Exam 7: Net Present Value AMCQ Other Investment Rules

Assume a project has an initial cost of $207,600 and cash flows of $62,100,$99,100,and $105,300 for Years 1 to 3,respectively.The required discount rate is 11 percent,the required payback period is 3 years,and the required AAR is 13 percent.Should this project be accepted based on the two most commonly used methods of analysis by large firms? Justify your answer.

Leo is considering adding a deli to his general store.The remodelling expenses and shelving costs are estimated at $27,500.Deli sales are expected to produce net cash inflows of $7,300,$8,600,$9,700,and $9,750 for Years 1 to 4,respectively.Leo has a firm 3-year payback requirement.Should he add the deli?

Uptown Developers is considering two projects.Project A consists of building a wholesale book outlet on the firm's downtown lot.Project B consists of building a sit-down restaurant on that same lot.The lot can only accommodate one of the projects.When trying to decide whether to build the book outlet or the restaurant,management should rely most heavily on the analysis results from which one of these methods?

Assume a project has an initial cost of $48,000 and will produce net income for 5 years.The project will use straight-line depreciation over the life of the project.The AAR of this project can be computed as

A project has an initial cash inflow of $40,800 and a cash outflow of $44,900 in Year 1.The discount rate is 10 percent.Should this project be accepted or rejected based on IRR? Why?

Dorian International has $75,000 that it can invest for 2.5 years.After that,the funds are needed to repay an outstanding bond issue.The company has two potential projects that are within the funding limit.Project A has an initial cost of $40,000 and cash flows of $24,000 a year for 2 years.Project B has an initial cost of $75,000 and cash flows of $27,000 a year for 4 years.If the required rate of return on both projects is 12 percent,what is your recommendation?

A project has an initial cost of $40,100 and anticipated cash flows of $10,200,$21,700,$15,600,and $7,800 for Years 1 to 4,respectively.What is the profitability index value if the required return is 12.6 percent?

Net present value

What is the key reason why a positive NPV project should be accepted?

Assume you are looking at a graph that relates the net present value of two mutually exclusive investment projects to various discount rates.Assume the projects have differing cash flows and finite lives.Which one of these statements accurately reflects this graph?

The internal rate of return

You know that two mutually exclusive projects are of different sizes.The smaller project is known to have a positive NPV.Which one of these accurately describes a method of properly determining which one,if either,project should be accepted?

A project has an initial cash inflow of $87,700 and cash flows of -$48,700 in Year 1 and -$57,200 in Year 2.The discount rate is 14 percent.Should this project be accepted or rejected based on IRR? Why?

Two mutually exclusive projects produce the same positive NPV at a discount rate of 11.34 percent.Both projects have 4-year lives.Project A has larger cash flows than Project B in the first 2 years.Given this information,you know that

Webster's wants to introduce a new product that has a start-up cost of $7,800.The product has a 2-year life and will provide cash flows of $6,700 in Year 1 and $4,300 in Year 2.The required rate of return is 14 percent.Should the product be introduced? Why or why not?

The discounted payback method

The value of a firm

A project requires an initial investment of $59,600 and will produce cash inflows of $21,200,$44,500,and $11,700 over the next 3 years,respectively.What is the project's NPV at a required return of 16 percent?

Toy Town is considering a new toy with initial costs of $35,900.This toy is expected to produce cash flows of $52,500 in Year 1,$11,300 in Year 2,and nothing thereafter.The discount rate assigned to the toy is 18.7 percent.What is the IRR?

What is the internal rate of return on an investment that has an initial cost of $63,100 and projected cash inflows of $18,700,$38,600,and $34,100 for Years 1 to 3,respectively?