Exam 13: Capital Investment Decisions: Appraisal Methods

The internal rate of return model assumes that all net cash inflows are reinvested at the:

If NPV and IRR produce different rankings, which method should be used in choosing investment projects?

Van Dyke Company is evaluating a capital expenditure proposal that has the following predicted cash flows: Original investment £45,000 Year 1 £17,500 Year 2 25,000 Year 3 15,000 Salvage value -0- Discount rate 14\% a.Net present value of the investment b.Proposal's internal rate of return c.Payback period

A firm is evaluating a project that has a net present value of £0 when a discount rate of 8 per cent is used. A discount rate of 10 per cent will result in

The present value of £2,000 to be received three years from now and earning a 12 per cent return is

Why do the NPV method and the IRR method sometimes produce different rankings of mutually exclusive investment projects?

Which of the following methods uses income instead of cash flows?

Maxim, Inc., is considering two mutually exclusive projects. Project 1 requires an investment of £40,000, while Project 2 requires an investment of £30,000. Cash revenues and cash costs for each project are shown below. $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text { PROJECT } 1$ YEAR 1 2 3 4 Revenues £13,000 £18,000 £35,000 £25,000 Variable costs 7,000 9,000 12,000 12,000 Fixed costs 1,000 2,000 3,000 1,000 $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text { PROJECT } 2$ YEAR 1 2 3 4 Revenues £22,000 £38,000 £16,000 £9,000 Variable costs 12,000 21,000 8,000 5,000 Fixed costs 4,000 3,000 2,000 1,000 The company estimates that at the end of the fourth year Project 1 would have a salvage value of £3,000 and Project 2 would have a salvage value of £1,000. a.Determine the net present value of EACH project using a 16 per cent discount rate. b.Prepare a memorandum for management stating your recommendation. Include supporting calculations in good form.

If the annual cash flows are an annuity (equal each period), payback is calculated as

Ducky Pizza Restaurant purchases a van to deliver pizzas to their customers. The van costs £28,000 and is projected to increase revenues by £10,000 a year and to increase costs by £4,500. The payback period for this van is

A firm is considering a project with annual cash flows of £75,000. The project would have a 7-year life, and the company uses a discount rate of 10 per cent. What is the maximum amount the company could invest in the project and the project still be acceptable?

A firm is considering a project with annual cash flows of £40,000. The project would have a 10-year life, and the company uses a discount rate of 8 per cent. What is the maximum amount the company could invest in the project and the project still be acceptable?

Which of the following methods assumes a reinvestment rate equal to the discount rate?

A capital investment project requires an investment of £75,000 and has an expected life of four years. Annual cash flows at the end of each year are expected to be as follows: Year Amount 1 £40,000 2 £30,000 3 £10,000 4 £35,000 a.Compute payback assuming that the cash flows occur evenly throughout the year. b.Compute the net present value of the project using a 12 per cent discount rate.

Five mutually exclusive projects had the following information: A B C D E NPV £200 £400 £2,000 £1,000 £(400) IRR 11\% 13\% 10\% 12\% 8\% Which project is preferred?

A firm is considering a project with annual cash flows of £120,000. The project would have an 8-year life, and the company uses a discount rate of 12 per cent. What is the maximum amount the company could invest in the project and the project still be acceptable?

Mitchell, Inc., is considering two mutually exclusive projects. Project 1 requires an investment of £80,000, while Project 2 requires an investment of £90,000. Cash revenues and cash costs for each project are shown below: $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text { PROJECT } 1$ YEAR 1 2 3 4 Revenues £30,000 £50,000 £70,000 £90,000 Variable costs 8,000 12,000 20,000 25,000 Fixed costs 12,000 10,000 10,000 10,000 $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\text { PROJECT } 2$ YEAR 1 2 3 4 Revenues £65,000 £80,000 £60,000 £40,000 Variable costs 15,000 30,000 14,000 12,000 Fixed costs 5,000 20,000 10,000 8,000 The company estimates that at the end of the fourth year Project 1 would have a salvage value of £10,000 and Project 2 would have a salvage value of £5,000. a.Determine the net present value of EACH project using an 8 per cent discount rate. b.Prepare a memorandum for management stating your recommendation. Include supporting calculations in good form.

Brooks Company invested in a project that is expected to have an annual cash flow of £10,000. The project's life is five years and has an IRR of 14 per cent. How much was the initial investment in the project?

Dale Davis Company is evaluating a proposal to purchase a new machine that would cost £100,000 and have a salvage value of £10,000 in four years. It would provide annual operating cash savings of £10,000, as follows: Old Machine New Machine Salaries £40,000 £36,000 Supplies 7,000 5,000 Maintenance Total £56,000 £46,000 If the new machine is purchased, the old machine will be sold for its current salvage value of £20,000. If the new machine is not purchased, the old machine will be disposed of in four years at a predicted salvage value of £2,000. The old machine's present book value is £40,000. If kept, in one year the old machine will require repairs predicted to cost £35,000. Dale Davis's cost of capital is 14 per cent.

If a project has a net present value of £0 when a discount rate of 10 per cent is used, what can be concluded about the rate of return of the project?