Exam 5: Net Present Value and Other Investment Rules

What is the net present value of a project with an initial cost of $36,900 and cash inflows of $13,400,$21,600,and $10,000 for Years 1 to 3,respectively? The discount rate is 13 percent.

For investment projects,the internal rate of return (IRR):

Anne is considering two independent projects with 2-year lives.Both projects have been assigned a discount rate of 13 percent.She has sufficient funds to finance one or both projects.Project A costs $38,500 and has cash flows of $19,400 and $28,700 for Years 1 and 2,respectively.Project B costs $41,000,and has cash flows of $25,000 and $22,000 for Years 1 and 2,respectively.Which project,or projects,if either,should you accept based on the profitability index method and what is the correct reason for that decision?

Roy's Welding projects cash flows of $13,500,$20,400,and $32,900 for Years 1 to 3 for a project with an initial cost of $45,000.What is the profitability index given an assigned discount rate of 15 percent?

An investment with an initial cost of $15,000 produces cash flows of $5,000 annually for 5 years.At a discount rate of 10 percent,what is the discounted payback period?

If a project is assigned a required rate of return of zero,then:

You are trying to determine whether to accept Project A or Project B.These projects are mutually exclusive.As part of your analysis,you should compute the incremental IRR by determining the:

Net present value:

The discounted payback period of a project will decrease whenever the:

The profitability index of an investment project is the ratio of the:

Assume you use all available methods to evaluate projects.If there is a conflict in the indicated accept/reject decision between two mutually exclusive projects due to the IRR-based indicator,you should:

Most financial experts will agree that net present value is the best capital budgeting method.However,even NPV can be unreliable when projecting project results.Explain why this is so.

One characteristic of the payback method of project analysis is the:

Bernstein's proposed project has an initial cost of $128,600 and cash flows of $64,500,$98,300,and −$15,500 for Years 1 to 3 respectively.If all negative cash flows are moved to Time 0 at a discount rate of 10 percent,what is the modified internal rate of return?

A food cart costs $4,500 and is expected to return $1,750 a year for three years and then be worthless.What is the payback period for this cart?

Sun Lee's is considering two mutually exclusive projects that have been assigned the same discount rate of 10.5 percent.Project A has an initial cost of $54,500,and should produce cash inflows of $16,400,$28,900,and $31,700 for Years 1 to 3,respectively.Project B has an initial cost of $79,400,and should produce cash inflows of $0,$48,300,and $42,100,for Years 1 to 3,respectively.What is the incremental IRR?

A proposed project costs $300 and has cash flows of $80,$200,$75,and $90 for Years 1 to 4,respectively.Because of its high risk,the project has been assigned a discount rate of 16 percent.In dollars,how much will this project return in today's dollars for every $1 invested?

Two mutually exclusive projects have 3-year lives and a required rate of return of 10.5 percent.Project A costs $75,000 and has cash flows of $18,500,$42,900,and $28,600 for Years 1 to 3,respectively.Project B costs $72,000 and has cash flows of $22,000,$38,000,and $26,500 for Years 1 to 3,respectively.Using the IRR,which project,or projects,if either,should be accepted?

Given the goal of maximization of firm value and shareholder wealth,we have stressed the importance of net present value (NPV).And yet,some financial decision-makers continue to use less desirable measures such as the payback method.Why do you think this is the case?

Project X has an initial cost of $20,000 and a cash inflow of $25,000 in Year 3.Project Y costs $40,700 and has cash flows of $12,000,$25,000,and $10,000 in Years 1 to 3,respectively.The discount rate is 6 percent and the projects are mutually exclusive.Based on the individual project's IRRs you should accept Project ________; based on NPV you should accept Project ________; the final decision should be to accept Project ________.