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Exam 7: Net Present Value and Other Investment Rules

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Question 41

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

A) The discounted payback requires an arbitrary cutoff point while payback does not.
B) Payback is easier to compute than discounted payback.
C) Payback considers all of a project's cash flows but discounted payback does not.
D) Payback requires the initial investment be recovered during a project's life while the required discounted payback period may be shorter.
E) Payback can be used with mutually exclusive projects but discounted payback cannot.

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Question 42

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Assume a project has an initial cost of $48,000 and will produce net income for 5 years.The project will use straight-line depreciation over the life of the project.The AAR of this project can be computed as

A) (Sum of all net income / 5) / ($48,000 / 2)
B) (Sum of all net income / 2) / ($48,000 / 2)
C) ($48,000 / 5) / (Sum of all net income / 5)
D) ($48,000 / 2) / (Sum of all net income / 2)
E) (Sum of all net income / 5) / $48,000

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Question 43

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The value of a firm

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?

Project Water has an initial cost of $598,900 and projected cash flows of $302,000,$264,000,and $250,000 for Years 1 to 3,respectively.Project Aqua has an initial cost of $512,200 and projected cash flows of $290,000,$214,000,and $220,000 for Years 1 to 3,respectively.What is the incremental IRR_A-B of these two mutually exclusive projects?

Toy Town is considering a new toy with initial costs of $35,900.This toy is expected to produce cash flows of $52,500 in Year 1,$11,300 in Year 2,and nothing thereafter.The discount rate assigned to the toy is 18.7 percent.What is the IRR?

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 2 years.Given this information,you know that

A 5-year project requires $65,000 of fixed assets that will be depreciated using straight-line depreciation to a zero book value over the life of the project.If the firm requires a minimum average accounting return of 11.65 percent,what must be the minimum average net income for the project to be accepted?

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

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

The net present value of a project is projected at $210.How should this amount be interpreted?

Which methods of project analysis are most biased towards short-term projects?

The payback method

All else constant,the net present value of a typical investment project increases when

A project initially costs $40,500 and will not produce any cash flows for the first 2 years.Starting in Year 3,it will produce cash flows of $34,500 a year for 2 years.In Year 6,the project will end and should produce a final cash inflow of $12,000.What is the net present value of this project if the required rate of return is 18.5 percent?

A project has an initial cost of $12,100 and cash flows of -$2,100,$5,800,$16,600,and -$800 for Years 1 to 4,respectively.How many IRRs will this project have?

A new product has start-up costs of $389,200 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 required return of 14 percent?

You are considering two independent projects both of which have been assigned a discount rate of 12 percent.Project A costs $39,100 and produces cash flows of $15,900 a year for 3 years.Project B costs $22,900 and produces cash flows of $14,000 a year for 2 years.Based on the profitability index,what is your recommendation concerning these projects?

The payback method is a convenient and useful tool because

Janice is considering an investment costing $65,500 with cash flows of $48,700 in Year 2,$36,500 in Year 3,and $19,900 in Year 4.The discount rate is 11 percent,and the required discounted payback period is 3 years.Should this project be accepted or rejected? What is the discounted payback period?