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Exam 8: Net Present Value and Other Investment Criteria

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Question 31

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The average accounting return:

A) measures profitability rather than cash flow.
B) discounts all values to today's dollars.
C) is expressed as a percentage of an investment's current market value.
D) will equal the required return when the net present value equals zero.
E) is used more often by CFOs than the internal rate of return.

F) A) and B)
G) B) and D)

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Question 32

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The Tool Box needs to purchase a new machine costing $1.46 million.Management is estimating the machine will generate cash inflows of $223,000 the first year and $600,000 for the following three years.If management requires a minimum 12 percent rate of return,should the firm purchase this particular machine based on its IRR? Why or why not?

A) Yes, because the IRR is 10.75 percent
B) Yes, because the IRR is 12.74 percent
C) No, because the IRR is 10.75 percent
D) No, because the IRR is 12.74 percent
E) The answer cannot be determined as there are multiple IRRs

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

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Question 33

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In which one of the following situations would the payback method be the preferred method of analysis?

What is the NPV of the following set of cash flows at a discount rate of zero percent? What if the discount rate is 15 percent? $\begin{array} { | c | r | } \hline \text { Year } & \text { Cash Flow } \\\hline 0 & - \$ 21,400 \\\hline 1 & 11,600 \\\hline 2 & 13,500 \\\hline 3 & 12,200 \\\hline\end{array}$

Diamond Enterprises is considering a project that will produce cash inflows of $41,650 a year for three years followed by $49,000 in.Year 4.What is the internal rate of return if the initial cost of the project is $219,000?

Which one of the following statements is correct?

Both Projects A and B are acceptable as independent projects.However,the selection of either one of these projects eliminates the option of selecting the other project.Which one of the following terms best describes the relationship between Project A and Project B?

The possibility that more than one discount rate can cause the net present value of an investment to equal zero is referred to as:

Molly is considering a project with cash inflows of $811,$924,$638,and $510 over the next four years,respectively.The relevant.discount rate is 11.2 percent.What is the net present value of this project if it the start-up cost is $2,700?

You are considering an equipment purchase costing $167,000.This equipment will be depreciated straight-line to zero over its three-year life.What is the average accounting return if this equipment produces the following net income? $\begin{array} { | c | r | } \hline \text { Year } & \text { Net Income } \\\hline 1 & 15,600 \\\hline 2 & 14,200 \\\hline 3 & 13,500 \\\hline\end{array}$

If a project with conventional cash flows has a profitability index of 1.0,the project will:

Auto Detailers is buying some new equipment at a cost of $188,900.This equipment will be depreciated on a straight-line basis to a zero book value its eight-year life.The equipment is expected to generate net income of $11,000 a year for the first four years and $24,000 a year for the last four years.What is the average accounting rate of return?

The payback period is the length of time it takes an investment to generate sufficient cash flows to enable the project to:

Which one of the following statements is correct? Assume cash flows are conventional.

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? $\begin{array}{|r|r|r|}\hline \text { Year } &{\text { Cash }} & {\text { Cash Flow }} \\ & {\text { Flow(A) }} & {\text { (B) }} \\\hline 0&-\$32,000&-\$26,000\\\hline 1 & 11,500,000 & -\$ 26,000 \\\hline 2 & 15,900 & 5,500 \\\hline 3 & 13,200 & 24,900 \\\hline\end{array}$

Consider the following two mutually exclusive projects: $\begin{array} { | r | r | r | } \hline \underline { \text { Year } } & \underline { \text { Cash Flow } } & \underline { \text { Cash } } \\& \underline { ( A ) } & \underline { \text { Flow } ( B ) } \\\hline0 &-\$54,000&-\$23,000\\\hline 1 & 12,700 & 11,600 \\\hline 2 & 23,200 & 11,200 \\\hline 3 & 27,600 & 12,500 \\\hline 4 & 46,500 & 6,000 \\\hline\end{array}$ Whichever project you choose,if any,you require a rate of return of 14 percent on your investment.If you apply the payback criterion,you will choose Project ______; if you apply the NPV criterion,you will choose Project ______; if you apply the IRR criterion,you will choose Project _____; if you choose the profitability index criterion,you will choose Project ___.Based on your first four answers,which project will you finally choose?

You're trying to determine whether or not to expand your business by building a new manufacturing plant.The plant has an installation cost of $29 million,which will be depreciated straight-line to zero over its three-year life.If the plant has projected net income of $1,848,000,$2,080,000,and $2,720,000 over these three years,what is the project's average accounting return (AAR) ?

What is the net present value of the following cash flows if the relevant discount rate is 7 percent? $\begin{array} { | r | r | } \hline \text { Year } & \text { Cash Flow } \\\hline 0 & - \$ 11,520 \\\hline 1 & 81 \\\hline 2 & 650 \\\hline 3 & 880 \\\hline 4 & 2,300 \\\hline 5 & 15,800 \\\hline\end{array}$

A project has the following cash flows.What is the internal rate of return? $\begin{array} { | c | r | } \hline \text { Year } & \text { Cash Flow } \\\hline 0 & - \$ 68,700 \\\hline 1 & 19,600 \\\hline 2 & 22,300 \\\hline 3 & 27,500 \\\hline 4 & 15,300 \\\hline\end{array}$

You are considering the following two mutually exclusive projects.The required return on each project is 14 percent.Which project should you accept and what is the best reason for that decision? $\begin{array} { | c | r | r | } \hline \underline { \text { Year } } & \underline { \text { Project A } } & \text { Project B } \\\hline 0 & - \$ 24,000 & - \$ 21,000 \\\hline 1 & 9,500 & 6,500 \\\hline 2 & 16,200 & 9,800 \\\hline 3 & 8,700 & 15,200 \\\hline\end{array}$