Exam 8: Investment Decision Rules

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?

Given the cash flows in the table above, the point at which the NPV profile crosses the vertical axis is ________.

An investor is considering the two investments shown above. Her cost of capital is 8%. Which of the following statements about these investments is true?

Tanner is choosing between two investment options. He can invest $500 now and get (guaranteed) $550 in one year, or invest $500 now and get (guaranteed) $531.40 back later today. The risk-free rate is 3.5%. Which investment should Tanner prefer?

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

A farmer sows a certain crop. It costs $240,000 to buy the seed, prepare the ground, and sow the crop. In one year's time it will cost $93,200 to harvest the crop. If the crop will be worth $350,000, and the interest rate is 7%, what is the net present value (NPV) of this investment?

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 company buys a color printer that will cost $16,000 to buy, and last 5 years. It is assumed that it will require servicing costing $500 each year. What is the equivalent annual annuity of this deal, given a cost of capital of 8%?

The payback rule is based on the idea that an opportunity that pays back its initial investment quickly is a worthwhile opportunity.

What can you comment about the shape of the net present value (NPV) profile of a multiple IRR project?

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

The Sisyphean Company is planning on investing in a new project. This will involve the purchase of some new machinery costing $400,000. The Sisyphean Company expects cash inflows from this project as detailed below: The appropriate discount rate for this project is 15%. The internal rate of return (IRR) for this project is closest to ________.

Consider a project with the following cash flows: Assume the appropriate discount rate for this project is 13%. The payback period for this project is closest to ________.

Use the information for the question(s) below. Your firm is preparing to open a new retail strip mall and you have multiple businesses that would like lease space in it. Each business will pay a fixed amount of rent each month plus a percentage of the gross sales generated each month. The cash flows from each of the businesses has approximately the same amount of risk. The business names, square footage requirements, and monthly expected cash flows for each of the businesses that would like to lease space in your strip mall are provided below: -If your new strip mall will have 16,000 square feet of retail space available to be leased, to which businesses should you lease and why?

The internal rate of return (IRR) is the interest rate that sets the net present value (NPV) of the cash flows equal to zero.

An investor has a budget of $35 million. He can invest in the projects shown above. If the cost of capital is 8%, what investment or investments should he make?

A company has identified the following investments as looking promising. Each requires an initial investment of $1.2 million. Which is the best investment?

What is a safe method to use when confronted with mutually exclusive projects?

Which of the following is NOT a limitation of the payback period rule?

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