Deck 8: Net Present Value and Other Investment Criteria

Question 1

Nagle's Machinery is spending $97 500 to update its equipment.This is necessary if the firm wishes to be competitive in the market place and provide a wide array of product models.The company estimates that these updates will improve their cash inflows by $18 500 a year for five years.What is the payback period?

A)1.37 years
B)2.84 years
C)3.29 years
D)5.49 years
E)this project never pays back

Answer 1

this project never pays back

Question 2

You are considering a project that has an initial outlay of $500 000.The project will generate cash inflows of $150 000 per year for four years,followed by $80 000 for one more year.Considering the discount rate of 10%,what is the profitability index?

A)0.95
B)0.97
C)1.00
D)1.05
E)1.36

Answer 2

1.05

Question 3

You are using a net present value profile to compare two projects.At the point where the net present values of the two projects intersect,the:

A)net present value of each project is equal to zero
B)internal rate of return is equal to the required rate of return
C)relevant discount rate is called the crossover rate
D)internal rate of return of each project is equal to zero
E)the accounting rate of return of each project is equal to zero

Answer 3

relevant discount rate is called the crossover rate

Question 4

The payback rule works best in evaluating which one of the following?

A)a low-cost project which pays back slowly
B)a low-cost project which pays back rapidly
C)a high-cost project with equal cash inflows over a long period of time
D)a high-cost project with increasing cash inflows over time
E)projects requiring significant research and development time

Question 5

Sonny and James are both considering the same project with the cash flows shown below.Sonny is content earning 8 per cent on the project but James wants to earn at least 12 per cent.Who,if either,should accept this project?

A)Sonny,but not James
B)James,but not Sonny
C)Sonny,James can either accept or reject as his NPV is zero
D)neither Sonny nor James
E)both Sonny and James

Question 6

Calculate the approximate internal rate of return given the following series of cash flows.

A)14.47%
B)15.80%
C)19.67%
D)17.92%
E)16.83%

Question 7

A net present value of zero implies that an investment:

A)has an initial cost of zero
B)has cash inflows which have a zero present value
C)has no expected impact on shareholders
D)does not pay back its initial cash outlay
E)has a profitability index that is less than 1.0

Question 8

The net present value rule states that you should accept a project if the NPV:

A)is equal to zero or negative
B)exceeds the required rate
C)is less than 1.0
D)is positive
E)exceeds the initial cost

Question 9

The internal rate of return identifies:

A)the minimum acceptable discount rate
B)the benefit-cost ratio
C)the average profit from a project
D)none of the given answers
E)all of the given answers

Question 10

Nawano is considering an investment of $200 000 with cash inflows of $80 000;$70 000;$75 000;$10 000 and $35 000 over the next five years,respectively.What is the net present value of this investment if the relevant discount rate is 11 per cent?

A)$63 063.10
B)$11 083.10
C)$17 008.60
D)$14 200.87
E)$44 151.62

Question 11

Angie is evaluating a proposed project and wants to answer two questions.First,what is the market value of the project? Second,how much profit will the project produce in relation to its book value.To answer these two questions,Angie should use which one of the following sets of investment analysis methods?

A)internal rate of return and payback
B)payback and profitability index
C)net present value and average accounting return
D)net present value and payback
E)profitability index and net present value

Question 12

Your firm requires an average accounting return (AAR)of at least 15 per cent on all fixed Asset purchases.Currently,you are considering some new equipment costing $96 000.This equipment will have a three-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 project is estimated at $5500,$12 400,and $17 600 for the three years.Should you accept this project based on the accounting rate of return? Why or why not?

A)yes;because the AAR is less than 15 per cent
B)yes;because the AAR is equal to 15 per cent
C)yes;because the AAR is greater than 15 per cent
D)no;because the AAR is less than 15 per cent
E)no;because the AAR is equal to 15 per cent

Question 13

Which one of the following defines the internal rate of return for a project?

A)a discount rate that creates a zero cash flow from assets
B)a discount rate which results in a zero net present value for the project
C)a discount rate which results in a net present value equal to the project's initial cost
D)a rate of return required by the project's investors
E)the project's current market rate of return

Question 14

The payback method of analysis is the most beneficial in which one of the following situations?

A)a firm is considering a project that can easily be extended if it is profitable
B)a firm can either build a bowling alley or a miniature golf course on a piece of land,but not both
C)a ski resort is considering adding a golf course to increase revenues
D)a firm has free cash which can be invested but must be returned in time to meet a bond obligation two years from now
E)a firm is trying to decide between two projects with vastly different costs

Question 15

You are considering a project which has an internal rate of return that is equal to the required return.This means that:

A)the net present value is negative in an amount equal to the initial investment
B)the project is returning the minimal amount that is acceptable to you
C)the profitability index is greater than one
D)the average accounting return exceeds the project's required return
E)the project will lower the value of the firm

Question 16

If managers only invest in projects that have a profitability index greater than 1.0:

A)the firm will increase in value
B)the manager will be forced to explain to stockholders why the net worth of the firm is declining
C)the value of the firm's stock should remain constant
D)the cash flows of the firm should decrease
E)the net losses of the firm should increase

Question 17

Which one of the following best expresses two mutually exclusive investments?

A)constructing a theatre and a restaurant side by side
B)locating a restaurant inside a theatre building
C)building either a gas station or a restaurant on a corner lot
D)building both a restaurant and a parking lot on a vacant lot
E)building a parking lot for the benefit of both restaurant and theatre patrons

Question 18

The possibility that more than one discount rate can cause the net present value of an investment to equal zero is referred to as:

A)duplication
B)the net present value profile
C)multiple rates of return
D)the AAR problem
E)the dual dilemma

Question 19

The World Dictionary needs to purchase a new printing machine costing $1.8 million.Management is estimating that the machine will generate cash inflows of $250 000 for three years and $350 000 for the following four years.If management requires a minimum 15 per cent rate of return,should they purchase this particular machine? Why or why not?

A)yes;because the IRR is 18.30 per cent
B)yes;because the IRR is 4.32 per cent
C)no;because the IRR is 18.30 per cent
D)no;because the IRR is 4.32 per cent
E)The answer can not be determined as there are multiple IRRs.

Question 20

Ben Lake Enterprises is currently considering a project that will produce cash inflows
Of $3500 a year for three years followed by $1200 a year for two more years.The cost of the project is $10 000.What is the profitability index if the discount rate is 7 per cent?

A)0.96
B)0.98
C)1.00
D)1.06
E)1.10

Question 21

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

A)positive
B)greater than the project's initial investment
C)zero
D)equal to the project's net profit
E)less than,or equal to,zero

Question 22

The net present value:

A)decreases as the required rate of return increases
B)is equal to the initial investment when the internal rate of return is equal to the required return
C)method of analysis cannot be applied to mutually exclusive projects
D)is directly related to the discount rate
E)is unaffected by the timing of an investment's cash flows

Question 23

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

A)The internal rate of return for project A equals that of project B,but generally does not equal zero.
B)The internal rate of return of each project is equal to zero.
C)The net present value of each project is equal to zero.
D)The net present value of project A equals that of project B,but generally does not equal zero.
E)The net present value of each project is equal to the respective project's initial cost.

Question 24

The payback period is the length of time it takes an investment to generate sufficient cash flows to enable the project to:

A)produce a positive annual cash flow
B)produce a positive cash flow from assets
C)offset its fixed expenses
D)offset its total expenses
E)recoup its initial cost

Question 25

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?

A)9.27 per cent
B)9.98 per cent
C)10.62 per cent
D)10.79 per cent
E)11.58 per cent

Question 26

The reinvestment approach to the modified internal rate of return:

A)individually discounts each separate cash flow back to the present
B)reinvests all the cash flows,including the initial cash flow,to the end of the project
C)discounts all negative cash flows to the present and compounds all positive cash flows to the end of the project
D)discounts all negative cash flows back to the present and combines them with the initial cost
E)compounds all of the cash flows,except for the initial cash flow,to the end of the project

Question 27

Which one of the following statements is correct?

A)A longer payback period is preferred over a shorter payback period.
B)The payback rule states that you should accept a project if the payback period is less than one year.
C)The payback period ignores the time value of money.
D)The payback rule is biased in favour of long-term projects.
E)The payback period considers the timing and amount of all of a project's cash flows.

Question 28

The modified internal rate of return is specifically designed to address the problems associated with which one of the following?

A)mutually exclusive projects
B)unconventional cash flows
C)long-term projects
D)negative net present values
E)crossover points

Question 29

Which one of the following statements is correct?

A)If the IRR exceeds the required return,the profitability index will be less than 1.0.
B)The profitability index will be greater than 1.0 when the net present value is negative.
C)When the internal rate of return is greater than the required return,the net present value is positive.
D)Projects with conventional cash flows have multiple internal rates of return.
E)If two projects are mutually exclusive,you should select the project with the shortest payback period.

Question 30

Discounted cash flow valuation is the process of discounting an investment's:

A)assets
B)future profits
C)liabilities
D)costs
E)future cash flows

Question 31

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

A)internal rate of return
B)profitability index
C)net present value
D)modified internal rate of return
E)average accounting return

Question 32

Which one of the following is generally considered to be the best form of analysis if you have to select a single method to analyse a variety of investment opportunities?

A)payback
B)profitability index
C)accounting rate of return
D)internal rate of return
E)net present value

Question 33

Rural Feed Mill Pty Ltd is spending $250 000 to update its facility.The company estimates that this investment will improve its cash inflows by $56 500 a year for 10 years.What is the payback period?

A)4.24 years
B)5.05 years
C)4.13 years
D)4.42 years
E)The project never pays back.

Question 34

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?

A)One of the time periods within the investment period has a cash flow equal to zero.
B)The initial cash flow is negative.
C)The investment has cash inflows that occur after the required payback period.
D)The investment is mutually exclusive with another investment under consideration.
E)The cash flows are conventional.

Question 35

Which one of the following is specifically designed to compute the rate of return on a project that has unconventional cash flows?

A)average accounting return
B)profitability index
C)internal rate of return
D)indexed rate of return
E)modified internal rate of return

Question 36

Which one of the following is an indicator that an investment is acceptable?

A)a modified internal rate of return equal to zero
B)a profitability index of zero
C)an internal rate of return that exceeds the required return
D)a payback period that exceeds the required period
E)a negative average accounting return

Question 37

The net present value of an investment represents the difference between the investment's:

A)cash inflows and outflows
B)cost and net profit
C)cost and market value
D)cash flows and profits
E)assets and liabilities

Question 38

You are considering the following two mutually exclusive projects.What is the crossover point?

A)10.76
B)13.72
C)15.89
D)18.79
E)22.56

Question 39

Which one of the following indicates that a project is expected to create value for its owners?

A)a profitability index less than 1.0
B)a payback period greater than the requirement
C)a positive net present value
D)a positive average accounting rate of return
E)an internal rate of return that is less than the requirement

Question 40

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?

A)mutually exclusive
B)conventional
C)multiple choice
D)dual return
E)crosswise

Question 41

Avalon Aviation Products are evaluating a new project.What is the net present value of this project if the discount rate is 14 per cent and the net cash flows are as per the following table?

A)$742.50
B)$801.68
C)$823.92
D)$899.46
E)$901.15

Question 42

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

A)required return
B)market rate of return
C)internal rate of return
D)average accounting return
E)discounted rate of return

Question 43

Golden Sands Distribution Company is considering the purchase of a new pallet wrapping machine at a cost of $55 000.The machine will result in increased cash flow for the company of $13 000 per annum for the next five years.What is the NPV of this project if the company use a discount rate of 12% per annum?

A)$46 862
B)-$8138
C)$8138
D)-$46 862
E)$10 000

Question 44

The average accounting return:

A)measures profitability rather than cash flow
B)discounts all values to today's dollars
C)is expressed as a percentage of an investment's current market value
D)will equal the required return when the net present value equals zero
E)is used more often by CFOs than the internal rate of return

Question 45

Manly Manufacturing Ltd is evaluating an expansion of its business by purchasing new manufacturing equipment.The equipment has an installation cost of $26 million,which will be depreciated straight-line to zero over its three-year life.If the plant has projected net income of $2 348 000,$2 680 000,and $1 920 000 over these three years,what is the project's average accounting return (AAR)?

A)11.69 per cent
B)14.14 per cent
C)15.08 per cent
D)17.82 per cent
E)19.21 per cent

Question 46

The Bondi Pizza Palace is considering opening a new store at a start-up cost of $700 000.The initial investment will be depreciated straight line to zero over the 15-year life of the project.Based on the income projections shown below what is the average accounting rate of return?

A)13.05 per cent
B)13.68 per cent
C)14.01 per cent
D)14.59 per cent
E)14.76 per cent

Question 47

Which one of the following methods of analysis is most similar to computing the return on assets (ROA)?

A)internal rate of return
B)profitability index
C)average accounting return
D)net present value
E)payback