Exam 7: Net Present Value and Other Investment Rules

A proposed project has an initial cost of $475,000 and cash flows of -$21,200,$367,500,and $287,000 for Years 1 to 3,respectively.Victoria,the 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 discount rate of 12 percent to all cash flows.Based on these criteria,the project should be:

Two mutually exclusive projects produce the same positive NPV at a discount rate of 11.34 percent.Both projects have 4-year lives.Project A has larger cash flows than Project B in the first two years.Given this information,you know that:

Project A has an initial cost of $628,000 and Project B has an initial cost of $894,000.Both projects have a positive NPV.Which one of these would be your best next step to determine which project to accept assuming the projects are mutually exclusive?

A project has average net income of $4,160 a year over its 4-year life.The initial cost of the project is $65,000 which will be depreciated using straightline depreciation to a zero book value over the life of the project.The firm wants to earn a minimal average accounting return of 11.65 percent.Should the project be accepted or rejected? What is the AAR?

If the discounted payback method is preferable to the payback method,then why is the payback method ever used?

No matter how many forms of investment analysis you perform:

Webster's wants to introduce a new product that has a startup cost of $15,000.The product has a 2-year life and will provide cash flows of $12,700 in Year 1 and $6,300 in Year 2.The required rate of return is 10 percent.Should the product be introduced? Why or why not?

Project A has an initial cost of $16,400 and cash flows of $5,100,$6,800,and $6,900 for Years 1 to 3,respectively.Project B has an initial cost of $21,200 and cash flows of $8,300,$7,900,and $7,700 for Years 1 to 3,respectively.What is the incremental IRR?

Assume you are looking at a graph that relates the net present value of two mutually exclusive investment projects to various discount rates.Assume the projects have differing cash flows and finite lives.Which one of these statements accurately reflects this graph?

Which of these are disadvantages of the payback method? I.May ignore some cash flows II.Required time period is set arbitrarily III.Easy to compute IV.Ignores the time value of money

Academic theory states that net present value is the best capital budgeting model.Why is this the case?

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

You are considering two independent projects both of which have been assigned a discount rate of 8 percent.Project A costs $13,100 and produces cash flows of $5,300 a year for three years.Project B costs $21,900 and produces cash flows of $12,000 a year for two years.Based on the profitability index,what is your recommendation concerning these projects?

Assume a project has normal cash flows.According to the accept/reject rules,the project should be accepted if the:

The Walk-Up Window is considering two mutually exclusive projects.Project A has an initial cost of $49,230 and annual cash flows of $31,200 for three years.Project B has an initial cost of $21,400 and annual cash flows of $21,400 for two years.What is the crossover rate?

A new product has startup costs of $338,200 and projected cash flows of $102,000,$187,500,and $245,000 for Years 1 to 3,respectively.What is the profitability index given a 9 percent required return?

When two projects can share the same economic resource,the projects are generally considered to be:

A project has an initial cash inflow of $36,400 and a cash outflow of $42,900 in Year 1.The discount rate is 20 percent.Should this project be accepted or rejected based on IRR? Why?

A proposed project has a positive net present value.If this project is accepted,then:

A project has an initial cost of $32,000 and a 4-year life.The company uses straightline depreciation to a book value of zero over the life of the project.The projected net income from the project is $1,200,$2,200,$3,500,and $2,700 a year for Years 1 to 4,respectively.What is the average accounting return?