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Exam 8: Net Present Value and Other Investment Criteria

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Question 21

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The net present value of a project's cash inflows is $2,716 at a discount rate of 12 percent.The profitability index is 1.09 and the firm's tax rate is 34 percent.What is the initial cost of the project?

A) $2,314.07
B) $2,018.50
C) $2,428.32
D) $2,491.74
E) $2,066.67

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Question 22

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Today, Sweet Snacks is investing $491,000 in a new oven.As a result, the company expects its cash flows to increase by $64,000 a year for the next two years and by $98,000 a year for the following three years.How long must the firm wait until it recovers all of its initial investment?

A) 3.97 years
B) 4.18 years
C) 4.46 years
D) 4.70 years
E) The project never pays back.

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Question 23

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Which one of the following statements is correct?

Net present value involves discounting an investment's:

Which one of the following indicates that a project is expected to create value for its owners?

EKG, Inc.is considering a new project that will require an initial cash investment of $419,000.The project will produce no cash flows for the first two years.The projected cash flows for Years 3 through 7 are $69,000, $98,000, $109,000, $145,000, and $165,000, respectively.How long will it take the firm to recover its initial investment in this project?

The internal rate of return is unreliable as an indicator of whether or not an investment should be accepted given which one of the following?

What is the net present value of the following cash flows if the relevant discount rate is 11.4 percent?

You are considering the following two mutually exclusive projects.The required return on each project is 12 percent.Which project should you accept and what is the best reason for that decision?

What is the net present value of a project that has an initial cost of $40,000 and produces cash inflows of $ 8,500 a year for 10 years if the discount rate is 13 percent?

The net present value of an investment represents the difference between the investment's:

The Nifty Fifty is considering opening a new store at a start-up cost of $628,000.The initial investment will be depreciated straight-line to zero over the 15-year life of the project.What is the average accounting rate of return given the following net income projections?

Which one of the following is specifically designed to compute the rate of return on a project that has a multiple negative cash flows that are interrupted by one or more positive cash flows?

An investment has an initial cost of $462,000 and will generate the net income amounts shown below.This investment will be depreciated straight-line to zero over the four-year life of the project.Should this project be accepted based on the average accounting rate of return if the required rate is 14.75 percent? Why or why not?

What is the net present value of a project that has an initial cost of $25,000 and produces cash inflows of $ 5,500 a year for 8 years if the discount rate is 7 percent?

Which one of the following indicates that a project should be rejected? Assume the cash flows are normal, i.e., the initial cash flow is negative.

A project has the following cash flows.What is the payback period?

Woodcrafters requires an average accounting return (AAR) of at least 17.5 percent on all fixed asset purchases.Currently, it is considering some new equipment costing $169,700.This equipment will have a four-year life over which time it will be depreciated on a straight-line basis to a zero book value.The annual net income from this equipment is estimated at $7,100, $13,300, $18,600, and $19,200 for the four years.Should this purchase occur based on the accounting rate of return? Why or why not?

A firm is reviewing a project that has an initial cost of $67,000.The project will produce annual cash inflows, starting with Year 1, of $8,000, $13,400, $18,600, $24,100, and finally in Year 5, $37,900.What is the profitability index if the discount rate is 11 percent?

Which one of the following is generally considered to be the best form of analysis if you have to select a single method to analyze a variety of investment opportunities?