Exam 7: 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 cashflow 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 accounting rate of return was positive, how would this affect your decision?

The problem of multiple IRRs can occur when:

Under capital rationing the profitability index is used to select investments because of limited capital by their:

An investment project is most likely to be accepted by the payback period rule and not accepted by the NPV rule if the project has:

The elements that cause problems with the use of the IRR in projects that are mutually exclusive are:

Suppose that a project has a cash flow pattern (-$2,000, $25,000, -$25000) Its IRR is given by

Accepting positive NPV projects benefits the stockholders because:

The Carnation Chemical Company is investing in an incinerator to dispose of PCB waste. The incinerator costs $1.5 million and will generate end of year cash of $1 million for the next 3 years. At the end of 3 years the incinerator will be worthless and must be disposed of at the cost of $500,000. The internal rate of return for this project is:

The Balistan Rug Company is considering investing in a new loom that will cost $12,000. The new loom will create positive end of year cash flow of $5,000 for the next 3 years. The internal rate of return for this project is:

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

Suppose that a project has a cash flow pattern (-$2,000, $25,000, -$25000) Its modified IRR is given by

Which of the following does not characterize NPV?

Using the internal rate of return rule, a conventional project should be accepted if the internal rate of return is:

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

A mutually exclusive project is a project whose:

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

The average accounting rate of return is determined by:

The discounted payback period rule:

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

The IRR decision rule can be reversed because: