Question 1

Which of the following is a correct Excel formula to solve for the net present value of a project?

Accepted Answer

The answer of Which of the following is a correct...

Question 2

Which of the following is a correct equation to solve for the NPV of the project that has an initial outlay of $30,000,followed by incremental cash inflows in the next 3 years of $15,000,$20,000,and $30,000? Assume a discount rate of 10%.

Accepted Answer

The correct equation for calculating NPV involves discounting future cash inflows back to their present value using the formula NPV = -Initial Investment + Σ(Cash Inflow / (1 + r)^t), where r is the discount rate and t is the time period. Option B correctly applies this formula with a 10% discount rate.

Question 3

Project H requires an initial investment of $100,000 and the produces annual cash flows of $50,000,$40,000,and $30,000.Project T requires an initial investment of $100,000 and the produces annual cash flows of $30,000,$40,000,and $50,000.If the required rate of return is greater than 0% and the projects are mutually exclusive

Accepted Answer

The answer of Project H requires an initial investment of...

Question 4

A machine has a cost of $5,575,000.It will produce cash inflows of $1,825,000 (Year 1);$1,775,000 (Year 2);$1,630,000 (Year 3);$1,585,000 (Year 4);and $1,650,000 (Year 5).At a discount rate of 16.25%,the project should be

Accepted Answer

Using the net present value (NPV) formula with a discount rate of 16.25%, we get an NPV of approximately -$623,000. This means that the present value of the cash inflows is not enough to cover the cost of the machine, resulting in a negative NPV. Therefore, the project should be rejected.

Question 5

You have been asked to analyse a capital investment proposal.The project's cost is $2,775,000.Cash inflows are projected to be $925,000 in Year 1;$1,000,000 in Year 2;$1,000,000 in Year 3;$1,000,000 in Year 4;and $1,225,000 in Year 5.Assume that your firm discounts capital projects at 15.5%.What is the project's NPV?

Accepted Answer

The answer of You have been asked to analyse a...

Question 6

A machine costs $1,000,has a three-year life,and has an estimated salvage value of $100.It will generate after-tax annual cash flows (ACF)of $600 a year,starting next year.If your required rate of return for the project is 10%,what is the NPV of this investment? (Round your answer to the nearest $10. )

Accepted Answer

First, we need to calculate the present value (PV) of the annual cash flows for three years using the formula:
PV = ACF / (1 + r)^n
where:
r = required rate of return = 10%
n = number of years
PV of cash flows = $600 / (1 + 0.1)^1 + $600 / (1 + 0.1)^2 + $600 / (1 + 0.1)^3
PV of cash flows = $1,553.67
Next, we need to calculate the present value of the salvage value at the end of the third year:
PV of salvage value = $100 / (1 + 0.1)^3
PV of salvage value = $75.13
Now, we can calculate the net present value (NPV) of the investment:
NPV = PV of cash flows - initial investment + PV of salvage value
NPV = $1,553.67 - $1,000 + $75.13
NPV = $628.80
Since the NPV is positive ($628.80), this investment is a good choice. The closest option to the calculated NPV is B) $570.

Question 7

Project EH! requires an initial investment of $50,000,and has a net present value of $12,000.Project BE requires an initial investment of $100,000,and has a net present value of $13,000.The projects are mutually exclusive.The firm should accept

Accepted Answer

Project BE has a higher net present value and thus should be accepted over Project EH!. Additionally, since the projects are mutually exclusive, only one can be chosen. Therefore, the firm should accept Project BE.

Question 8

Project Full Moon has an initial outlay of $30,000,followed by positive cash flows of $10,000 in year 1,$15,000 in year 2,and $15,000 in year 3.The project should be accepted if the required rate of return is

Accepted Answer

The answer of Project Full Moon has an initial outlay...

Question 9

Which of the following is the correct equation to solve for the NPV of the project that has an initial outlay of $30,000,followed by three years of $20,000 in incremental cash inflow? Assume a discount rate of 10%.

Accepted Answer

NPV = -$30,000 + $20,000/(1.10)1 + $20,000/(1.10)2 + $20,000/(1.10)3
This is the correct formula to calculate the NPV of the project. The initial outlay of $30,000 is subtracted from the sum of the present values of the three years of incremental cash inflows, which are discounted at a rate of 10%. Therefore, the correct choice is B.

Question 10

Project H requires an initial investment of $100,000 and the produces annual cash flows of $45,000 per year for each of the next 3 years.Project T also requires an initial investment of $100,000 and produces cash flows of $30,000 in year 1,$40,000 in year 2,and $70,000 in year 3.If the discount rate is 10% and the projects are mutually exclusive

Accepted Answer

To compare the two projects, we need to find the present value of the cash flows for each project using a discount rate of 10%.
For Project H:
PV = -$100,000 + $45,000/(1+0.10)^1 + $45,000/(1+0.10)^2 + $45,000/(1+0.10)^3
PV = -$100,000 + $36,363 + $33,058 + $29,144
PV = -$1,435
For Project T:
PV = -$100,000 + $30,000/(1+0.10)^1 + $40,000/(1+0.10)^2 + $70,000/(1+0.10)^3
PV = -$100,000 + $27,273 + $33,057 + $52,701
PV = $12,031
Therefore, Project T has a higher present value of cash flows and should be chosen over Project H.

Question 11

Project Eh! requires an initial investment of $50,000,and has a net present value of $12,000.Project B requires an initial investment of $100,000,and has a net present value of $13,000.The projects are proposals for increasing revenue and are not mutually exclusive.The firm should accept

Accepted Answer

Both projects have positive net present values, indicating that they will generate returns higher than the initial investment. Since the projects are not mutually exclusive, the firm can invest in both and increase their overall revenue. Therefore, accepting both projects would be the best choice.

Question 12

Warchester Inc.is considering the purchase of copying equipment that will require an initial investment of $15,000 and $4,000 per year in annual operating costs over the equipment's estimated useful life of 5 years.The company will use a discount rate of 8.5%.What is the equivalent annual cost?

Accepted Answer

The answer of Warchester Inc.is considering the purchase of copying...

Question 13

Artie's Soccer Ball Company is considering a project with the following cash flows: Initial outlay = $750,000
Incremental after-tax cash flows from operations Years 1-4 = $250,000 per year
Compute the NPV of this project if the company's discount rate is 12%.

Accepted Answer

The NPV (Net Present Value) of the project can be calculated using the formula: NPV = $\sum \frac{C_t}{(1+r)^t} - C_0$, where $C_t$ is the cash flow at time $t$, $r$ is the discount rate, and $C_0$ is the initial investment. Here, $C_0 = $750,000$, $C_t = $250,000$ for $t = 1$ to $4$, and $r = 12\%$. Calculating the NPV: NPV = $\frac{250,000}{(1+0.12)^1} + \frac{250,000}{(1+0.12)^2} + \frac{250,000}{(1+0.12)^3} + \frac{250,000}{(1+0.12)^4} - 750,000$. This calculation results in an NPV of approximately $9,337, making option A correct.

Question 14

Project H requires an initial investment of $100,000 and the produces annual cash flows of $45,000 per year for each of the next 3 years.Project T also requires an initial investment of $100,000 and produces cash flows of $30,000 in year 1,$40,000 in year 2,and $70,000 in year 3.If the discount rate increases from 10% to 16%

Accepted Answer

The answer of Project H requires an initial investment of...

Question 15

WSU Inc.has various options for replacing a piece of manufacturing equipment.The present value of costs for option Ell is $84,000.Option Ell has a useful life of 5 years;annual operating costs were discounted at 9%.What is the equivalent annual cost?

Accepted Answer

The equivalent annual cost for option Ell can be calculated using the formula: Equivalent annual cost = present value of costs / annuity factor.

The annuity factor can be calculated using the formula:

annuity factor = (1 - (1 + discount rate)^(-useful life)) / discount rate

Plugging in the values:

annuity factor = (1 - (1 + 0.09)^(-5)) / 0.09 = 3.240854

Equivalent annual cost = $84,000 / 3.240854 = $25,944.48

Therefore, option Ell has an equivalent annual cost of $25,944.48.

To determine the best choice, WSU Inc. would need to compare the equivalent annual costs of all the available options and choose the one(s) with the lowest cost. Without additional information on the costs and benefits of the other options, it is not possible to make a recommendation.

Question 16

Suppose you determine that the NPV of a project is $1,525,855.What does that mean?

Accepted Answer

A positive NPV indicates that the project will add value to the firm. However, the comparison with another project with a different NPV cannot be made solely based on this information. Other factors such as project timelines, risks, and financial constraints need to be considered before making a decision. The statement about payback and profitability index is not necessarily true for all cases.

Question 17

The present value of the total costs over a five-year period for Project April is $50,000.The net present value of total costs over a 4-year period for Project October is $40,000.The company uses a discount rate of 9%.Which project should it choose and why?

Accepted Answer

To compare the two projects, we need to calculate their equivalent annual cost (EAC) using the formula:

EAC = (Present value of total costs) x (Discount rate / 1 - 1 / (1 + Discount rate) ^ Number of years)

For Project April: EAC = (50,000) x (0.09 / 1 - 1 / (1 + 0.09) ^ 5) = $12,776.67

For Project October: EAC = (40,000) x (0.09 / 1 - 1 / (1 + 0.09) ^ 4) = $12,703.98

Project October has a lower EAC, which means it is the better choice. Additionally, it has a shorter life, which may be preferable for the company.

Question 18

A machine has a cost of $5,375,000.It will produce cash inflows of $1,825,000 (Year 1);$1,775,000 (Year 2);$1,630,000 (Year 3);$1,585,000 (Year 4);and $1,650,000 (Year 5).At a discount rate of 16.25%,what is the NPV?

Accepted Answer

The answer of A machine has a cost of $5,375,000.It...

Question 19

Project January has a NPV of $50,000,and project December has a NPV of $40,000.Which of the following circumstances could make it possible to choose December over January?

Accepted Answer

If the projects have unequal lives, it is possible that project December has a higher profitability index (PI) than project January. PI adjusts for the length of the project and shows how much return is expected per unit of investment. Therefore, even though project January has a higher NPV, project December may have a higher PI and be the better choice. Choices A, B, and D do not provide enough information to choose one project over the other.

Question 20

Project H requires an initial investment of $100,000 and the produces annual cash flows of $45,000 per year for each of the next 3 years.Project T also requires an initial investment of $100,000 and produces cash flows of $30,000 in year 1,$40,000 in year 2,and $70,000 in year 3.If the discount rate is 10% and the projects are not mutually exclusive

Accepted Answer

Both projects should be accepted because they have positive net present values (NPVs) at the discount rate of 10%. The NPV of Project H is calculated as follows:
Year 1: $45,000 / (1 + 0.10)^1 = $40,909.09
Year 2: $45,000 / (1 + 0.10)^2 = $37,172.27
Year 3: $45,000 / (1 + 0.10)^3 = $33,793.88
NPV = -$100,000 + $40,909.09 + $37,172.27 + $33,793.88 = $11,875.24
The NPV of Project T is calculated as follows:
Year 1: $30,000 / (1 + 0.10)^1 = $27,272.73
Year 2: $40,000 / (1 + 0.10)^2 = $32,231.41
Year 3: $70,000 / (1 + 0.10)^3 = $53,355.71
NPV = -$100,000 + $27,272.73 + $32,231.41 + $53,355.71 = $12,859.84
Since both projects have positive NPVs, they should both be accepted.

Quiz 11: Investment Decision Criteria