Exam 8: Net Present Value and Other Investment Criteria

The acceptance of an investment project implies that: Its IRR is greater than 15 percent. Its NPV is greater than its IRR. Its NPV is greater than 0.

What happens to the equivalent annual cost of a project as the opportunity cost of capital decreases?

Which of the following investment decision rules tends to improperly reject long-lived projects?

For many firms the limits on capital funds are "soft." By this we mean that the capital rationing is not imposed by investors.

When using a profitability index to select projects, a value of 1.63 is preferred over a value of 1.21.

ABC Corporation is experiencing hard capital rationing and will not be able to invest more than $1,000,000 this year.Develop a profitability index for the following four projects and state what would be selected: All four projects will last three years and the firm uses a 10 percent discount rate. Project Cost Annual Inflows A \ 300,000 \ 130,000 B \ 500,000 \ 220,000 C \ 125,000 \ 60,000 D \ 250,000 \ 100,000

Gordon Corporation is considering a 30 year project.The present value of all future cash flows from the project is $825,000.Its initial investment is $475,000.Calculate the Profitability Index on this project.

The "gold standard" of investment criteria refers to:

Soft rationing should never cost the firm anything.

The opportunity cost of capital is equal to:

How many IRRs are possible for the following set of cash flows? CF0 = -1,000, CF1 = + 500, CF2 = -300, CF3 = + 1,000, CF4 = + 200.

Which of the following should be assumed about a project that requires a $100,000 investment at time-period zero, then returns $20,000 annually for five years?

Borrowing and lending projects usually can be distinguished by whether:

Because of its age, your car costs $4,000 annually in maintenance expense.You could replace it with a newer vehicle costing $8,000.Both vehicles would be expected to last four more years.If your opportunity cost is 8 percent, by how much must maintenance expense decrease on the newer vehicle to justify its purchase?

You can continue to use your less efficient machine at a cost of $8,000 annually for the next five years.Alternatively, you can purchase a more efficient machine for $12,000 plus $5,000 annual maintenance.At a cost of capital of 15 percent, you should:

Dons Corporation is planning a 15 year project with an initial investment of $2,500,000.The project will have $400,000 cash inflows per year in years 1-5; $200,000 cash inflows in years 6-10, and $40,000 cash inflows in years 11-15.Determine the projects rate of return.

Norbert is considering a project with an initial value of $125,000.Cash inflows during the next 6 years will be $35,000 per year.Given this information, provide the project's payback.

When projects are mutually exclusive, selection should be made according to the project with the:

A firm considers a project with the following cash flows: time-zero = +20,000, years 1-5 = -4,500.Should the project be accepted if the cost of capital is 10 percent?

Given a particular set of project cash flows, which of the following statements is correct?