Exam 6: Net Present Value and Other Investment Rules

An investment with an initial cost of £15,000 produces cash flows of £5,000 annually for 5 years.If the cash flow is evenly spread out over the year and the firm can borrow at 10%, the discounted Payback period is _____ years.

You are considering a project with an initial cost of £4,300.What is the payback period for this project if the cash inflows are £550, £970, £2,600, and £500 a year over the next four years, Respectively.

The Walker Landscaping Company can purchase a piece of equipment for £3,600.The asset has a two-year life, will produce a cash flow of £600 in the first year and £4,200 in the second year.The interest rate is 15%.Calculate the project's payback assuming steady cash flows.Also calculate the project's IRR.Should the project be taken? Check your answer by computing the project's NPV.

Which one of the following is the best example of two mutually exclusive projects?

A project has an initial cost of £1,900.The cash inflows are £0, £500, £900, and £700 over the next four years, respectively.What is the payback period?

In actual practice, managers may use the: I.AAR because the necessary accounting numbers are readily available. II)IRR because the results are easy to communicate and understand. III)payback because of its simplicity. IV)net present value because it is considered by many to be the best method of analysis.

You would like to invest in the following project. Year Cash Flow 0 -£55,000 1 £30,000 2 £37,000 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:

The two fatal flaws of the internal rate of return rule are:

You are considering the following two mutually exclusive projects. Both projects will be depreciated using straight-line depreciation to a zero book value over the life of the project. Neither proiect has any salvaqe value. Year Project A Project B 0 -£75,000 -£70,000 1 £19,000 £10,000 2 £48,000 £16,000 3 £12,000 £72,000 Project A Project B Required rate of return 10\% 13\% Required payback period 2.0 years 2.0 years Required accounting return 8\% 11\% Based upon the internal rate of return (IRR) and the information provided in the problem, you should:

Which of the following does not characterize NPV?

Given the goals of firm value and shareholder wealth maximization, we have stressed the importance of net present value (NPV).And yet, many financial decision-makers at some of the most prominent firms in the world continue to use less desirable measures such as the payback period and the average accounting return (AAR).Why do you think this is the case?

The discounted payback period rule:

Given that the net present value (NPV) is generally considered to be the best method of analysis, why should you still use the other methods?

You are considering the following two mutually exclusive projects. 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. Year Project A Project B 0 £75,000 £70,000 1 £19,000 £10,000 2 £48,000 £16,000 3 £12,000 £72,000 Project A Project B Required rate of return 10\% 13\% Required payback period 2.0 years 2.0 years Required accounting return 8\% 11\% Based upon the profitability index (PI) and the information provided in the problem, you should:

The advantages of the payback method of project analysis include the: I.application of a discount rate to each separate cash flow. II)bias towards liquidity. III)ease of use. IV)arbitrary cut-off point.

No matter how many forms of investment analysis you do:

Explain the differences and similarities between net present value (NPV) and the profitability index (PI).

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?

The Ziggy Trim and Cut Company can purchase equipment on sale for £4,300.The asset has a three-year life, will produce a cash flow of £1,200 in the first and second year, and £3,000 in the third year.The interest rate is 12%.Calculate the project's payback.Also, calculate project's IRR. Should the project be taken? Check your answer by computing the project's NPV.

All else equal, the payback period for a project will decrease whenever the: