Exam 9: Net Present Value and Other Investment Criteria

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?

The payback period is defined as the length of time it requires for an investment to generate sufficient cash flows to recoup:

What is the discounted payback of the following project if the required return is 14%?

A firm that only accepts projects for which the IRR is equal to the firm's required return will, on average, neither create nor destroy wealth for its shareholders.

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

Would you accept a project which is expected to pay $10,000 a year for seven years if the initial investment is $40,000 and your required return is 15%?

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

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 _______________.

The process of valuing an investment by determining the present value of its future cash flows is called (the):

You would like to invest in the following project. 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 percent discount rate to all cash flows. Based on these criteria, you should:

Corey is considering two projects both of which have an initial cost of $20,000 and total cash inflows of $25,000. The cash inflows of project A are $3,000, $5,000, $8,000, and $9,000 over the Next four years, respectively. The cash inflows for project B are $9,000, $8,000, $5,000, and $3,000 over the next four years, respectively. Which one of the following statements is correct if Corey requires a 10 percent rate of return and has a required discounted payback period of 3 Years?

If a project has a net present value equal to zero, then any delay in receiving the projected cash inflows will cause the project to have a negative net present value.

Suppose a firm invests $600 in a project. The initial cost is depreciated straight-line to zero over 3 years. Net income from the project is $100, $125, and $140 in each of the three years of the Project's life. What is the average accounting return?

An increased availability of computers and financial calculators to handle the more complex computations may have contributed to the change in the primary methods used by chief financial officers to evaluate projects over the past forty years.

No matter how many forms of investment analysis you do:

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 accept Project ____ because it has the _____ profitability index of the two projects.

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

A project has a required return of 15% and a five year life. Which of the following is inconsistent with the other four?

The profitability index (PI) rule can be best stated as:

Sun, Inc. is analyzing two projects. Project A requires an initial investment of $2,200 and produces cash inflows of $500, $550, $700, and $900 respectively over four years. Project B requires an Initial investment of $2,400 and produces cash inflows of $550, $650, $700, and $1,100 Respectively over four years. What is the crossover point?