Question 1

Brighter Investment has a NPV of $50,000 and Apogee Investment 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 may be possible to choose December over January if the difference in NPV is not substantial and the December project has a shorter life. This would result in a higher overall return for the same investment period. However, if the projects have equal lives, choosing the one with the higher NPV would be the best option. Option A is not necessarily a factor in choosing between the two projects, and options B and D do not provide enough information to make a decision.

Question 2

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 NPV (Net Present Value) is calculated by discounting the future cash inflows at the given discount rate and then subtracting the initial investment. Using the given cash inflows and a discount rate of 16.25%, the NPV calculation results in $190,939.

Question 3

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

To calculate the NPV of the project, we need to discount the future cash inflows at the required rate of return (discount rate). The correct formula for calculating NPV is to find the present value of all cash inflows and then subtract the initial outlay. Therefore, option B is the correct equation to solve for the NPV of the project as it calculates the present value of each of the three years of cash inflows and subtracts the initial outlay of $30,000. Option A only calculates the present value of the total cash inflows, whereas Option C and Option D have incorrect formulas for calculating the present value of each year's cash inflows.

Question 4

Mission Co.requires an initial investment of $50,000, and has a net present value of $12,000.Ardent Co.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

Ardent Co. has a higher net present value compared to Mission Co. even though it requires a higher initial investment. Since the projects are mutually exclusive, we should choose the project with the higher net present value, which is Ardent Co. Therefore, the best choice is to invest in Ardent Co. and not in Mission Co.

Question 5

NorthCoast Inc.is considering the purchase of a 3-D printer that will require an initial investment of $15,000.The printer will produce parts at a net savings of $4000 per year in operating costs.The company will use a discount rate of 8.5%.What is the NPV of this equipment to the nearest dollar?

Accepted Answer

The answer of NorthCoast Inc.is considering the purchase of a...

Question 6

A machine costs $10,000, has a three-year life, and has an estimated salvage value of $1000.It will generate after-tax annual cash flows (ACF)of $6000 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 $1.00.)

Accepted Answer

The NPV can be calculated as follows:
Year 0: -$10,000 (initial investment)
Year 1-3: $6000*(1-0.3) / (1+0.1)^1-3 =$15,234 (after-tax annual cash flows, discounted to present value)
Salvage value: $1000 / (1+0.1)^3 =$751 (discounted salvage value)
NPV = -$10,000 + $15,234 + $751 = $5672 (rounded to the nearest dollar)

Question 7

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 three 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 calculate the present value of their cash flows using the discount rate of 10%.

For Project H: 
PV = $45,000 / (1 + 0.10)^1 + $45,000 / (1 + 0.10)^2 + $45,000 / (1 + 0.10)^3 + $100,000 
PV = $111,359.10

For Project T: 
PV = $30,000 / (1 + 0.10)^1 + $40,000 / (1 + 0.10)^2 + $70,000 / (1 + 0.10)^3 + $100,000 
PV = $121,534.54

Therefore, Project T has a higher present value of cash flows, so it should be chosen over Project H.

Question 8

Coastline Project 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 Coastline Project has an initial outlay of...

Question 9

Cloud Inc is considering a project with the following cash flows: Initial outlay = $750,000
Incremental after-tax cash flows from operations for years 1-4 = $250,000 per year
Calculate the NPV of this project if the company's discount rate is 12%.

Accepted Answer

The NPV (Net Present Value) can be calculated using the formula: NPV = $\sum \frac{CF_t}{(1+r)^t} - Initial\ Outlay$, where $CF_t$ is the cash flow in period $t$, $r$ is the discount rate, and $t$ is the time period. For this project, the cash flows are $250,000 for years 1-4, the discount rate is 12% (0.12), and the initial outlay is $750,000.NPV = $\frac{250,000}{(1+0.12)^1} + \frac{250,000}{(1+0.12)^2} + \frac{250,000}{(1+0.12)^3} + \frac{250,000}{(1+0.12)^4} - 750,000$NPV = $\frac{250,000}{1.12} + \frac{250,000}{1.2544} + \frac{250,000}{1.404928} + \frac{250,000}{1.57351936} - 750,000$NPV = $223,214.29 + 199,290.78 + 177,915.73 + 158,916.21 - 750,000$NPV = $759,336.99 - 750,000$NPV = $9,337$Therefore, the correct choice is A, with the NPV of the project being $9,337.

Question 10

Which of the following statements is correct?

Accepted Answer

The answer of Which of the following statements is correct?
...

Question 11

Which of the following is a correct EXCEL formula to solve for the net present value of a project? Assume that CF0 is expressed as a negative number.

Accepted Answer

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

Question 12

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 three years of $15,000, $20,000, and $30,000? Assume a discount rate of 10%.

Accepted Answer

The correct equation to solve for NPV is NPV = −Initial Outlay + (Cash inflow year 1 / (1+r)^1) + (Cash inflow year 2 / (1+r)^2) + (Cash inflow year 3 / (1+r)^3)
Plugging in the numbers, we get: NPV = −$30,000 + $15,000/(1.1)^1 + $20,000/(1.1)^2 + $30,000/(1.1)^3

Question 13

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

To determine whether the project should be accepted or rejected, we need to calculate the net present value (NPV) of the cash inflows.

NPV = (Cash inflow year 1 / (1 + discount rate)^1) + (Cash inflow year 2 / (1 + discount rate)^2) + (Cash inflow year 3 / (1 + discount rate)^3) + (Cash inflow year 4 / (1 + discount rate)^4) + (Cash inflow year 5 / (1 + discount rate)^5) - Cost of machine

NPV = ($1,825,000 / (1 + 0.1625)^1) + ($1,775,000 / (1 + 0.1625)^2) + ($1,630,000 / (1 + 0.1625)^3) + ($1,585,000 / (1 + 0.1625)^4) + ($1,650,000 / (1 + 0.1625)^5) - $5,575,000
NPV = $35,013.90

Since the NPV is positive, the project should be accepted. However, if the NPV had been negative, the project should have been rejected (choice letter B).

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 three 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

As the discount rate increases, the present value of future cash flows decreases. Projects with cash flows occurring later in the timeline, like Project T, will be more adversely affected by a higher discount rate compared to projects with more immediate cash flows, like Project H. This can lead to a change in project rankings.

Question 15

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

Accepted Answer

A. If two projects are mutually exclusive, the one with the higher NPV should be chosen, so if this project has an NPV of $1 525 855 and another project has an NPV of $850 000, this project should be preferred.

B. A positive NPV means that the project is expected to generate more cash than it costs, adding value to the firm.

C. This is the definition of NPV - it represents the difference between the present value of positive cash flows and the present value of negative cash flows. Therefore, if the project has an NPV of $1 525 855, the present value of its positive cash flows exceeds the present value of its negative cash flows.

So, all of the above choices are correct.

Question 16

Parkway Car can purchase a new vehicle for $200,000 that will provide annual net cash flow over the next five years of $40,000, $45,000, $50,000, $55,000 and $60,000.The salvage value of the vehicle will be $25,000.Assume that the vehicle is sold at the end of year 5.Calculate the NPV of the ambulance if the required rate of return is 9%.(Round your answer to the nearest $1.)

Accepted Answer

The NPV is calculated as the present value of the future cash flows minus the initial investment. The present value of the future cash flows is calculated as the sum of the present values of each individual cash flow. The present value of each individual cash flow is calculated as the cash flow multiplied by the discount factor. The discount factor is calculated as 1 / (1 + r)^n, where r is the required rate of return and n is the number of years until the cash flow is received.In this case, the required rate of return is 9% and the cash flows are received over the next five years. The present value of the future cash flows is calculated as follows:PV = $40,000 / (1 + 0.09)^1 + $45,000 / (1 + 0.09)^2 + $50,000 / (1 + 0.09)^3 + $55,000 / (1 + 0.09)^4 + $60,000 / (1 + 0.09)^5 + $25,000 / (1 + 0.09)^5PV = $40,000 / 1.09 + $45,000 / 1.1881 + $50,000 / 1.2950 + $55,000 / 1.4116 + $60,000 / 1.5386 + $25,000 / 1.5386PV = $36,697 + $37,894 + $38,603 + $38,971 + $39,029 + $16,253PV = $207,447The NPV is calculated as the present value of the future cash flows minus the initial investment. In this case, the initial investment is $200,000. The NPV is calculated as follows:NPV = PV - Initial InvestmentNPV = $207,447 - $200,000NPV = $7,447The NPV is $7,447. The closest answer choice is A) $7390.

Question 17

The present value of the total costs over a five-year period for TopNotch Investment is $50,000.The present value of total costs over the same five-year period for BotomLine Investment is $40,000.The company uses a discount rate of 9%.There are no positive cash flows for these projects, but one or the other is required to comply with government regulations.Which project should be chosen and why?

Accepted Answer

The company should choose BottomLine Investment because it has a lower present value of total costs, which means it will require less investment upfront. Since there are no positive cash flows for these projects, choosing the project with the lower net present cost is preferred.

Question 18

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 three 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

To determine which project to choose, we need to calculate the net present value (NPV) of each project using the given discount rate of 10%.

The NPV of Project H can be calculated as follows:

NPV = (-$100,000) + ($45,000 / 1.10) + ($45,000 / 1.10^2) + ($45,000 / 1.10^3) 
    = -$100,000 + $38,636 + $33,215 + $28,793 
    = $0

The NPV of Project T can be calculated as follows:

NPV = (-$100,000) + ($30,000 / 1.10) + ($40,000 / 1.10^2) + ($70,000 / 1.10^3) 
    = -$100,000 + $27,273 + $32,231 + $50,319 
    = $9,823

Since both projects have positive NPVs, both projects should be accepted. However, if we had to choose between the two projects, Project T has the higher NPV, making it the better choice.

Question 19

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 20

You have been asked to analyze 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 analyze a...

Quiz 11: Investment Decision Criteria