Exam 7: Net Present Value and Other Investment Rules

Project I has an initial cash outflow of $18,300 and annual cash flows of $8,700 for Years 1 to 3.Project II has an initial cash outflow of $25,400 and annual cash flows of $10,500 for Years 1 to 3.These projects are mutually exclusive.The required rate of return is 11 percent.Based on the incremental NPV_{(II - I)} which project(s)should be accepted and why?

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?

An independent,financing type project has an IRR of 11.4 percent and a required rate of return of 10.6 percent.Given this,you know the

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?

A project produces annual net income of $10,500,$15,700,and $16,200 over its 3-year life and requires an initial investment in fixed assets of $210,000.The book value of these assets will be $140,007,$46,662,and $15,561 at the end of Years 1 to 3,respectively.What is the average accounting rate of return if the required discount rate is 14.5 percent?

All else equal,the payback period for a project will decrease whenever the

A project has an initial cost of $12,300 and produces cash inflows of $5,200,$5,300,and $4,800 over Years 1 to 3,respectively.What is the discounted payback period if the required rate of return is 12 percent?

An investment is acceptable if its average accounting return (AAR)

The two most commonly used methods of capital budgeting analysis are the

Project Q has an initial cost of $257,412 and projected cash flows of $123,300 in Year 1 and $180,300 in Year 2.Project R has an initial cost of $345,000 and projected cash flows of $184,500 in Year 1 and $230,600 in Year 2.The discount rate is 12.2 percent and the projects are independent.Which project(s),if either,should be accepted based on its profitability index value?

Projects A and B require an initial investment of $48,000 and $98,000,respectively.The projects are mutually exclusive,and you know the smaller project has a positive NPV.Which one of these methods is probably the best method to use to determine which project to accept?

A firm should accept projects with positive net present values primarily because those projects will

Assume a project has normal cash flows.Given this,you should accept the project

One advantage of the payback method of project analysis is the method's

The discounted payback period of a project will decrease whenever the

The Walk-Up Window is considering two mutually exclusive projects.Project A has an initial cost of $64,230 and annual cash flows of $25,200 for three years.Project B has an initial cost of $45,400 and annual cash flows of $21,400,$21,900,and $10,200 for Years 1 to 3,respectively.What is the incremental IRR_A-B? Which project should be accepted if the discount rate is 9 percent? Which project should be accepted if the discount rate is 6 percent?

The discount rate that makes the net present value of an investment exactly equal to zero is called the

You are considering a project with an initial cost of $13,000.What is the payback period for this project if the annual cash inflows are $3,450,$5,970,$2,100,and $1,400 for Years 1 to 4,respectively?

An investment

It will cost $28,900 to acquire a small ice cream cart.Cart sales are expected to be $10,500 a year for 3 years.After the 3 years,the cart is expected to be worthless.What is the payback period?