Exam 8: Net Present Value and Other Investment Criteria

Evaluate the following mutually exclusive projects using IRR as a selection criterion.Assuming the discount rate to be 14 percent, which project-if either-would be selected? Project A costs $50,000 and returns $15,000 after-tax annually.Project B costs $35,000 and returns $11,000 after-tax annually.Both projects last five years.

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. B.So payback can seriously underestimate a Project's contribution to business wealth, as illustrated in its contrasting results to that of NPV. Payback_A: years Payback_B:

As the opportunity cost of capital increases, the net present value of a project increases.

A new machine will cost $100,000 and generate after-tax cash inflows of $356,000 for four years.Find the NPV if the firm uses a 12 percent opportunity cost of capital.What is the IRR? What is the payback period?

A Project's payback period is determined to be four years.If it is later discovered that additional cash flows will be generated in years five and six, then:

Calculate the NPV for a project costing $200,000 and providing $20,000 annually for 40 years.The discount rate is 8 percent.By how much would the NPV change if the inflows were reduced to 30 years? Describe the implications of both answers.

A Project's opportunity cost of capital is:

The IRR is the rate of return on the cash flows of the investment, also known as the opportunity cost of capital.

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:

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 investment criteria takes the time value of money into consideration?

A Project's payback period is the length of time necessary to generate an NPV of zero.

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

A project's Profitability Index is .85 and its investment value of $250,000.Given this information, determine its NPV

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.

When calculating IRR with a trial and error process, one would raise discount rates in order to reach a zero NPV.

The use of a profitability index will always provide results consistent with selecting the project with the:

What is the minimum number of years that an investment costing $500,000 must return $65,000 per year at a discount rate of 13 percent in order to be an acceptable investment?

Use of a profitability index to select projects in the absence of capital rationing:

What is the net present value of an investment, and how do you calculate it?