Exam 8: Investment Decision Rules

Mary is in contract negotiations with a publishing house for her new novel. She has two options. She may be paid $100,000 up front, and receive royalties that are expected to total $26,000 at the end of each of the next five years. Alternatively, she can receive $200,000 up front and no royalties. Which of the following investment rules would indicate that she should take the former deal, given a discount rate of 8%? Rule I: The Net Present Value rule Rule II: The Payback Rule with a payback period of two years Rule III: The internal rate of return (IRR)Rule

A car dealership offers a car for $14,000, with up to one year to pay for the car. If the interest rate is 5%, what is the net present value (NPV)of this offer to buyers who elect not to pay for the car for one year?

Consider the following two projects: Assume that projects A and B are mutually exclusive. The correct investment decision and the best rationale for that decision is to ________.

You can evaluate alternative projects with different lives by calculating and comparing their equivalent annual annuity.

You are opening up a brand new retail strip mall. You presently have more potential retail outlets wanting to locate in your mall than you have space available. What is the most appropriate tool to use if you are trying to determine the optimal allocation of your retail space?

A company has four projects it wishes to undertake. Which of these investments should be the lowest priority, given a discount rate of 5%?

The profitability index can break down completely when dealing with multiple resource restraints.

Consider the following two projects: The net present value (NPV)for project alpha is closest to ________.

A lawn maintenance company compares two ride-on mowers-the Excelsior, which has an expected working-life of six years, and the Grassassinator, which has a working life of four years. After examining the equivalent annual annuities of each mower, the company decides to purchase the Excelsior. Which of the following, if true, would be most likely to make them change that decision?

The cash flows for three projects are shown above. The cost of capital is 9.5%. If an investor decided to take projects with a payback period two years or less, which of these projects would he take?

Use the information for the question(s)below. -The owner of a hair salon spends $1,000,000 to renovate its premises, estimating that this will increase her cash flow by $220,000 per year. She constructs the above graph, which shows the net present value (NPV)as a function of the discount rate. If her discount rate is 6%, should she accept the project?

A delivery service is buying 600 tires for its fleet of vehicles. One supplier offers to supply the tires for $80 per tire, payable in one year. Another supplier will supply the tires for $20,000 down today, then $45 per tire, payable in one year. What is the difference in PV between the first and the second offer, assuming interest rates are 8.1%?

The Net Present Value rule implies that we should compare a project's net present value (NPV)to zero.

You are trying to decide between three mutually exclusive investment opportunities. The most appropriate tool for identifying the correct decision is ________.

A convenience store owner is contemplating putting a large neon sign over his store. It would cost $50,000, but is expected to bring an additional $24,000 of profit to the store every year for five years. Would this project be worthwhile if evaluated using a payback period of two years or less and if the cost of capital is 10%?

How do you apply the Net Present Value rule when multiple projects are available and you have the added constraint of accepting only one project?

Consider the following two projects: The payback period for project B is closest to ________.

A bakery is deciding whether to buy an extra van to help deliver its products. The van will cost $28,000, but is expected to increase profits by $6,500 per year over the five years of its working life. Which of the following is the correct net present value (NPV)profile for this purchase?

An investor has a budget of $30 million. He can invest in the projects shown above. If the cost of capital is 5%, what investment or investments should he make?

The Sisyphean Company is planning on investing in a new project. This will involve the purchase of some new machinery costing $420,000. The Sisyphean Company expects cash inflows from this project as detailed below: The appropriate discount rate for this project is 16%. The net present value (NPV)for this project is closest to ________.