Exam 7: Net Present Value and Other Investment Rules

It will cost $3,000 to acquire a small ice cream cart.Cart sales are expected to be $1,400 a year for three years.After the three years,the cart is expected to be worthless as that is the expected remaining life of the cooling system.What is the payback period of the ice cream cart?

Cutler Compacts will generate cash flows of $30,000 in year one,and $65,000 in year two.However,if they make an immediate investment of $20,000,they can expect to have cash streams of $55,000 in year 1 and $63,000 in year 2 instead.The interest rate is 9%.Calculate the NPV of the proposed project.Why would the IRR be a poor choice in this situation?

Which of the following does not characterize NPV?

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

Payback is frequently used to analyze independent projects because:

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 assuming end of year cash flows.Also,calculate project's IRR.Should the project be taken? Check your answer by computing the project's NPV.

You have a choice between two projects,Project1 pays $12,000 back at the end of 1 period on an investment of $10,000.Project 2 pays back $6,500 at the end of 1 period on an investment of $5,000.Which project should be chosen and what is the problem that you must be concerned with in this choice?

Which of the following correctly orders the investment rules of average accounting return (AAR),internal rate of return (IRR),and net present value (NPV)from the most desirable to the least desirable?

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

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?

A project will have more than one IRR if:

You are considering a project with the following data: Internal rate of return 8.7% Profitability ratio .98 Net present value -$393 Payback period 2.44 years Required return 9.5% Which one of the following is correct given this information?

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:

Suppose that a project has a cash flow pattern (-$2,000,$25,000,- $25000).For its modified IRR at a discount rate of 10%,the relevant numbers are:

Suppose that a project has a cash flow pattern (-$2,000,$25,000,-$25000)and discount rate of 10%,its modified IRR is given by:

Given the cash flow stream of the following mutually exclusive projects,prove through the incremental investment that Project B,with the higher NPV,will be preferred to project A. 0 1 2 3 NPV IRR Project A: -500 150 245 320 46.39 17.76 Project B: -800 360 360 360 50.01 16.65 Incremental investment in B: -300 210 115 40 NPV = 3.63

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

A project will have only one internal rate of return if:

The average accounting rate of return is determined by:

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