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Exam 9: Net Present Value and Other Investment Criteria

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Question 21

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Motor City Productions sells original automotive art on a prepaid basis as each piece is uniquely designed to the customer's specifications.For one project,the cash flows are estimated as follows.Based on the internal rate of return (IRR) ,should this project be accepted if the required return is 9 percent?

A) Accept the project.
B) Reject the project.
C) The IRR cannot be used to evaluate this type of project.
D) The firm should be indifferent to either accepting or rejecting this project.
E) Insufficient information is provided to make a decision based on IRR.

F) A) and E)
G) C) and D)

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Question 22

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The relevant discount rate for the following set of cash flows is 14 percent.What is the profitability index?

A) 0.89
B) 0.93
C) 0.99
D) 1.03
E) 1.07

F) C) and D)
G) B) and C)

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Question 23

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Which two methods of project analysis were the most widely used by CEO's as of 1999?

-The Green Fiddle is considering a project that will produce sales of $87,000 a year for the next 4 years.The profit margin is estimated at 6 percent.The project will cost $90,000 and will be depreciated straight-line to a book value of zero over the life of the project.The firm has a required accounting return of 11 percent.This project should be _____ because the AAR is _____ percent.

A project has a discounted payback period that is equal to the required payback period.Given this,which of the following statements must be true? I.The project must also be acceptable under the payback rule. II.The project must have a profitability index that is equal to or greater than 1.0. III.The project must have a zero net present value. IV.The project's internal rate of return must equal the required return.

-You're trying to determine whether to expand your business by building a new manufacturing plant.The plant has an installation cost of $12 million,which will be depreciated straight-line to zero over its 4-year life.The plant has projected net income of $1,095,000,$902,000,$1,412,000,and $1,724,000 over these 4 years.What is the average accounting return?

The profitability index (PI)of a project is 1.0.What do you know about the project's net present value (NPV)and its internal rate of return (IRR)?

-You are analyzing the following two mutually exclusive projects and have developed the following information.What is the crossover rate?

A project's average net income divided by its average book value is referred to as the project's average:

You are viewing a graph that plots the NPVs of a project to various discount rates that could be applied to the project's cash flows.What is the name given to this graph?

-Scott is considering a project that will produce cash inflows of $2,100 a year for 4 years.The project has a 12 percent required rate of return and an initial cost of $6,000.What is the discounted payback period?

-J&J Enterprises is considering an investment that will cost $318,000.The investment produces no cash flows for the first year.In the second year,the cash inflow is $47,000.This inflow will increase to $198,000 and then $226,000 for the following two years,respectively,before ceasing permanently.The firm requires a 15.5 percent rate of return and has a required discounted payback period of three years.Should the project be accepted? Why or why not?

Which of the following statements related to the internal rate of return (IRR) are correct? I.The IRR method of analysis can be adapted to handle non-conventional cash flows. II.The IRR that causes the net present value of the differences between two project's cash flows to equal zero is called the crossover rate. III.The IRR tends to be used more than net present value simply because its results are easier to comprehend. IV.Both the timing and the amount of a project's cash flows affect the value of the project's IRR.

Which of the following are definite indicators of an accept decision for an independent project with conventional cash flows? I.positive net present value II.profitability index greater than zero III.internal rate of return greater than the required rate IV.positive internal rate of return

A project has an initial cost of $27,400 and a market value of $32,600.What is the difference between these two values called?

-You are considering two mutually exclusive projects with the following cash flows.Which project(s) should you accept if the discount rate is 8.5 percent? What if the discount rate is 13 percent?

-You are analyzing a project and have gathered the following data: Based on the internal rate of return of _____ percent for this project,you should _____ the project.

A project has average net income of $5,900 a year over its 6-year life.The initial cost of the project is $98,000 which will be depreciated using straight-line depreciation to a book value of zero over the life of the project.The firm wants to earn a minimum average accounting return of 11.5 percent.The firm should _____ the project because the AAR is _____ percent.

The internal rate of return:

-A firm evaluates all of its projects by applying the IRR rule.The required return for the following project is 21 percent.The IRR is _____ percent and the firm should ______ the project.