Exam 9: Net Present Value and Other Investment Criteria

Bill plans to open a do-it-yourself dog bathing center in a storefront. The bathing equipment will cost $160,000. Bill expects the after-tax cash inflows to be $40,000 annually for seven years, after which he plans to scrap the equipment and retire to the beaches of Jamaica. Assume the required return is 10%. What is the project's NPV?

The internal rate of return tends to be:

The payback method:

Without using formulas, provide a definition of discounted payback period.

If you want to review a project from a benefit-cost perspective, you should use the _____ method of analysis.

Two projects that are mutually exclusive are said to be independent.

You are considering two independent projects, both of which have been assigned a discount rate of 8 %. Based on the profitability index, what is your recommendation concerning these projects?

An investment has the following cash flows. Should the project be accepted if it has been assigned a required return of 14 %? Why or why not?

The average accounting rate of return:

A 30 year project is estimated to cost $35 million dollars and provide annual cash flows of $5 million per year in years 1-5; $4 million per year in years 6-20 and $2 million per year in years 21-30. Given this information, determine the IRR of the project.

A project should be accepted when the:

List and briefly discuss the advantages and disadvantages of the IRR rule.

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

Without using formulas, provide a definition of internal rate of return (IRR).

The average accounting return could lead to incorrect decisions when comparing mutually exclusive investments.

The following four-year project has an initial cost of $1,000,000. The future cash inflows for the next four years are $600,000, $500,000, $400,000, and $400,000, respectively. If the rate of return is 12%, determine the discounted payback period for this project.

The payback period is defined as the length of time it requires for an investment to generate sufficient cash flows to recoup:

When comparing the payback and discounted payback from a financial point of view, the discounted payback method is preferred over the payback method.

The internal rate of return (IRR) is often preferred by managers over the net present value (NPV) because the IRR:

You are considering the following two mutually exclusive projects with the following cash flows. 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. You should accept Project _____ because its internal rate of return (IRR) is _____ %.