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Exam 8: Net Present Value and Other Investment Criteria

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Question 1

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You were recently hired by a firm as a project analyst.The owner of the firm is unfamiliar with financial analysis and wants to know only what the expected dollar return is per dollar spent on a given project.Which financial method of analysis will provide the information that the owner requests?

A) Internal rate of return
B) Modified internal rate of return
C) Net present value
D) Profitability index
E) Payback

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

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Question 2

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Which one of the following methods of analysis ignores cash flows?

A) Profitability index
B) Payback
C) Average accounting return
D) Modified internal rate of return
E) Internal rate of return

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

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Question 3

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Jefferson International is trying to choose between the following two mutually exclusive design projects: $\begin{array} { | r | r | r | } \hline \text { Year } & \text { Cash Flow } & \underline { \text { Cash } } \\&{ ( \mathrm { A } ) } & \underline { \text { Flow } ( \mathrm { B } ) } \\\hline 0 & - \$ 55,000 & - \$ 29,000 \\\hline 1 & 12,300 & 19,400 \\\hline 2 & 15,100 & 16,600 \\\hline 3 & 50,000 & 900 \\\hline\end{array}$ The required return is 13 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 is true if the managers of a firm accept only projects that have a profitability index greater than 1.5?

Which one of the following methods of analysis is most appropriate to use when two investments are mutually exclusive?

A firm is reviewing a project that has an initial cost of $67,000.The project will produce annual cash inflows,starting with Year 1,of $8,000,$13,400,$18,600,$24,100,and finally in Year 5,$37,900.What is the profitability index if the discount rate is 11 percent?

What is the net present value of a project that has an initial cost of $42,700 and produces cash inflows of $9,250 a year for 9 years if the discount rate is 14.65 percent?

Which one of the following methods of analysis has the greatest bias toward short-term projects?

The profitability index reflects the value created per dollar:

You are using a net present value profile to compare Projects A and B,which are mutually exclusive.Which one of the following statements correctly applies to the crossover point between these two?

The average net income of a project divided by the project's average book value is referred to as the project's:

A proposed project requires an initial cash outlay of $49,000 for equipment and an additional cash outlay of $18,700 in Year 1 to cover.operating costs.During Years 2 through 4,the project will generate cash inflows of $42,500 a year.What is the net present value of this.project at a discount rate of 11.6 percent?

If an investment is producing a return that is equal to the required return,the investment's net present value will be:

Miller and Sons is evaluating a project with the following cash flows: $\begin{array} { | c | r | } \hline \text { Year } & \text { Cash Flow } \\\hline 0 & - \$ 72,000 \\\hline 1 & 29,100 \\\hline 2 & 20,600 \\\hline 3 & 42,500 \\\hline 4 & 24,300 \\\hline 5 & - 9,800 \\\hline\end{array}$ The company uses a 10 percent interest rate on all of its projects.What is the MIRR of the project using the reinvestment approach? The discounting approach? The combination approach?

Based on the most recent survey information presented in your textbook,CFOs tend to use which two methods of investment analysis the most frequently?

Greenbriar Cotton Mill is spending $284,000 to update its facility.The company estimates that this investment will improve its cash.inflows by $50,500 a year for 8 years.What is the payback period?

The modified internal rate of return is specifically designed to address the problems associated with:

Which one of the following analytical methods is based on net income?

A project has expected cash inflows,starting with Year 1,of $900,$1,200,$1,500,and finally in Year 4,$2,000.The profitability index is 1.11 and the discount rate is 12 percent.What is the initial cost of the project?

A project has the following cash flows.What is the payback period? $\begin{array} { | c | r | } \hline \text { Year } & \text { Cash Flow } \\\hline 0 & - \$ 28,000 \\\hline 1 & 11,600 \\\hline 2 & 11,600 \\\hline 3 & 6,600 \\\hline 4 & 6,600 \\\hline\end{array}$