Exam 7: Net Present Value and Other Investment Rules

Suppose that a project has a cash flow pattern (-$2,000, $25,000,- $25000). For its modified IRR at a discount rate of 10%, the relevant numbers are:

Consider an investment with an initial cost of $20,000 and is expected to last for 5 years. The expected cash flow in years 1 and 2 are $5000, in years 3 and 4 are $5,500 and in year 5 is $1,000. The total cash inflow is expected to be $22,000 or an average of $4,400 per year. Compute the payback period in years.

A $25 investment produces $27.50 at the end of the year with no risk. Which of the following is not true?

The elements that cause problems with the use of the IRR in projects that are mutually exclusive are:

Under capital rationing the profitability index is used to select investments because of limited capital by their:

The payback period rule accepts all investment projects in which the payback period for the cash flows is:

The Ziggy Trim and Cut Company can purchase equipment on sale for $4,300. The asset has a three-year life, will produce a cash flow of $1,200 in the first and second year, and $3,000 in the third year. The interest rate is 12%. Calculate the project's payback assuming end of year cash flows. Also, calculate project's IRR. Should the project be taken? Check your answer by computing the project's NPV.

The difference between the present value of an investment's future cash flows and its initial cost is the:

Payback is frequently used to analyze independent projects because:

The Balistan Rug Company is considering investing in a new loom that will cost $12,000. The new loom will create positive end of year cash flow of $5,000 for the next 3 years. The internal rate of return for this project is:

The problem of multiple IRRs can occur when:

Which statement concerning the net present value (NPV) of an investment or a financing project is correct?

A project will have only one internal rate of return if:

The average accounting rate of return is determined by:

Ginny is considering an investment which will cost her $120,000. The investment produces no cash flows for the first year. In the second year the cash inflow is $35,000. This inflow will increase to $55,000 and then $75,000 for the following two years before ceasing permanently. Ginny requires a 10% rate of return and has a required discounted payback period of three years. Ginny should _______ this project because the discounted payback period is ______.

The Walker Landscaping Company can purchase a piece of equipment for $3,600. The asset has a two-year life, will produce a cashflow of $600 in the first year and $4200 in the second year. The interest rate is 15%. Calculate the project's payback assuming steady cashflows. Also calculate the project's IRR. Should the project be taken? Check your answer by computing the project's NPV.

The discounted payback period rule:

The IRR decision rule can be reversed because:

The internal rate of return may be defined as:

An investment that requires initial cash outlay of $100,000 has a useful life of 3 years. In each of these years the before-tax cash flow is $40,000. If the tax rate is 34% and straight-line depreciation is used, the average accounting return is: