Exam 6: Net Present Value and Other Investment Rules

The Ziggy Trim and Cut Company can purchase equipment on sale for £4,300.The asset has a three-year life,will produce a cash flow of £1,200 in the first and second year,and £3,000 in the third year.The interest rate is 12%.Calculate the project's Discounted Payback and Profitability Index assuming end of year cash flows.Should the project be taken? If the Average Accounting Return was positive,how would this affect your decision?

Explain the differences and similarities between net present value (NPV)and the profitability index (PI).

A mutually exclusive project is a project whose:

Which one of the following is the best example of two mutually exclusive projects?

Net present value:

The two fatal flaws of the internal rate of return rule are:

A project will produce cash inflows of £1,750 a year for four years.The project initially costs £10,600 to get started.In year five,the project will be closed and as a result should produce a cash inflow of £8,500.What is the net present value of this project if the required rate of return is 13.75%?

An investment's average net income divided by its average book value defines the average:

The Ziggy Trim and Cut Company can purchase equipment on sale for £4,300.The asset has a three-year life,will produce a cash flow of £1,200 in the first and second year,and £3,000 in the third year.The interest rate is 12%.Calculate the project's payback.Also,calculate project's IRR.Should the project be taken? Check your answer by computing the project's NPV.

The internal rate of return tends to be:

What is the net present value of a project that has an initial cash outflow of £12,670 and the following cash inflows? The required return is 11.5%. Year Cash Inflows 1 £4,375 2 £0 3 £8,750 4 £4,100

Ginny Trueblood is considering an investment which will cost her £120,000.The investment produces no cash flows for the first year.In the second year the cash inflow is £35,000.This inflow will increase to £55,000 and then £75,000 for the following two years before ceasing permanently.Ginny requires a 10% rate of return and has a required discounted payback period of three years.Ginny should _____ this project because the discounted payback period is _____.

The present value of an investment's future cash flows divided by the initial cost of the investment is called the:

You are analyzing a project and have prepared the following data: Year Cad Flow 0 -£169,000 1 £46,200 2 £87,300 3 £41,000 4 £39,000 Required payback period: 2.5 years Required AAR: 7.25% Required return: 8.50% Based on the internal rate of return of _____for this project,you should _____ the project.

The investment decision rule that relates average net income to average investment is the:

Brounen,de Jong,and Koedijk (2006)found that ___ and ___ were the two most popular capital budgeting methods in the UK.

An investment project has the cash flow stream of £-250,£75,£125,£100,and £50.The cost of capital is 12%.What is the discounted payback period?

Accepting positive NPV projects benefits the shareholders because:

If a project is assigned a required rate of return equal to zero,then:

You would like to invest in the following project. Year Cad Flow 0 -£55,000 1 £30,000 2 £37,000 Victoria,your boss,insists that only projects that can return at least £1.10 in today's dollars for every £1 invested can be accepted.She also insists on applying a 10% discount rate to all cash flows.Based on these criteria,you should: