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Exam 8: Net Present Value and Other Investment Criteria

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Question 31

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You are considering the following two mutually exclusive projects. The crossover point is _____ and project _____ should be accepted at a 12 percent discount rate.

A) 11.07 percent; B
B) 11.38 percent; A
C) 11.38 percent; B
D) 14.02 percent; A
E) 14.02 percent; B

F) D) and E)
G) B) and E)

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Question 32

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Major Importers would like to spend $211,000 to expand its warehouse. However, the company has a loan outstanding that must be repaid in 2.5 years and thus will need the $211,000 at that time. The warehouse expansion project is expected to increase the cash inflows by $48,000 in the first year, $139,000 in the second year, and $210,000 a year for the following two years. Should the firm expand at this time? Why or why not?

A) Yes; because the money will be recovered in 1.69 years
B) Yes; because the money will be recovered in 1.87 years
C) Yes; because the money will be recovered in 2.11 years
D) No; because the project never pays back
E) No; because the money will not be recovered in time to repay the loan

F) B) and D)
G) B) and E)

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Question 33

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Both Projects A and B are acceptable as independent projects. However, the selection of either one of these projects eliminates the option of selecting the other project. Which one of the following terms best describes the relationship between Project A and Project B?

The internal rate of return is unreliable as an indicator of whether or not an investment should be accepted given which one of the following?

Which one of the following indicates that a project should be rejected?

T.L.C., Inc. is considering an investment with an initial cost of $175,000 that would be depreciated straight line to a zero book value over the life of the project. The cash inflows generated by the project are estimated at $76,000 for the first two years and $30,000 for the following two years. What is the internal rate of return?

An investment has an initial cost of $3.2 million. This investment will be depreciated by $900,000 a year over the 3-year life of the project. Should this project be accepted based on the average accounting rate of return if the required rate is 10.5 percent? Why or why not?

A project has expected cash inflows, starting with year 1, of $2,200, $2,900, $3,500 and finally in year four, $4,000. The profitability index is 1.14 and the discount rate is 12 percent. What is the initial cost of the project?

Which one of the following will occur when the internal rate of return equals the required return?

Today, Crunchy Snacks is investing $487,000 in a new oven. As a result, the company expects its cash flows to increase by $62,000 a year for the next two years and by $98,000 a year for the following three years. How long must the firm wait until it recovers all of its initial investment?

Payback is best used to evaluate which type of projects?

An investment has an initial cost of $320,000 and a life of four years. This investment will be depreciated by $60,000 a year and will generate the net income shown below. Should this project be accepted based on the average accounting rate of return (AAR) if the required rate is 9 percent? Why or why not?

The Drive-Thru requires an average accounting return (AAR) of at least 17 percent on all fixed asset purchases. Currently, it is considering some new equipment costing $168,000. This equipment will have a 4-year life over which time it will be depreciated on a straight line basis to a zero book value. The annual net income from this equipment is estimated at $8,100, $10,300, $17,900, and $19,600 for the four years. Should this purchase occur based on the accounting rate of return? Why or why not?

Jefferson International is trying to choose between the following two mutually exclusive design projects: The required return is 12 percent. If the company applies the profitability index (PI) decision rule, which project should the firm accept? If the company applies the NPV decision rule, which project should it take? Given your first two answers, which project should the firm actually accept?

Which one of the following methods of analysis ignores the time value of money?

You are considering the following two mutually exclusive projects. The crossover point is _____ and Project _____ should be accepted if the discount rate is 14 percent.

Which one of the following statements is correct?

The present value of the benefits of a particular investment happens to equal the initial cost of that investment at the required rate of 14 percent. What is the value of the investment's internal rate of return, its net present value, and its profitability index?

Curtis is considering a project with cash inflows of $918, $867, $528, and $310 over the next four years, respectively. The relevant discount rate is 11 percent. What is the net present value of this project if it the start up cost is $2,100?

A project has the following cash flows. What is the internal rate of return?