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Exam 9: Net Present Value and Other Investment Criteria

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Question 81

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Project A and B have 4 year timelines. Project A has an initial investment of $120,000 and cash inflows of $50,000, $50,000 $30,000 and $30,000. Project B has an initial investment of $190,000 and cash inflows of $80,000, $70,000, $70,000 and $60,000. At what rate of interest would a company be indifferent at choosing project A or B?

A) 25.77%
B) 24.66%
C) 23.55%
D) 22.44%
E) 21.33%

F) B) and C)
G) A) and E)

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Question 82

Multiple Choice

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Which one of the following methods of analysis is most applicable to those situations where small dollar, short-term, independent projects are evaluated by low level managers on a daily basis?

A) Net present value.
B) Internal rate of return.
C) Accounting rate of return.
D) Payback.
E) Profitability index.

F) None of the above
G) A) and C)

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Question 83

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You are comparing two mutually exclusive projects. The crossover point is 9 %. You determine that you should accept project A if the required return is 6 %. This implies that you should always accept project A and always reject project B.

Without using formulas, provide a definition of discounted cash flow (DCF) valuation.

Without using formulas, provide a definition of mutually exclusive investment decisions.

The IRR method can produce multiple rates of return if the cash flows are nonconventional.

Which capital investment evaluation technique is described by the following characteristics? (1) Easy to understand and communicate; (2) May result in multiple answers; (3) May lead to incorrect decisions when applied to mutually exclusive investments.

The IRR is the most widely used capital budgeting technique.

Which of the following statements is false?

You are considering two independent projects with the following cash flows, both of which have been assigned a discount rate of 9.5 %. Based on the profitability index (PI) , what is your recommendation concerning these projects?

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

The use of the internal rate of return could lead to incorrect decisions in comparing mutually exclusive investments.

The discount rate that makes the net present value of investment exactly equal to zero is the:

You are considering the following two mutually exclusive projects with the following cash flows. Both projects will be depreciated using straight-line depreciation to a zero book value over the life of the project. Neither project has any salvage value. You should _____ Project A and _____ Project B based on the payback period of each project.

Fulton Corporation purchased an asset costing $525,000. The asset has a 4 year life, $90,000 salvage value, and is depreciated on a straight line method. During the past four years, Fulton posted net income of $15,000, $18,500, $20,000 and $21,000. Given the following information, calculate the company's average accounting return over the past four years.

What is the net present value of a project that has an initial cash outflow of $12,670 and the following cash inflows? The required return is 11.5 %.

Project X has a cost of $750 and a three year annual cash flow of $350 per year. Project Y has a cost of $500 and a three year annual cash flow of $300, $225 and $200. Given this information, calculate the IRR cross-over rate.

Larry's Lanterns is considering a project which will produce sales of $240,000 a year for the next five years. The profit margin is estimated at 6 %. The project will cost $290,000 and be depreciated straight-line to a book value of zero over the life of the project. Larry's has a required accounting return of 8 %. This project should be _____ because the AAR is _____

Which one of the following is the best example of two mutually exclusive projects?

The capital budgeting process addresses what products or services are offered or sold, in what markets to compete, and what new products to introduce.