Exam 6: Net Present Value and Other Investment Rules

The internal rate of return (IRR): I.rule states that a typical investment project with an IRR that is less than the required rate should Be accepted. II)is the rate generated solely by the cash flows of an investment. III)is the rate that causes the net present value of a project to exactly equal zero. IV)can effectively be used to analyze all investment scenarios.

The discounted payback rule states that you should accept projects:

If a project has a net present value equal to zero, then: I.the present value of the cash inflows exceeds the initial cost of the project. II)the project produces a rate of return that just equals the rate required to accept the project. III)the project is expected to produce only the minimally required cash inflows. IV)any delay in receiving the projected cash inflows will cause the project to have a negative net.

An investment is acceptable if its IRR:

An investment is acceptable if the profitability index (PI) of the investment is:

You are considering the following two mutually exclusive projects that will not be repeated. The required rate of return is $11.25 \%$ for project $A$ and $10.75 \%$ for project $B$ . Which project should you accept and why?

You are considering two independent projects with the following cash flows. The required return for both projects is $10 \%$ . Given this information, which one of the following statements is correct?

An investment's average net income divided by its average book value defines the average:

An investment is acceptable if its average accounting return (AAR):

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 on the net present value method of analysis and given the information in the problem, you should: