Exam 8: Net Present Value and Other Investment Criteria

Gordon Corporation is considering a 30 year project.The present value of all future cash flows from the project is $825,000.Its initial investment is $475,000.Calculate the Profitability Index on this project.

If the net present value of a project which costs $20,000 is $5,000 when the discount rate is 10 percent, then the:

What is the minimum cash flow that could be received at the end of year three to make the following project "acceptable?" Initial cost = $100,000; cash flows at end of years one and two = $35,000; opportunity cost of capital = 10 percent.

For most managers, discounted cash flow analysis is in fact the dominant tool for project evaluation.

What is the approximate maximum amount that a firm should consider paying for a project that will return $15,000 annually for 5 years if the opportunity cost is 10 percent?

When mutually exclusive projects have different lives, the project which should be selected will have the:

When using a profitability index to select projects, a value of 0.63 is preferred over a value of 0.21.

How can the net present value rule be used to analyze three common problems that involve competing projects: when to postpone an investment expenditure; how to choose between projects with equal lives; and when to replace equipment?

A currently used machine costs $10,000 annually to run.What is the maximum that should be paid to replace the machine with one that will last three years and cost only $4,000 annually to run? The opportunity cost of capital is 12 percent.

Determine the project's NPV if the Profitability Index is 1.4; and the investment value is $500,000.

What happens to the equivalent annual cost of a project as the opportunity cost of capital decreases?

Net present value subtracts the present value of the cash flows from the initial investment.

When graphing NPV at different discount rates for mutually exclusive projects, the project with the lower IRR should be selected whenever:

Mountain Corporation is considering purchasing one of two photocopiers.The first copier will have an initial cost of $8,000 and will have operating costs of $1,000 per year during its 5 year life.The second photocopier will cost $10,500 and will have $1,100 per year during its 8 year life.If the company's required rate of return is 8%, determine the equivalent annual cost of each machine.

Which of the following best illustrates the problem imposed by capital rationing?

Why doesn't the payback rule always make shareholders better off?

If projects A and B are independent, which of the following is true?

Norton Corporation is considering a 6 year project having an initial investment of $150,000.The project will provide cash inflows of $25,000 for the first 3 years and $60,000 during the last 3 years.Given this information, calculate the project's payback.

Norbert is considering a project with an initial value of $125,000.Cash inflows during the next 6 years will be $35,000 per year.Given this information, provide the project's payback.

If a Project's IRR is 13 percent and the project provides annual cash flows of $15,000 for four years, how much did the project cost?