Exam 9: Net Present Value and Other Investment Criteria

You are considering the following projects but have limited funds to invest and can't take them all. Using the profitability index, rank the projects in the order in which you would accept them. That is, rank them from best to worst.

Annmarie is considering a project which will produce cash inflows of $1,200 a year for 6 years. The project has a 15 % required rate of return and an initial cost of $3,400. What is the discounted payback period?

What is the IRR of an investment that costs $77,500 and pays $27,500 a year for four years?

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 net present value?

_______________ is the focus of corporate finance as it is concerned with making the optimal choice between project alternatives.

Deciding which product markets to enter is a capital budgeting decision.

A project costs $12,500 to initiate. Cash flows are estimated as $2,500 a year for the first two years and $3,100 a year for the next three years. The discount rate is 11.25%. The net present value for this project is _____ and the internal rate of return is _________ the discount rate.

If a project is assigned a required rate of return equal to zero, then:

Which one of the following statements is correct concerning the payback period?

The average accounting return is defined as the:

The payback rule can be best stated as:

You would like to invest in the following project. Victoria, your boss, insists that only projects that can return at least $1.10 in today's dollars for every $1 invested can be accepted. She also insists on applying a 10 % discount rate to all cash flows. Based on these criteria, you should:

You are analyzing the following two mutually exclusive projects and have developed the following information. What is the crossover rate?

Desiree, Inc. is considering adding a new product with a start-up cost of $540,000. This cost will be depreciated over 3 years, which is the estimated life of the product. Desiree has a 34% marginal tax rate. The net income for each of the three years is estimated at $15,000, $45,000, and $80,000. What is the average accounting return for the new product?

Calculate the NPV of the following project using a discount rate of 12%: Yr 0 = -$500; Yr 1 = -$50; Yr 2 = $50; Yr 3 = $200; Yr 4 = $400; Yr 5 = $400

A project has a required return of 15% and a five year life. Which of the following is inconsistent with the other four?

The crossover point is useful when trying to determine:

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

Shawn's Health Care is considering a project which will produce sales of $1.7 million a year for the next ten years. The profit margin is estimated at 8 %. The project will cost $2.9 million and will be depreciated straight-line to a zero book value over the life of the project. Shawn's has a required accounting return of 9 %. This project should be _____ because the AAR is _____.

Project A and B have 4 year timelines. Project A has an initial investment of $100,000 and cash inflows of $60,000, $50,000 $40,000 and $40,000. Project B has an initial investment of $75,000 and cash inflows of $50,000, $40,000, $30,000 and $30,000. At what rate of interest would a company be indifferent at choosing project A or B?