Exam 9: Net Present Value and Other Investment Criteria

The internal rate of return for a project will increase if:

Compare and contrast the advantages and disadvantages of both the payback and the discounted payback methods of analysis.

A firm seeks to accept projects with a high degree of liquidity, avoid the higher forecasting error associated with cash flows occurring in the distant future, and avoid projects that require a large amount of research and development expenses. This firm may be justified in using the ____________ to evaluate its projects.

For a project with conventional cash flows, if NPV is greater than zero, then:

All else constant, the net present value of a project increases when:

Your firm needs to buy a metal stamping press. The CFO presents you with two analyses: one for a press that is automated, requiring little labour to operate, and another that is manual, requiring a significant amount of labour. This is an example of a decision involving ______________.

Ranking conflicts can arise if one relies on IRR instead of NPV when:

Without using formulas, provide a definition of profitability index (PI).

Project A has a five-year life and an initial cost of $2,000 and annual cash flows of $700 per year. Project B also has a five-year life and an initial cost of $3,000 with annual cash flows of $950 per year. Given this information, calculate the NPV that the IRR cross-over rate provides.

Jinny's Ice Cream is considering opening a new outlet for a period of three years. The up-front costs are $288,000. The outlet is expected to earn net income of $31,500 a year. What is the expected average accounting rate of return on this venture?

A project has an initial cost of $72,500. The cash inflows are $11,500, $36,900, $22,900, and $18,200 over the next four years, respectively. What is the payback period?

Monika's Café wants to expand its dining area and is considering two alternatives. Alternative 1 converts the existing dining area into a buffet line and then builds a new dining area. Alternative 2 builds a new dining area and remodels the current dining area so that one expansive area is created. This is an example of:

What is the profitability index of the following investment if the required return = 14%?

How does the net present value method of analysis help managers adhere to the primary objective of creating shareholder wealth?

The Blue Moon is considering a project which will produce sales of $120,000 a year for the next five years. The profit margin is estimated at 5.5 %. The project will cost $140,000 and will be depreciated straight-line to a book value of zero over the life of the project. The firm has a required accounting return of 9.5 %. This project should be _____ because the AAR is _____ %.

A 50- year project has a cost of $500,000 and has annual cash flows of $100,000 in years 1-25, and $200,000 in years 26-50. The company's required rate is 8%. Given this information, calculate the profitability index of the project.

Average accounting return is defined as:

If a project has a net present value equal to zero, then the project is expected to produce only the minimally required cash inflows.

Peter is considering a project with an initial cost of $42,000 and annual cash inflows of $9,100 a year for six years. What discount rate, when applied to this project, will produce a profitability index of 1.0?

Roger is considering adding toys to his general store. He estimates that the cost of inventory will be $6,400. The remodeling expenses and shelving costs are estimated at $2,100. Toy sales are expected to produce net cash inflows of $1,400, $2,300, $3,100, and $2,000 over the next four years, respectively. Should Roger add toys to his store if he assigns a three-year payback period to this project? Why or why not?