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Exam 8: Net Present Value and Other Investment Criteria

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Question 51

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You are making an investment of $110,000 and require a rate of return of14.6 percent.You expect to receive $48,000 in the first year,.$52,500 in the second year,and $55,000 in the third year.There will be a cash outflow of $900 in the fourth year to close out the.investment.What is the net present value of this investment?

A) $7,881.55
B) $4,305.56
C) $1,879.63
D) $633.33
E) $8,534.25

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

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Question 52

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Which one of the following methods of analysis ignores the time value of money?

A) Net present value
B) Internal rate of return
C) Discounted cash flow analysis
D) Payback
E) Profitability index

F) B) and E)
G) D) and E)

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Question 53

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You are considering an investment for which you require a rate of return of 8.5 percent.The investment costs $67,400 and will produce.cash inflows of $25,720 for three years.Should you accept this project based on its internal rate of return? Why or why not?

Chestnut Tree Farms has identified the following two mutually exclusive projects: $\begin{array} { | r | r | r | } \hline \text { Year } & \text { Cash Flow } & \underline { \text { Cash } } \\&{ ( \mathrm { A } ) } & \underline { \text { Flow } ( \mathrm { B } ) } \\\hline 0 & - \$ 40,000 & - \$ 40,000 \\\hline 1 & 11,300 & 17,400 \\\hline 2 & 14,800 & 14,100 \\\hline 3 & 13,700 & 12,900 \\\hline 4 & 7,900 & 2,200 \\\hline\end{array}$ Over what range of discount rates would you choose Project A?

You are considering the following two mutually exclusive projects.What is the crossover point? $\begin{array} { | c | r | r | } \hline \text { Year } & \text { Project A } & \text { Project B } \\\hline 0 & - \$ 52,000 & - \$ 52,000 \\\hline 1 & 0 & 12,000 \\\hline 2 & 33,000 & 29,000 \\\hline 3 & 40,000 & 27,000 \\\hline\end{array}$

Generally speaking,payback is best used to evaluate which type of projects?

The reinvestment approach to the modified internal rate of return:

Net present value involves discounting an investment's:

Which one of the following is an indicator that an investment is acceptable? Assume cash flows are conventional.

What is the payback period for a project with the following cash flows? $\begin{array} { | c | r | } \hline \text { Year } & \text { Cash Flow } \\\hline 0 & - \$ 75,000 \\\hline 1 & 15,000 \\\hline 2 & 23,000 \\\hline 3 & 35,000 \\\hline 4 & 25,000 \\\hline\end{array}$

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

An investment has an initial cost of $300,000 and a life of four years.This investment will be depreciated by $60,000 a year and will generate the net income shown below.Should this project be accepted based on the average accounting rate of return (AAR) if the required rate is 9.5 percent? Why or why not? $\begin{array} { | c | r | } \hline \text { Year } & \text { Net Income } \\\hline 1 & \$ 14,500 \\\hline 2 & 16,900 \\\hline 3 & 19,600 \\\hline 4 & 23,700 \\\hline\end{array}$

What is the IRR of the following set of cash flows? $\begin{array} { | c | r | } \hline \text { Year } & \text { Cash Flow } \\\hline 0 & - \$ 61,300 \\\hline 1 & 18,900 \\\hline 2 & 64,500 \\\hline 3 & 7,600 \\\hline\end{array}$

Which one of the following statements is correct?

The Black Horse is currently considering a project that will produce cash inflows of $11,000 a year for three years followed by $6,500 in Year 4.The cost of the project is $38,000.What is the profitability index if the discount rate is 9 percent?

What is the net present value of the following cash flows if the relevant discount rate is 11.4 percent? $\begin{array} { | c | r | } \hline \text { Year } & \text { Cash Flow } \\\hline 0 & - \$ 32,400 \\\hline 1 & 10,620 \\\hline 2 & 16,800 \\\hline 3 & - 3,110 \\\hline 4 & 26,600 \\\hline\end{array}$

Corner Restaurant is considering a project with an initial cost of $211,600.The project will not produce any cash flows for the first three years.Starting in Year 4,the project will produce cash inflows of $151,000 a year for three years.This project is risky,so the firm has assigned it a discount rate of 18.6 percent.What is the project's net present value?

The net present value profile illustrates how the net present value of an investment is affected by which one of the following?

Which one of the following is most closely related to the net present value profile?

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