Exam 8: Net Present Value and Other Investment Criteria

"While IRR may be easier to understand than NPV, NPV should be used as a final decision criterion for an investment." Do you agree with the above statement? Why or why not?

What is the minimum cash flow that could be received at the end of year three to make the following project "acceptable?" Initial cost = $100,000; cash flows at end of years one and two = $35,000; opportunity cost of capital = 10 percent.

When we compare assets with different lives, we should select the machine that has the lowest equivalent annual annuity.

Discuss three reasons why a firm may want to impose soft capital rationing.

As long as the NPV of a project declines smoothly with increases in the discount rate, the project is acceptable if its:

Which of the following projects would you feel safest in accepting? Assume the opportunity cost of capital to be 12 percent for each project.

Calculate the payback period for each of the following projects, then comment on the advisability of selection based on the payback period criterion in contrast to NPV: Project A has a cost of $15,000, returns $4,000 after-tax the first year and this amount increases by $1,000 annually over the five-year life; Project B costs $15,000 and returns $13,000 after-tax the first year, followed by four years of $2,000 per year.The firm uses a 10 percent discount rate.

The payback period considers all project cash flows.