Exam 9: Net Present Value and Other Investment Criteria

Suppose a firm invests $600 in a project. The initial cost is depreciated straight-line to zero over 3 years. Net income from the project is $100, $125, and $140 in each of the three years of the project's life. What is the average accounting return?

The advantages of the payback method of project analysis include the bias towards liquidity.

The possibility that more than one discount rate will make the NPV of an investment zero is called the ___________ problem.

If financial managers only invest in projects that have a profitability index greater than one, then firm value will be maximized.

You are considering a project with an initial cost of $27,900. What is the payback period for this project if the cash inflows are $14,650, $16,190, $12,480, and $9,500 a year over the next four years, respectively?

Which one of the following is the primary advantage of the payback method of analysis?

Without using formulas, provide a definition of net present value profile.

Floyd Clymer is the CFO of Bonavista Mustang, a manufacturer of parts for classic automobiles. Floyd is considering the purchase of a two-ton press which will allow the firm to stamp out auto fenders. The equipment costs $250,000. The project is expected to produce after-tax cash flows of $60,000 the first year, and increase by $10,000 annually; the after-tax cash flow in year 5 will reach $100,000. Liquidation of the equipment will net the firm $10,000 in cash at the end of five years, making the total cash flow in year five $110,000. Assume the required return is 15%. What is the project's discounted payback period?

You are considering an investment which has the following cash flows. If you require a four year payback period, should you take the investment?

The essence of _________________ is determining whether a proposed investment or project will generate positive wealth for the owners of the firm once it is in place.

Net present value is affected by the timing of each and every cash flow related to a project.

Floyd Clymer is the CFO of Bonavista Mustang, a manufacturer of parts for classic automobiles. Floyd is considering the purchase of a two-ton press which will allow the firm to stamp out auto fenders. The equipment costs $250,000. The project is expected to produce after-tax cash flows of $60,000 the first year, and increase by $10,000 annually; the after-tax cash flow in year 5 will reach $100,000. Liquidation of the equipment will net the firm $10,000 in cash at the end of five years, making the total cash flow in year five $110,000. Assuming a required return is 15%, what is the project's profitability index?

The profitability index is closely related to:

You are considering two independent projects both of which have been assigned a discount rate of 9 %. Based on the profitability index, what is your recommendation concerning these projects?

If financial managers only invest in projects that have a profitability index greater than one, then shareholder wealth will be maximized.

Jack is considering adding work jeans and T-shirts to the items he stocks in his general store provided that his payback period is less than 2.5 years. He estimates that the initial cost of inventory will be $6,750. The remodeling expenses required for this addition are $18,200. Jean and T-shirt sales are expected to produce net cash inflows of $10,200, $14,500, and $16,600 over the next three years, respectively. Jack _____ add the jeans and T-shirts to his offerings as the payback period is _____ years.

An investment has the following cash flows. Should the project be accepted if it has been assigned a required return of 9.5 %? Why or why not?

The internal rate of return (IRR) is the rate generated solely by the cash flows of an investment.

Net present value is highly independent of the rate of return assigned to a particular project.

According to the text, the NPV rule states that "An investment should be accepted if the NPV is positive and rejected if it is negative." What does an NPV of zero mean? If you were a decision-maker faced with a project with a zero NPV (or very close to zero) what would you do? Why?