Exam 5: Net Present Value and Other Investment Rules

Juan is considering two independent projects.Project A costs $74,600 and has projected cash flows of $18,700,$46,300,and $12,200 for Years 1 to 3,respectively.Project B costs $70,000 and has cash flows of $10,600,$15,800,and $67,900 for Years 1 to 3,respectively.Juan assigns a discount rate of 10 percent to Project A and 12 percent to Project B.Which project or projects,if either,should he accept based on the profitability index rule?

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

Wilson's Market is considering two mutually exclusive projects that will not be repeated.The required rate of return is 13.9 percent for Project A and 12.5 percent for Project B.Project A has an initial cost of $54,500,and should produce cash inflows of $16,400,$28,900,and $31,700 for Years 1 to 3,respectively.Project B has an initial cost of $69,400,and should produce cash inflows of $0,$48,300,and $42,100,for Years 1 to 3,respectively.Which project,or projects,if either,should be accepted and why?

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

A financing project is acceptable if its internal rate of return is:

The internal rate of return is:

Which of the following methods of project analysis are biased towards short-term projects?

Ted,a project manager,wants to invest in a project with an initial cost of $58,500 and cash flows of $32,400 and $38,500 in Years 1 and 2.Rosita,his boss,requires a discount rate of 10 percent and also a return of $1.10 in today's dollars for every $1 invested.Will Ted get his project approved? Why or why not?

Consider an investment with an initial cost of $20,000 that expected to last for 5 years.The expected cash flows in Years 1 and 2 are $5,000 each,in Years 3 and 4 are $5,500 each,and the Year 5 cash flow is $1,000.Assume each annual cash flow is spread evenly over its respective year.What is the payback period?

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

Which statement concerning the net present value (NPV)of an investment or a financing project is correct?

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

Homer is considering a project with cash inflows of $950 a year for Years 1 to 4,respectively.The project has a required discount rate of 11 percent and an initial cost of $2,100.What is the discounted payback period?

A financing project has an initial cash inflow of $42,000 and cash flows of −$15,600,−$22,200,and −$18,000 for Years 1 to 3,respectively.The required rate of return is 13 percent.What is the internal rate of return? Should the project be accepted?

What is the net present value of a project that has an initial cash outflow of $7,670 and cash inflows of $1,280 in Year 1,$6,980 in Year 3,and $2,750 in Year 4? The discount rate is 12.5 percent.

The payback method of analysis:

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

The length of time required for an investment to generate cash flows sufficient to recover the initial cost of the investment is called the:

The possibility that more than one discount rate will make the NPV of an investment equal to zero presents the problem referred to as:

Project A has an initial cost of $75,000 and annual cash flows of $33,000 for three years.Project B costs $60,000 and has cash flows of $25,000,$30,000,and $25,000 for Years 1 to 3,respectively.Projects A and B are mutually exclusive.The incremental IRR is ________ and if the required rate is higher than the crossover rate then Project ________ should be accepted.