Exam 9: Net Present Value and Other Investment Criteria

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 net present value?

Which capital investment evaluation technique is described by the following characteristics? (1) Easy to understand; (2) Biased towards liquidity; (3) Requires an arbitrary cutoff point; (4) Ignores the time Value of money.

The essence of _________________ is determining whether a proposed investment or project will generate positive wealth for the owners of the firm once it is in place.

The payback method:

You are to present a proposed capital investment project to your board of directors. The project has a NPV of $12,000 and an IRR of 12%. The firm's required return is 10%. You are to convey your proposal to the board in a single paragraph. Write that paragraph here. Remember, your job is to convince the board to either accept or reject the project, whichever you feel is appropriate given this information.

A project will produce cash inflows of $3,650 a year for four years. The start-up costs are $15,000. In year five, the project will be closed and as a result should produce a cash inflow of $7,500. What Is the net present value of this project if the required rate of return is 11.5 percent?

List and briefly discuss the advantages and disadvantages of the IRR rule.

The discounted payback rule states that you should accept projects:

The profitability index will be:

A situation in which taking one investment prevents the taking of another is called:

Determining whether to sell bonds or issue stock is a capital budgeting decision.

The internal rate of return method of analysis is generally more popular in practice than NPV.

The average accounting return calculation takes the time value of money into account.

The internal rate of return (IRR) rule states that a project with an IRR that is less than the required rate should be accepted.

Bridgewater Fountains is considering expanding its current line of business and has developed the following expected cash flows for the project. Should this project be accepted based on the Discounting approach to the modified internal rate of return if the discount rate is 9.6 percent? Why Or why not?

Matt is analyzing two mutually exclusive projects of similar size and has prepared the following data. Both projects have 5 year lives. Matt has been asked for his best recommendation given this information. His recommendation Should be to accept:

A project will produce cash inflows of $1,750 a year for four years. The project initially costs $10,600 to get started. In year five, the project will be closed and as a result should produce a cash inflow of $8,500. What is the net present value of this project if the required rate of return is 13.75 percent?

You are considering two mutually exclusive projects with the following cash flows. Will your choice between the two projects differ if the required rate of return is 8 percent rather than 11 percent? If so, what should you do?

A project which has a discounted payback period longer than its life also has a positive NPV.

If a project with conventional cash flows has a profitability index less than one, then: