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Exam 8: Net Present Value and Other Investment Criteria

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Question 1

Multiple Choice

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Which one of the following is specifically designed to compute the rate of return on a project that has unconventional cash flows?

A) average accounting return
B) profitability index
C) internal rate of return
D) indexed rate of return
E) modified internal rate of return

F) A) and D)
G) All of the above

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Question 2

Multiple Choice

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Sonny and James are both considering the same project with the cash flows shown below.Sonny is content earning 8 per cent on the project but James wants to earn at least 12 per cent.Who,if either,should accept this project?

A) Sonny,but not James
B) James,but not Sonny
C) Sonny,James can either accept or reject as his NPV is zero
D) neither Sonny nor James
E) both Sonny and James

F) C) and D)
G) A) and D)

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Question 3

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Golden Sands Distribution Company is considering the purchase of a new pallet wrapping machine at a cost of $55 000.The machine will result in increased cash flow for the company of $13 000 per annum for the next five years.What is the NPV of this project if the company use a discount rate of 12% per annum?

Which one of the following methods of analysis is most appropriate to use when two investments are mutually exclusive?

If managers only invest in projects that have a profitability index greater than 1.0:

The Bondi Pizza Palace is considering opening a new store at a start-up cost of $700 000.The initial investment will be depreciated straight line to zero over the 15-year life of the project.Based on the income projections shown below what is the average accounting rate of return?

The average accounting return:

You are using a net present value profile to compare two projects.At the point where the net present values of the two projects intersect,the:

The payback method of analysis is the most beneficial in which one of the following situations?

The net present value:

Rural Feed Mill Pty Ltd is spending $250 000 to update its facility.The company estimates that this investment will improve its cash inflows by $56 500 a year for 10 years.What is the payback period?

T.L.C. ,Inc.is considering an investment with an initial cost of $175 000 that would be depreciated straight line to a zero book value over the life of the project.The cash inflows generated by the project are estimated at $76 000 for the first two years and $30 000 for the following two years.What is the internal rate of return?

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

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

Discounted cash flow valuation is the process of discounting an investment's:

The payback rule works best in evaluating which one of the following?

You are considering the following two mutually exclusive projects.What is the crossover point?

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

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?

Which one of the following methods of analysis is most similar to computing the return on assets (ROA) ?