Exam 6: Net Present Value and Other Investment Rules

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The Liberty Co.is considering two projects.Project A consists of building a wholesale book outlet on lot #169 of the Englewood Retail Center.Project B consists of building a sit-down restaurant on lot #169 of the Englewood Retail Center.When trying to decide whether to build the book outlet or the restaurant,management should rely most heavily on the analysis results from the _____ method of analysis.

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Question 1

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The Walker Landscaping Company can purchase a piece of equipment for £3,600.The asset has a two-year life,will produce a cash flow of £600 in the first year and £4,200 in the second year.The interest rate is 15%.Calculate the project's payback assuming steady cash flows.Also calculate the project's IRR.Should the project be taken? Check your answer by computing the project's NPV.

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Payback = 1.714 years Calculated IRR = 16.67%.Accept the project.NPV = £97.54.

List and briefly discuss the advantages and disadvantages of the internal rate of return (IRR)rule.

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Question 3

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The advantages of the rule are its close relationship with NPV and the ease with which it is understood and communicated.The two disadvantages are that there may be multiple solutions and the rule may lead to a ranking conflict in evaluating mutually exclusive investments.The student should add a brief explanation demonstrating their understanding of each.

Which one of the following statements concerning net present value (NPV)is correct?

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Question 4

If a project has a net present value equal to zero,then: I.the present value of the cash inflows exceeds the initial cost of the project. II.the project produces a rate of return that just equals the rate required to accept the project. III.the project is expected to produce only the minimally required cash inflows. IV.any delay in receiving the projected cash inflows will cause the project to have a negative net.

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Question 5

The shortcoming(s)of the average accounting return (AAR)method is (are):

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Question 6

Jack is considering adding toys to his general store.He estimates that the cost of inventory will be £4,200.The remodeling expenses and shelving costs are estimated at £1,500.Toy sales are expected to produce net cash inflows of £1,200,£1,500,£1,600,and £1,750 over the next four years,respectively.Should Jack add toys to his store if he assigns a three-year payback period to this project?

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Question 7

The profitability index is closely related to:

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Question 8

All else constant,the net present value of a typical investment project increases when:

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Question 9

The problem of multiple IRRs can occur when:

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Question 10

Payback is frequently used to analyze independent projects because:

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Question 11

If there is a conflict between mutually exclusive projects due to the IRR,one should:

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Question 12

Graphing the NPVs of mutually exclusive projects over different discount rates helps demonstrate:

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Question 13

Which one of the following statements is correct concerning the payback period?

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Question 14

The discounted payback period rule:

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Question 15

The payback period rule is a convenient and useful tool because:

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Question 16

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

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Question 17

The payback period rule accepts all investment projects in which the payback period for the cash flows is:

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Question 18

An investment is acceptable if the profitability index (PI)of the investment is:

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Question 19

The internal rate of return for a project will increase if:

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Question 20

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Exam 6: Net Present Value and Other Investment Rules

List and briefly discuss the advantages and disadvantages of the internal rate of return (IRR)rule.

Which one of the following statements concerning net present value (NPV)is correct?

The shortcoming(s)of the average accounting return (AAR)method is (are):

The profitability index is closely related to:

All else constant,the net present value of a typical investment project increases when:

The problem of multiple IRRs can occur when:

Payback is frequently used to analyze independent projects because:

If there is a conflict between mutually exclusive projects due to the IRR,one should:

Graphing the NPVs of mutually exclusive projects over different discount rates helps demonstrate:

Which one of the following statements is correct concerning the payback period?

The discounted payback period rule:

The payback period rule is a convenient and useful tool because:

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

The payback period rule accepts all investment projects in which the payback period for the cash flows is:

An investment is acceptable if the profitability index (PI)of the investment is:

The internal rate of return for a project will increase if:

Introduction to Corporate Finance

Corporate Governance

Financial Statement Analysis and Long-Term Planning

Discounted Cash Flow Valuation

How to Value Bonds and Shares

Making Capital Investment Decisions

Risk Analysis, Real Options, and Capital Budgeting

Risk and Return: Lessons From Market History

Return and Risk: The Capital Asset Pricing Model Capm

Factor Models and the Arbitrage Pricing Theory

Risk, cost of Capital, and Capital Budgeting

Corporate Financing Decisions and Efficient Capital Markets

Long-Term Financing: An Introduction

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Valuation and Capital Budgeting for the Levered Firm

Dividend and Other Payouts

Equity Financing

Debt Financing

Leasing and Off-Balance-Sheet Financing

Options and Corporate Finance

Options and Corporate Finance: Extensions and Applications

Warrants and Convertibles

Financial Risk Management With Derivatives

Short-Term Finance and Planning

Cash Management

Credit Management

Mergers and Acquisitions

Financial Distress

International Corporate Finance

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