Exam 9: Net Present Value and Other Investment Criteria

-The Chandler Group wants to set up a private cemetery business.According to the CFO,Barry M.Deep,business is "looking up".As a result,the cemetery project will provide a net cash inflow of $57,000 for the firm during the first year,and the cash flows are projected to grow at a rate of 7 percent per year forever.The project requires an initial investment of $759,000.The firm requires a 14 percent return on such undertakings.The company is somewhat unsure about the assumption of a 7 percent growth rate in its cash flows.At what constant rate of growth would the company just break even?

Rossiter Restaurants is analyzing a project that requires $180,000 of fixed assets.When the project ends,those assets are expected to have an aftertax salvage value of $45,000.How is the $45,000 salvage value handled when computing the net present value of the project?

You are considering a project with conventional cash flows and the following characteristics: Which of the following statements is correct given this information? I.The discount rate used in computing the net present value was less than 11.63 percent. II.The discounted payback period must be more than 2.98 years. III.The discount rate used in the computation of the profitability ratio was 11.63 percent. IV.This project should be accepted as the internal rate of return exceeds the required return.

In actual practice,managers frequently use the: I.average accounting return method because the information is so readily available. II.internal rate of return because the results are easy to communicate and understand. III.discounted payback because of its simplicity. IV.net present value because it is considered by many to be the best method of analysis.

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

-Day Interiors is considering a project with the following cash flows.What is the IRR of this project?

Which one of the following will decrease the net present value of a project?

-A project has an initial cost of $32,000 and a 3-year life.The company uses straight-line depreciation to a book value of zero over the life of the project.The projected net income from the project is $1,200,$2,300,and $1,800 a year for the next 3 years,respectively.What is the average accounting return?

Douglass Interiors is considering two mutually exclusive projects and have determined that the crossover rate for these projects is 11.7 percent.Project A has an internal rate of return (IRR)of 15.3 percent and Project B has an IRR of 16.5 percent.Given this information,which one of the following statements is correct?

There are two distinct discount rates at which a particular project will have a zero net present value.In this situation,the project is said to:

A project has a required payback period of three years.Which one of the following statements is correct concerning the payback analysis of this project?

Western Beef Exporters is considering a project that has an NPV of $32,600,an IRR of 15.1 percent,and a payback period of 3.2 years.The required return is 14.5 percent and the required payback period is 3.0 years.Which one of the following statements correctly applies to this project?

-Boston Chicken is considering two mutually exclusive projects with the following cash flows.What is the crossover rate? If the required rate of return is lower than the crossover rate,which project should be accepted?

Which one of the following statements is correct in relation to independent projects?

The present value of an investment's future cash flows divided by the initial cost of the investment is called the:

Graphing the crossover point helps explain:

-A project has an initial cost of $6,500.The cash inflows are $900,$2,200,$3,600,and $4,100 over the next four years,respectively.What is the payback period?

-It will cost $6,000 to acquire an ice cream cart.Cart sales are expected to be $3,600 a year for three years.After the three years,the cart is expected to be worthless as the expected life of the refrigeration unit is only three years.What is the payback period?

Why is payback often used as the sole method of analyzing a proposed small project?

-A firm evaluates all of its projects by using the NPV decision rule.At a required return of 14 percent,the NPV for the following project is _____ and the firm should _____ the project.