Exam 8: Investment Decision Rules

You have an investment opportunity in the United Kingdom that requires an investment of $500,000 today and will produce a cash flow of £320,000 in one year with no risk.Suppose the risk-free rate of interest in the United Kingdom is 6% and the current competitive exchange rate is $1.70/£.What is the net present value (NPV)of this project? Would you take the project?

Internal rate of return (IRR)can reliably be used to choose between mutually exclusive projects.

How can you calculate the y-intercept of a net present value (NPV)profile without using TVM concepts?

The internal rate of return (IRR)rule will agree with the Net Present Value rule even when positive cash flows precede negative cash flows.

Use the table for the question(s)below. Consider the following list of projects: -Assuming that your capital is constrained,which project should you invest in first?

A security firm is offered $80,000 in one year for providing CCTV coverage of a property.The cost of providing this coverage to the security firm is $74,000,payable now,and the interest rate is 8.5%.Should the firm take the contract?

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

What is the present value (PV)of an investment?

A garage is comparing the cost of buying two different car hoists.Hoist A will cost $20,000,will require servicing of $1000 every two years,and last ten years.Hoist B will cost $15,000,require servicing of $800 per year,and last eight years.If the cost of capital is 7%,which is the better option,given that the firm has an ongoing requirement for a hoist?

Use the information for the question(s)below. -If WiseGuy Inc.uses the NPV rule with a cost of capital of 8% to choose projects,which of the projects will rank highest?

What is the decision criteria while using the payback rule?

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?

Use the information for the question(s)below. The Sisyphean Company is planning on investing in a new project.This will involve the purchase of some new machinery costing $450,000.The Sisyphean Company expects cash inflows from this project as detailed below: The appropriate discount rate for this project is 16%. -The internal rate of return (IRR)for this project is closest to:

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

Use the table for the question(s)below. Consider a project with the following cash flows: -Assume the appropriate discount rate for this project is 15%.The profitability index for this project is closest to:

An investor has a budget of $5 million.He can invest in the projects shown above.If the cost of capital is 6%,what investment or investments should he make?

You are considering an investment opportunity that will cost you $15,000 up front,and return $5,000 per year for 10 years,with the first payment 5 years from today.What is the IRR for this investment?

A mining company plans to mine a beach for rutile.To do so will cost $10 million up front and then produce cash flows of $3 million per year for five years.At the end of the sixth year the company will incur shut-down and clean-up costs of $2 million.If the cost of capital is 11%,then what is the NPV for this project?

Use the table for the question(s)below. Consider a project with the following cash flows: -If the appropriate discount rate for this project is 15%,then the net present value (NPV)is closest to:

The owner of a number of gas stations is considering installing coffee machines in his gas stations.It will cost $280,000 to install the coffee machines,and they are expected to boost cash flows by $120,000 per year for their five-year working life.What must the cost of capital be if this investment has a profitability index of 1?