Exam 9: Net Present Value and Other Investment Criteria

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 NPV of the project.

The profitability index is closely related to:

The present value of an investment's future cash flows divided by its initial cost is the:

The net present value of a project will increase when the:

Bill plans to open a do-it-yourself dog bathing center in a storefront. The bathing equipment will cost $160,000. Bill expects the after-tax cash inflows to be $40,000 annually for seven years, after Which he plans to scrap the equipment and retire to the beaches of Jamaica. Assume the required return is 10%. What is the project's NPV?

The NPV method quickly determines the discount rate that changes an accept decision into a reject decision and vice versa.

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

A project costs $475 and has cash flows of $100 for the first three years and $75 in each of the project's last five years. What is the payback period of the project?

The internal rate of return method of analysis should not be used to analyze projects with conventional cash flows.

The IRR method can produce multiple rates of return if the cash flows are nonconventional.

Capital budgeting decisions generally:

The use of the internal rate of return could lead to incorrect decisions in comparing mutually exclusive investments.

A four-year project has an initial outlay of $100,000. The future cash inflows from its project are $50,000 for years one and two and $40,000 for years three and four. Given a discount rate of 10%, Will the project be accepted?

Explain why the internal rate of return (IRR) is so useful to decision makers when analyzing an independent project.

An investment has the following cash flows. Should the project be accepted if it has been assigned a required return of 9.5 percent? Why or why not?

The present value created per dollar invested is called the:

Floyd Clymer is the CFO of Bonavista Mustang, a manufacturer of parts for classic automobiles. Floyd is considering the purchase of a two-ton press which will allow the firm to stamp out auto Fenders. The equipment costs $250,000. The project is expected to produce after-tax cash flows of $60,000 the first year, and increase by $10,000 annually; the after-tax cash flow in year 5 will reach $100,000. Liquidation of the equipment will net the firm $10,000 in cash at the end of five years, Making the total cash flow in year five $110,000. Assume the required return is 15%. What is the project's discounted payback period?

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

Which of the following decision rules has the advantage that the information needed for the calculation is readily available?

Based on the payback rule, which of the following is false?