Exam 6: The Application of Project Evaluation Methods

A limitation of the chain of replacement methods of project evaluation is the unrealistic assumption that replacement assets in a chain are identical.

The term ________________ is used to describe a situation where the firm is prevented,through a shortage of funds,from undertaking all acceptable projects.

Mulch-it Ltd owns an asset that is 7 years old and has estimated the remaining physical life is no more than 4 years.The table provides the cash flows and residual value estimated for the asset. The required rate of return is 9% p.a.When should the asset be retired?

Which of the following statements is the correct treatment of finance charges in project evaluation?

An investment of $1.5 million is expected to generate cash flows of $600 000 p.a. ,at constant prices,over the next three years.Given that the nominal required rate of return is 12% p.a.and that prices are expected to increase at the rate of 5% p.a. ,the project's net present value is:

Given the data below,calculate the net present value using the equivalent annual value method.Assume the cost of capital is 10% p.a.

How can we compare mutually exclusive projects with different timeframes?

Break-even analysis can be defined as:

Which of the following costs should not be included in the allocated costs of the project?

What is the incremental cash flow for a company that forgoes $7000 p.a.rental for factory space for manufacturing a product that will return net cash inflows of $20 000 p.a.?

A company may not accept a new project with a positive net present value because of difficulties with hiring new staff and training them.Such limitation to investments is referred to as:

The equivalent annual value method of project evaluation cannot be used to compare projects with different lives.

Which of the following statements in regard to simulation is false?

A method of evaluation which ranks projects of unequal lives by assuming that both 'chains' continue indefinitely is referred to as the:

One of the limitations of decision-tree analysis is that it does not take into account the time value of money.

Which analysis involves assessing the effect of changes or errors in the estimated variables on the NPV of a project?

Consider a machine that costs $20 000,has an estimated useful life of five years with cash flows of $10 000 p.a.and a cost of capital of 10% p.a.A company is considering whether the machine should be replaced every one,two,three,four or five years.The net present value (assuming constant chain of replacement)under each alternative is given as follows: NPV(1)= $20 000 NPV(2)= $29 000 NPV(3)= $35 000 NPV(4)= $25 000 NPV(5)= $19 000 What is the appropriate action for the firm?

Assume that an investment of $1000 is expected to generate cash flows of $500 at constant prices at the end of each of three years.Also,assume that prices are expected to increase at the rate of 10% p.a.and that the nominal rate of return is 15% p.a.What is the project's NPV?

If a firm is faced with a need to make a sequence of decisions over time,it could use:

A company is to evaluate the following mutually exclusive investment proposals that involve the purchase of assets with different initial values and useful lives.The required rate of return is 10%. A.Using the constant chain of replacement method which project should be chosen? B.Using the equivalent annual value method which project should be chosen?