Question 1

In words, explain how the crossover rate is computed and why the net present value profile is useful.

Accepted Answer

The crossover rate is the internal rate

Question 2

Consider the following two mutually exclusive projects:   Whichever project you choose, if any, you require a 14 percent return on your investment. If you apply the payback criterion, you will choose investment _____, if you apply the NPV criterion, you will choose investment _____; if you apply the IRR criterion, you will choose investment ____; if you choose the profitability index criterion, you will choose investment ____. Based on your first four answers, which project will you finally choose?

Accepted Answer

A)  A; B; A; A; B 
B)  A; A; B; B; A 
C)  A; A; B; B; B 
D)  B; A; B; A; A 
E)  B; A; B; B; A 
A)  A; B; A; A; B 
B)  A; A; B; B; A 
C)  A; A; B; B; B 
D)  B; A; B; A; A 
E)  B; A; B; B; A

Question 3

The Spoon Restaurant is considering a project with an initial cost of $525,000. The project will not produce any cash flows for the first three years. Starting in year four, the project will produce cash inflows of $721,000 a year for three years. This project is risky, so the firm has assigned it a discount rate of 17 percent. What is the project's net present value?

Accepted Answer

A)  $382,507.17 
B)  $389,211.76 
C)  $414,141.41 
D)  $451,329.69 
E)  $469,691.45 
A)  $382,507.17 
B)  $389,211.76 
C)  $414,141.41 
D)  $451,329.69 
E)  $469,691.45

Question 4

An investment has conventional cash flows and a profitability index of 1.0. Given this, which one of the following must be true?

Accepted Answer

A)  The internal rate of return exceeds the required rate of return. 
B)  The investment never pays back. 
C)  The net present value is equal to zero. 
D)  The average accounting return is 1.0. 
E)  The net present value is greater than 1.0. 
A)  The internal rate of return exceeds the required rate of return. 
B)  The investment never pays back. 
C)  The net present value is equal to zero. 
D)  The average accounting return is 1.0. 
E)  The net present value is greater than 1.0.

Question 5

Which one of the following is the primary advantage of payback analysis?

Accepted Answer

A)  Incorporation of the time value of money concept 
B)  Ease of use 
C)  Research and development bias 
D)  Arbitrary cutoff point 
E)  Long-term bias 
A)  Incorporation of the time value of money concept 
B)  Ease of use 
C)  Research and development bias 
D)  Arbitrary cutoff point 
E)  Long-term bias

Question 6

You are considering an investment for which you require a 14 percent rate of return. The investment costs $58,900 and will produce cash inflows of $25,000 for 3 years. Should you accept this project based on its internal rate of return? Why or why not?

Accepted Answer

A)  Yes; because the IRR is 13.13 percent 
B)  Yes; because the IRR is 13.65 percent 
C)  Yes; because the IRR is 13.67 percent 
D)  No; because the IRR is 13.13 percent 
E)  No; because the IRR is 13.65 percent 
A)  Yes; because the IRR is 13.13 percent 
B)  Yes; because the IRR is 13.65 percent 
C)  Yes; because the IRR is 13.67 percent 
D)  No; because the IRR is 13.13 percent 
E)  No; because the IRR is 13.65 percent

Question 7

Ed has to choose between Project A and Project B, which are mutually exclusive. Project A has an initial cost of $28,000 and an internal rate of return of 16 percent. Project B has an initial cost of $47,000 and an internal rate of return of 12 percent. Explain why the selection of the project with the higher internal rate of return could be a faulty decision.

Accepted Answer

0.16 X $28,000 = $4,480
0.12 X

Question 8

Identify one primary strength and one primary weakness for each of the following methods of investment analysis.
Net present value:
Strength:
Weakness:
Internal rate of return:
Strength:
Weakness:
Profitability index:
Strength:
Weakness:
Payback:
Strength:
Weakness:
Average accounting return:
Strength:
Weakness:

Accepted Answer

Student answers should include comments

Question 9

The Steel Factory is considering a project that will produce annual cash flows of $36,800, $45,500, $56,200, and $21,800 over the next four years, respectively. What is the internal rate of return if the initial cost of the project is $135,000?

Accepted Answer

A)  7.56 percent 
B)  9.19 percent 
C)  11.28 percent 
D)  12.24 percent 
E)  12.83 percent 
A)  7.56 percent 
B)  9.19 percent 
C)  11.28 percent 
D)  12.24 percent 
E)  12.83 percent

Question 10

Which one of the following methods of analysis has the greatest bias towards short-term projects?

Accepted Answer

A)  Net present value 
B)  Internal rate of return 
C)  Average accounting return 
D)  Profitability index 
E)  Payback 
A)  Net present value 
B)  Internal rate of return 
C)  Average accounting return 
D)  Profitability index 
E)  Payback

Question 11

Miller Brothers is considering a project that will produce cash inflows of $61,500, $72,800, $84,600, and $68,000 a year for the next four years, respectively. What is the internal rate of return if the initial cost of the project is $225,000?

Accepted Answer

A)  9.39 percent 
B)  10.22 percent 
C)  11.47 percent 
D)  11.62 percent 
E)  12.24 percent 
A)  9.39 percent 
B)  10.22 percent 
C)  11.47 percent 
D)  11.62 percent 
E)  12.24 percent

Question 12

Mary has just been asked to analyze an investment to determine if it is acceptable. Unfortunately, she is not being given sufficient time to analyze the project using various methods. She must select one method of analysis and provide an answer based solely on that method. Which method do you suggest she use in this situation?

Accepted Answer

A)  Internal rate of return 
B)  Payback 
C)  Average accounting rate of return 
D)  Net present value 
E)  Profitability index 
A)  Internal rate of return 
B)  Payback 
C)  Average accounting rate of return 
D)  Net present value 
E)  Profitability index

Question 13

Quattro, Inc. has the following mutually exclusive projects available. The company has historically used a 4-year cutoff for projects. The required return is 11 percent.   The payback for Project A is ____ while the payback for Project B is _____. The NPV for Project A is _____ while the NPV for Project B is _____. Which project, if any, should the company accept?

Accepted Answer

A)  3.92 years; 3.64 years; $780.85; $1,211.48; accept both Project A and B 
B)  3.92 years; 3.79 years; -$211.60; $1,211.48; accept Project B only 
C)  3.92 years; 3.79 years; $780.85; -$7,945.93; accept Project A only 
D)  4.06 years; 3.64 years; $780.85; $1,211.48; accept both Project A and B 
E)  4.06 years; 3.79 years; -$211.60; -$7,945.93; reject both projects 
A)  3.92 years; 3.64 years; $780.85; $1,211.48; accept both Project A and B 
B)  3.92 years; 3.79 years; -$211.60; $1,211.48; accept Project B only 
C)  3.92 years; 3.79 years; $780.85; -$7,945.93; accept Project A only 
D)  4.06 years; 3.64 years; $780.85; $1,211.48; accept both Project A and B 
E)  4.06 years; 3.79 years; -$211.60; -$7,945.93; reject both projects

Question 14

Benny's is considering adding a new product to its lineup. This product is expected to generate sales for four years after which time the product will be discontinued. What is the project's net present value if the firm wants to earn a 14 percent rate of return?

Accepted Answer

A)  $2,336.29 
B)  $2,511.49 
C)  $2,874.21 
D)  $3,013.05 
E)  $3,268.47 
A)  $2,336.29 
B)  $2,511.49 
C)  $2,874.21 
D)  $3,013.05 
E)  $3,268.47

In words, explain how the crossover rate is computed and why the net present value profile is useful.

An investment has conventional cash flows and a profitability index of 1.0. Given this, which one of the following must be true?

Which one of the following is the primary advantage of payback analysis?

You are considering an investment for which you require a 14 percent rate of return. The investment costs $58,900 and will produce cash inflows of $25,000 for 3 years. Should you accept this project based on its internal rate of return? Why or why not?

The Steel Factory is considering a project that will produce annual cash flows of $36,800, $45,500, $56,200, and $21,800 over the next four years, respectively. What is the internal rate of return if the initial cost of the project is $135,000?

Which one of the following methods of analysis has the greatest bias towards short-term projects?

Miller Brothers is considering a project that will produce cash inflows of $61,500, $72,800, $84,600, and $68,000 a year for the next four years, respectively. What is the internal rate of return if the initial cost of the project is $225,000?

Benny's is considering adding a new product to its lineup. This product is expected to generate sales for four years after which time the product will be discontinued. What is the project's net present value if the firm wants to earn a 14 percent rate of return?

Introduction to Financial Management

Financial Statements, Taxes, and Cash Flow

Working With Financial Statements

Introduction to Valuation: The Time Value of Money

Discounted Cash Flow Valuation

Interest Rates and Bond Valuation

Equity Markets and Stock Valuation

Making Capital Investment Decisions

Some Lessons From Capital Market History

Risk and Return

Cost of Capital

Leverage and Capital Structure

Dividends and Dividend Policy

Raising Capital

Short-Term Financial Planning

Working Capital Management

International Aspects of Financial Management

Filters

Exam 8: Net Present Value and Other Investment Criteria

In words, explain how the crossover rate is computed and why the net present value profile is useful.

An investment has conventional cash flows and a profitability index of 1.0. Given this, which one of the following must be true?

Which one of the following is the primary advantage of payback analysis?

You are considering an investment for which you require a 14 percent rate of return. The investment costs $58,900 and will produce cash inflows of $25,000 for 3 years. Should you accept this project based on its internal rate of return? Why or why not?

The Steel Factory is considering a project that will produce annual cash flows of $36,800, $45,500, $56,200, and $21,800 over the next four years, respectively. What is the internal rate of return if the initial cost of the project is $135,000?

Which one of the following methods of analysis has the greatest bias towards short-term projects?

Miller Brothers is considering a project that will produce cash inflows of $61,500, $72,800, $84,600, and $68,000 a year for the next four years, respectively. What is the internal rate of return if the initial cost of the project is $225,000?

Benny's is considering adding a new product to its lineup. This product is expected to generate sales for four years after which time the product will be discontinued. What is the project's net present value if the firm wants to earn a 14 percent rate of return?

Introduction to Financial Management

Financial Statements, Taxes, and Cash Flow

Working With Financial Statements

Introduction to Valuation: The Time Value of Money

Discounted Cash Flow Valuation

Interest Rates and Bond Valuation

Equity Markets and Stock Valuation

Making Capital Investment Decisions

Some Lessons From Capital Market History

Risk and Return

Cost of Capital

Leverage and Capital Structure

Dividends and Dividend Policy

Raising Capital

Short-Term Financial Planning

Working Capital Management

International Aspects of Financial Management

Filters