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Exam 9: Net Present Value and Other Investment Criteria

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Question 51

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Which one of the following correctly applies to the average accounting rate of return?

A) It considers the time value of money.
B) It measures net income as a percentage of the sales generated by a project.
C) It is the best method of analyzing mutually exclusive projects from a financial point of view.
D) It is the primary methodology used in analyzing independent projects.
E) It can be compared to the return on assets ratio.

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

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Question 52

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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?

A) 10.70 percent
B) 15.63 percent
C) 18.87 percent
D) 21.39 percent
E) 23.05 percent

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

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Question 53

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Which one of the following is the best example of two mutually exclusive projects?

There are two distinct discount rates at which a particular project will have a zero net present value.In this situation,the project is said to:

The Square Box is considering two projects,both of which have an initial cost of $35,000 and total cash inflows of $50,000.The cash inflows of project A are $5,000,$10,000,$15,000,and $20,000 over the next four years,respectively.The cash inflows for project B are $20,000,$15,000,$10,000,and $5,000 over the next four years,respectively.Which one of the following statements is correct if The Square Box requires a 13 percent rate of return and has a required discounted payback period of 3.5 years?

The profitability index is most closely related to which one of the following?

Tedder Mining has analyzed a proposed expansion project and determined that the internal rate of return is lower than the firm desires.Which one of the following changes to the project would be most expected to increase the project's internal rate of return?

Samuelson Electronics has a required payback period of three years for all of its projects.Currently,the firm is analyzing two independent projects.Project A has an expected payback period of 2.8 years and a net present value of $6,800.Project B has an expected payback period of 3.1 years with a net present value of $28,400.Which projects should be accepted based on the payback decision rule?

You are analyzing a project and have gathered the following data: Based on the net present value of _____,you should _____ the project.

Isaac has analyzed two mutually exclusive projects of similar size and has compiled the following information based on his analysis.Both projects have 3- year lives. Isaac has been asked for his best recommendation given this information.His recommendation should be to accept:

Hungry Hoagie's has identified the following two mutually exclusive projects: At what rate would you be indifferent between these two projects?

You are considering an investment with the following cash flows.If the required rate of return for this investment is 15.5 percent,should you accept the investment based solely on the internal rate of return rule? Why or why not?

Which one of the following methods of project analysis is defined as computing the value of a project based upon the present value of the project's anticipated cash flows?

You are considering the following two mutually exclusive projects.Both projects will be depreciated using straight-line depreciation to a zero book value over the life of the project.Neither project has any salvage value. Should you accept or reject these projects based on net present value analysis?

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 one of the following statements would generally be considered as accurate given independent projects with conventional cash flows?

A project has an initial cost of $18,400 and produces cash inflows of $7,200,$8,900,and $7,500 over three years,respectively.What is the discounted payback period if the required rate of return is 16 percent?

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?

Based on the profitability index rule,should a project with the following cash flows be accepted if the discount rate is 14 percent? 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.