Exam 8: Investment Decision Rules

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%?

What is the decision criteria using internal rate of return (IRR)rule?

A firm is considering several mutually exclusive investment opportunities.The best way to choose between them is which of the following?

An investor is considering the two investments shown above.Her cost of capital is 9%.Which of the following statements about these investments is TRUE?

You are considering an investment opportunity that will cost you $8,000 up front,but return a single cash flow of $18,000 6 years from now.What is the IRR for this investment?

The owners of a chain of fast-food restaurants spend $28 million installing donut makers in all their restaurants.This is expected to increase cash flows by $10 million per year for the next five years.If the discount rate is 6.5%,were the owners correct in making the decision to install donut makers?

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

Which of the following decision rules is best defined as the amount of time it takes to pay back the initial investment?

A florist is buying a number of motorcycles to expand its delivery service.These will cost $87,000,but are expected to increase profits by $3000 per month over the next four years.What is the payback period in this case?

A steel company wishes to replace the lighting in its warehouse with an energy efficient LED system.Installing the new lighting system will cost $1.5 million,but is expected to generate a cost savings of $140,000 per year for the next 25 years,when the new lights will need to be replaced.If the steel company has a cost of capital of 6%,what is the NPV of this investment?

Use the table for the question(s)below. Consider the following list of projects: -Assume that your capital is constrained,so that you only have $600,000 available to invest in projects.If you invest in the optimal combination of projects given your capital constraint,then the total net present value (NPV)for all the projects you invest in will be closest to:

Use the information for the question(s)below. An independent film maker is considering producing a new movie.The initial cost for making this movie will be $20 million today.Once the movie is completed,in one year,the movie will be sold to a major studio for $25 million.Rather than paying for the $20 million investment entirely using its own cash,the film maker is considering raising additional funds by issuing a security that will pay investors $11 million in one year.Suppose the risk-free rate of interest is 10%. -Refer to the information above.Without issuing the new security,the net present value (NPV)for this project is closest to what amount? Should the film maker make the investment?

Why is the internal rate of return (IRR)inadequate when comparing mutually exclusive investments of different scale?

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 payback period for this project is closest to:

A janitorial services firm is considering two brands of industrial vacuum cleaner to equip their staff.Option A will cost $1500,will require servicing of $200 per year,and last five years.Option B will cost $1000,require servicing of $100 per year,and last three years.If the cost of capital is 8%,which is the better option,given that the firm has an ongoing requirement for vacuum cleaners?

Investment A: Investment B: Investment C: Investment D: Investment E: The cash flows for three projects are shown above.The cost of capital is 7.5%.If an investor decided to take projects with a payback period two years or less,which of these projects would he take?