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. Based upon the internal rate of return (IRR) and the information provided in the problem, you should:

An advantage of the payback method is its:

The discounted payback rule may cause:

If a firm uses the _____________ as an investment criterion, one of the risks it takes is that it may ignore some future cash flows.

Martin is analyzing a project and has gathered the following data. Based on this data, what is the average accounting rate of return? The firm depreciates its assets using straight-line depreciation to a zero book value over the life of the asset.

The internal rate of return should:

AAR and payback use an arbitrary cutoff number in their decision rules.

Which of the following decision rules is best for evaluating projects for which cash flows beyond a specified point in time, and the time value of money, can both be ignored?

All else equal, the payback period for a project will decrease whenever the:

You are analyzing a project and have prepared the following data: Based on the payback period of _____ years for this project, you should _____ the project.

A project has an initial investment of $10,000, with $3,500 annual inflows for each of the subsequent four years. If the required return is 15%, what is the NPV?

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. Based upon the payback period and the information provided in the problem, you should:

A project has an initial cash outlay of $29,500. Cash inflows are estimated at $1,200, $6,900, $7,800, $9,500, and $4,800 for years 1 through 5, respectively. What is the net present value of this project given a 7% discount rate?

Payback is frequently used to analyze independent projects because: