Exam 9: Net Present Value and Other Investment Criteria

Freeley Co. is considering an expansion project costing $390,000 up front. The expansion is expected to produce cash flows of $120,000 a year for two years. In Year 3, the project is expected To produce a cash flow of $225,000. The expected return on this expansion project is:

A project is accepted if the target AAR exceeds the project AAR.

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

What is the payback period of a $40,000 investment with the following cash flows?

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

A project is expected to produce cash inflows of $6,500 for three years. What is the maximum amount that can be spent on costs to initiate this project and still consider the project as Acceptable, given an 11% discount rate?

Both net present value and the internal rate of return incorporate the same data and utilize the same time value of money theory in their computations. Given this, why is net present value considered to be a superior measure when making capital budgeting decisions?

An advantage of the payback method is its:

The possibility that more than one discount rate will make the NPV of an investment zero is called the ___________ problem.

A disadvantage with the average accounting return is the accounting basis of the values used in the computation.

When two projects both require the total use of the same limited economic resource, the projects are generally considered to be:

Which capital investment evaluation technique is described by the following characteristics? (1) Easy to understand and communicate; (2) May result in multiple answers; (3) May lead to incorrect Decisions when applied to mutually exclusive investments.

The Winston Co. is considering two mutually exclusive projects with the following cash flows. The crossover rate is _____ and if the required rate is higher than the crossover rate then project _____ Should be accepted.

Average accounting return is defined as:

An element of the IRR concept is the rate designated as the minimum acceptable rate for a project to be accepted

Shawn's Health Care is considering a project which will produce sales of $1.7 million a year for the next ten years. The profit margin is estimated at 8 percent. The project will cost $2.9 million and will Be depreciated straight-line to a zero book value over the life of the project. Shawn's has a required Accounting return of 9 percent. This project should be _____ because the AAR is _____.

Average accounting return employs some sort of arbitrary value against which the project measurement must be compared when determining whether to accept or reject a project.

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 _____ Project A and _____ Project B based on the payback period of each project.

The Jensen Company has compiled the following information about a project it is considering. What is the average accounting rate of return on this project?

A project has an initial cash outlay of $16,500. Cash inflows are $5,200 in year 1, $6,800 in year 2, and $8,100 in year 3. What is the net present value if an 8.30% discount rate is applied to this Project?