Exam 7: Net Present Value and Other Investment Rules

Which of the following correctly orders the investment rules of average accounting return (AAR), internal rate of return (IRR), and net present value (NPV) from the most desirable to the least desirable?

The internal rate of return tends to be:

Explain the differences and similarities between net present value (NPV) and the profitability index (PI).

Using the internal rate of return rule, a conventional project should be accepted if the internal rate of return is:

The investment decision rule that relates average net income to average investment is the:

A mutually exclusive project is a project whose:

The discounted payback rule states that you should accept projects:

The Ziggy Trim and Cut Company can purchase equipment on sale for $4,300. The asset has a three-year life, will produce a cashflow 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 discounted payback and Profitability Index assuming end of year cash flows. Should the project be taken? If the accounting rate of return was positive, how would this affect your decision?

The two fatal flaws of the internal rate of return rule are:

You have a choice between two projects, Project1 pays $12,000 back at the end of 1 period on an investment of $10,000. Project 2 pays back $6,500 at the end of 1 period on an investment of $5,000. Which project should be chosen and what is the problem that you must be concerned with in this choice?

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 discounted payback and Profitability Index assuming steady cashflows. Should the project be taken? If the accounting rate of return was positive, how would this affect your decision?

Suppose that a project has a cash flow pattern (-$2,000, $25,000, -$25000) Its IRR is given by:

A project has an initial cost of $8,600 and produces cash inflows of $3,200, $4,900, and $1,500 over the next three years, respectively. What is the discounted payback period if the required rate of return is 8%?

Cutler Compacts will generate cash flows of $30,000 in year one, and $65,000 in year two. However, if they make an immediate investment of $20,000, they can expect to have cash streams of $55,000 in year 1 and $63,000 in year 2 instead. The interest rate is 9%. Calculate the NPV of the proposed project. Why would the IRR be a poor choice in this situation?

If a project is assigned a required rate of return equal to zero, then:

The profitability index is the ratio of:

A project will have more than one IRR if: