Exam 9: Net Present Value and Other Investment Criteria

Your firm's CFO presents you with two capital budgeting analyses: one that involves buying a new delivery truck to replace the existing truck and one that involves the purchase of a three-ton metal stamping press to replace the existing press on the plant floor. This is an example of a decision involving _______________.

From a finance perspective, discounted payback is considered to be a superior method of analysis as compared to payback. Why then, is discounted payback used less frequently than payback?

Project A has a five-year life and an initial cost of $1,600 and annual cash flows of $600 per year. Project B also has a five-year life and an initial cost of $2,500 with annual cash flows of $850 per year. Given this information, calculate the NPV that the IRR cross-over rate provides.

The difference between the present value of an investment and its cost is the:

You are considering a project with the following data: Which one of the following is correct given this information?

The internal rate of return (IRR) is the rate that causes the net present value of a project to exactly equal zero.

What is the net present value of a project with the following cash flows if the required rate of return is 14 %?

The purchase of new equipment is classified as a _____ decision.

Which one of the following is a reason why managers may utilize more than one method when analyzing a project?

Bridgewater Fountains is considering expanding its current line of business and has developed the following expected cash flows for the project. Should this project be accepted based on the discounting approach to the modified internal rate of return if the discount rate is 9.6 %? Why or why not?

Yuli is analyzing the following two mutually exclusive projects and has developed the following cash flow information. What is the crossover rate?

You run a small bagel shop and are considering replacing your four employees with automated machines that allow customers to buy their bagels without any human interaction. Of the following, the most difficult task you face in computing the NPV of this change is the:

The internal rate of return method of analysis should not be used for comparing two independent projects of differing sizes.

If a project with conventional cash flows has a profitability index less than one, then:

The crossover point occurs where the IRR of two projects are equal.

A project has an initial cost of $61,000 and a 5-year life. The company uses straight-line depreciation to a zero book value over the life of the project. The projected net income from the project is $1,500, $1,600, $1,900, $2,100, and $2,200 a year for the next five years, respectively. What is the average accounting rate of return?

What is the net present value of a project that has an initial cash outflow of $21,000 and the following cash inflows? The required return is 12 %.

The profitability index will be:

A disadvantage with the average accounting return is the exclusion of time value of money considerations.

A disadvantage with the average accounting return is the difficulty in obtaining necessary information to do computation.