Exam 7: Net Present Value and Other Investment Rules

Project A has an initial cost of $22,400 and cash flows of $7,100,$8,800,and $1,900 for Years 1 to 3,respectively.Project B has an initial cost of $37,200 and cash flows of $18,300,$17,900,and $2,700 for Years 1 to 3,respectively.What is the incremental IRR?

Projects A and B require an initial investment of $48,000 and $98,000,respectively.The projects are mutually exclusive and both have positive net present values.Which of these methods is probably the best method to use to determine which project to accept?

Leo is considering adding a deli to his general store.The remodeling expenses and shelving costs are estimated at $2,500.Deli sales are expected to produce net cash inflows of $1,300,$1,600,$1,700,and $1,750 for Years 1 to 4,respectively.Leo has a firm 3-year payback requirement.Should he add the deli?

Rodriquez's Hot Rods is considering a new project with an initial cost of $26,410 and a discount rate of 8 percent.The project is expected to have one cash inflow of $42,500 in Year 2.What is the discounted payback period?

Bloomfield Tires has assigned a discount rate of 14.4 percent to a new project that has an initial cost of $229,000 and cash flows of $74,300,$128,700,and $89,500 for Years 1 to 3,respectively.What is the net present value of this project?

Toy Town is considering a new toy that will cost $49,100 in startup costs.The toy is expected to produce cash flows of $47,500 in Year 1 and $18,600 in Year 2.The toy will be discontinued after the second year.The discount rate assigned to the toy is 14.9 percent.Should the toy be produced? What is the IRR?

Janice is considering an investment costing $102,500 with cash flows of $9,800 in Year 2,$48,700 in Year 3,and $82,900 in Year 4.The discount rate is 9 percent and the required discounted payback period is 2.5 years.Should this project be accepted or rejected? What is the discounted payback period?

The Depot is considering a project with annual sales of $325,000 for four years.The profit margin is 4.65 percent.The initial cost for equipment will be $330,000.The equipment will be depreciated by $55,000 each year.The required average accounting rate of return is 11.4 percent.Should this project be accepted or rejected? What is the AAR?

A project will not produce any cash flows for two years.Starting in the third year,it will produce annual cash flows of $11,900 a year for two years.The project initially costs $43,600.In Year 6,the project will be closed and as a result should produce a final cash inflow of $50,500.What is the net present value of this project if the required rate of return is 8.7 percent?

Two key weaknesses of the internal rate of return rule are the:

Which one of the following statements concerning net present value (NPV)is correct?

Project Q has an initial cost of $211,415 and projected cash flows of $121,300 in Year 1 and $176,300 in Year 2.Project R has an initial cost of $415,000 and projected cash flows of $187,500 in Year 1 and $236,600 in Year 2.The discount rate is 8.5 percent and the projects are independent.Which project(s),if either,should be accepted based on its profitability index value?

Which two of the following methods of project analysis are most biased towards short-term projects? I.Internal rate of return II.Accounting rate of return III.Payback IV.Discounted payback

Clinton is considering a project that costs $3,200 will produce cash inflows of $980 a year for 4 years.The project has a required rate of return of 8.75 percent.What is the discounted payback period?

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

A project has an initial cost of $2,600.The cash inflows are $300,$500,$900,and $700 for Years 1 to 4,respectively.What is the payback period?

Which one of these statements is correct given a project with conventional cash flows?

The discounted payback period of a project will decrease whenever the:

A project is expected to have annual cash flows of $22,400,$13,600 and -$4,200 for Years 1 to 3,respectively.The initial cash outlay is $27,500 and the discount rate is 12 percent.What is the modified IRR?

A firm should accept projects with positive net present values primarily because those projects will: