Finance Ch. 9

A project with financing type cash flows is typified by a project that has which one of the following characteristics?

A cash inflow at Time 0

Assume a project is independent with financing cash flows. Which one of these statements is correct?

The project is acceptable if the required return exceeds the IRR.

If a project has a net present value equal to zero, then:

the project earns a return exactly equal to the discount rate.

Swenson's is considering two mutually exclusive projects, Projects A and B, and has determined that the crossover rate for these projects is 11.7 percent and the required return for both projects is 9 percent. Given this you know that:

the project that is acceptable at a discount rate of 11 percent should be rejected at a discount rate of 12 percent.

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.

A project has an initial cost of $31,800 and a market value of $29,600. What is the difference between these two values called?

Net Present Value

A firm evaluates all of its projects by applying the IRR rule. A project under consideration has the following cash flows: Year Cash Flow 0-$34,000 1- 15,000 2- 17,000 3- 13,000 If the required return is 14 percent, what is the IRR for this project?

Calculate IRR with Cash Flow Function on Calculator *** Compute IRR not NPV!!

A project that provides annual cash flows of $19,000 for 5 years costs $61,000 today. a. If the required return is 13 percent, what is the NPV for this project?

Calculate NPV with CF function on Calculator *** Use -61,000 as CF0 NPV = 5,827.39 IRR = 16.85%

Rossiter Restaurants is analyzing a project that requires $180,000 of fixed assets. When the project ends, those assets are expected to have an aftertax salvage value of $45,000. How is the $45,000 salvage value handled when computing the net present value of the project?

Cash inflow in the final year of the project

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?

Condensing the firm's cash inflows into fewer years without lowering the total amount of those inflows

You are comparing two mutually exclusive projects that both have a required return of 8 percent. The crossover point is 12.3 percent. You have determined that you should accept project A if the required return is 13.1 percent. This implies you should:

always accept Project A if the required return exceeds the crossover rate.

The internal rate of return is defined as the:

discount rate which causes the net present value of a project to equal zero.

Graphing the crossover point helps explain:

how decisions concerning mutually exclusive projects are derived.

Net present value:

is the best method of analyzing mutually exclusive projects.

The internal rate of return is:

tedious to compute without the use of either a financial calculator or a computer.

Which one of the following will decrease the net present value of a project? a) Increasing the value of each of the project's discounted cash inflows b) Moving each cash inflow forward one time period, such as from Year 3 to Year 2 c) Decreasing the required discount rate d) Increasing the project's initial cost at time zero e) Increasing the amount of the final cash inflow

Increasing the project's initial cost at time zero

You are viewing a graph that plots the NPVs of a project to various discount rates that could be applied to the project's cash flows. What is the name given to this graph?

NPV profile

Which one of the following methods predicts the amount by which the value of a firm will change if a project is accepted?

Net present value

A project has a net present value of zero. Which one of the following best describes this project?

The project's cash inflows equal its cash outflows in current dollar terms.

Which one of the following statements related to the internal rate of return (IRR) is correct?

The IRR is equal to the required return when the net present value is equal to zero.