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Exam 9: Net Present Value and Other Investment Criteria

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Question 161

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What is the internal rate of return for a project with the following cash flows?

A) 11.9 percent
B) 12.1 percent
C) 12.3 percent
D) 12.5 percent
E) 12.7 percent

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

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Question 162

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If you want to review a project from a benefit-cost perspective, you should use the _____ method of analysis.

A) Net present value.
B) Payback
C) Internal rate of return.
D) Average accounting return.
E) Profitability index.

F) D) and E)
G) A) and E)

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Question 163

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Desiree, Inc. is considering adding a new product with a start-up cost of $540,000. This cost will be depreciated over 3 years, which is the estimated life of the product. Desiree has a 34% marginal tax Rate. The net income for each of the three years is estimated at $15,000, $45,000, and $80,000. What is the average accounting return for the new product?

Fulton Corporation purchased an asset costing $525,000. The asset has a 4 year life, $90,000 salvage value, and is depreciated on a straight line method. During the past four years, Fulton Posted net income of $15,000, $18,500, $20,000 and $21,000. Given the following information, Calculate the company's average accounting return over the past four years.

A 50- year project has a cost of $500,000 and has annual cash flows of $100,000 in years 1-25, and $200,000 in years 26-50. The company's required rate is 8%. Given this information, calculate the Discounted payback of the project.

The payback method assumes that the cash flows:

In actual practice, managers frequently use the IRR because the results are easy to communicate and understand.

A 25- year project has a cost of $1,500,000 and has annual cash flows of $400,000 in years 1-15, and $200,000 in years 16-25. The company's required rate is 14%. Given this information, calculate The NPV of the project.

Net present value is a highly valued decision-making tool because:

AAR and payback use an arbitrary cutoff number in their decision rules.

What is the crossover rate for these two projects?

The discounted payback rule may cause:

When the present value of the cash inflows exceeds the initial cost of a project, then the project should be:

An investment is acceptable if its average accounting return (AAR) :

You are considering the following projects but have limited funds to invest and can't take them all. Using the profitability index, rank the projects in the order in which you would accept them. That is, Rank them from best to worst.

The internal rate of return method of analysis should not be used for comparing two mutually exclusive projects of similar size.

A project costs $12,500 to initiate. Cash flows are estimated as $2,500 a year for the first two years and $3,100 a year for the next three years. The discount rate is 11.25%. The net present value for This project is _____ and the internal rate of return is _________ the discount rate.

The use of either the internal rate of return or the profitability index could lead to incorrect decisions when comparing mutually exclusive investments.

A project has an initial cost of $47,500 and produces cash inflows of $21,200, $24,800, and $21,500 over the next three years, respectively. What is the discounted payback period if the Required rate of return is 14 percent?

Draw a graph that illustrates two mutually exclusive investments, A and B, with a crossover rate of return equal to 10%, and with A having the higher NPV at a discount rate of zero percent. Explain the graph, including under which conditions project A or project B would be chosen using NPV and then using IRR.