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Exam 8: Net Present Value and Other Investment Criteria

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Question 41

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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

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

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Question 42

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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.

F) C) and D)
G) D) and E)

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Question 43

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An investment has an initial cost of $2.7 million and net income of $189,400,$178,600,and $172,500 for Years 1 to 3.This investment will be depreciated by $900,000 a year over the three-year life of the project.Should this project be accepted based on the average accounting rate of return if the required rate is 12.5 percent? Why or why not?

Delta Mu Delta is considering purchasing some new equipment costing $393,000.The equipment will be depreciated on a straight-line basis to a zero book value over the four-year life of the project.Projected net income for the four years is $16,900,$25,300,$27,700,and $18,400.What is the average accounting rate of return?

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 Golden Goose is considering a project with an initial cost of $46,700.The project will produce cash inflows of $10,000 a year for the.first two years and $12,000 a year for the following three years.What is the payback period?

Which one of the following indicators offers the best assurance that a project will produce value for its owners?

Textiles Unlimited has gathered projected cash flows for two projects.At what interest rate would the company be indifferent between the two projects? Which project is better if the required return is 12 percent? $\begin{array} { | r | r | r | } \hline \text { Year } & \underline { \text { Cash Flow } } & \underline { \text { Cash } } \\& \underline { ( A ) } & \text { Flow(B) } \\\hline 0 &-\$105,000&-\$105,000\\\hline 1 & 42,200 & - 52,600 \\\hline 2 & 34,600 & 39,400 \\\hline 3 & 38,700 & 35,500 \\\hline 4 & 40,500 & 30,100 \\\hline\end{array}$

The net present value:

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? $\begin{array} { | c | r | } \hline \text { Years } & \text { Net Income } \\\hline 1 - 6 & \$ 58,000 \\\hline 6 - 10 & 52,000 \\\hline 11 - 15 & 44,000 \\\hline\end{array}$

What is the net present value of the following set of cash flows at a discount rate of 5 percent? At 15 percent? $\begin{array} { | c | r | } \hline \text { Year } & \text { Cash Flow } \\\hline 0 & - \$ 23,600 \\\hline 1 & 8,200 \\\hline 2 & 9,100 \\\hline 3 & 10,600 \\\hline\end{array}$

Services United is considering a new project that requires an initial cash investment of $26,000.The project will generate cash inflows of $2,500,$11,700,$13,500,and $10,000 over each of the next four years,respectively.How long will it take to recover the initial investment?

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

A project has the following cash flows.What is the internal rate of return? $\begin{array} { | c | r | } \hline \text { Year } & \text { Cash Flow } \\\hline 0 & - \$ 89,300 \\\hline 1 & 32,900 \\\hline 2 & 64,200 \\\hline 3 & 5,800 \\\hline\end{array}$

Mary has just been asked to analyze an investment to determine if it is acceptable.Unfortunately,she is not being given sufficient time to analyze the project using various methods.She must select one method of analysis and provide an answer based solely on that method.Which method do you suggest she use in this situation?

Baker's Supply imposes a payback cutoff of 3.5 years for its international investment projects.If the company has the following two projects available,which project(s) ,if either,should it accept? $\begin{array} { | r | r | r | } \hline \underline { \text { Year } } & \underline { \text { Cash Flow } } & \underline { \text { Cash } } \\&\text {A}&\text {Flow (B) }\\\hline 0 & - \$ 62,000 & - \$ 26,000 \\\hline 1 & 7,100 & 15,600 \\\hline 2 & 9,800 & 8,400 \\\hline 3 & 28,700 & 1,900 \\\hline 4 & 45,900 & 1,100 \\\hline\end{array}$

Which one of the following is the primary advantage of payback analysis?

Soft and Cuddly is considering a new toy that will produce the following cash flows.Should the company produce this toy based on IRR if the firm requires a rate of return of 17.5 percent? $\begin{array} { | c | r | } \hline \text { Year } & \text { Cash Flow } \\\hline 0 & - \$ 132,000 \\\hline 1 & 97,000 \\\hline 2 & 42,000 \\\hline 3 & 28,000 \\\hline\end{array}$

The internal rate of return is the:

Professional Properties is considering remodeling the office building it leases to Heartland Insurance.The remodeling costs are.estimated at $2.8 million.If the building is remodeled,Heartland Insurance has agreed to pay an additional $820,000 a year in rent for.the next five years.The discount rate is 12.5 percent.What is the benefit of the remodeling project to Professional Properties?