Business Finance 8

China Importers would like to spend $215,000 to expand its warehouse. However, the company has a loan outstanding that must be repaid in 2.5 years and thus will need the $215,000 at that time. The warehouse expansion project is expected to increase the cash inflows by $60,000 in the first year, $140,000 in the second year, and $150,000 a year for the following 2 years. Should the firm expand at this time? Why or why not?

Yes; because the money will be recovered in 2.10 years

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

cost and its market value.

The net present value:

decreases as the required rate of return increases.

The internal rate of return is the:

discount rate that results in a zero net present value for the project.

If a project with conventional cash flows has a profitability index of 1.0, the project will:

have an internal rate of return that equals the required return.

The profitability index reflects the value created per dollar:

invested.

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

recoup its initial cost.

What is the net present value of the following set of cash flows at a discount rate of 5 percent? At 15 percent? Year/Cash Flow 0/-23,600 1/8,200 2/9,100 3/10,600

$1,620.17; -$2,618.99

What is the net present value of the following cash flows if the relevant discount rate is 7 percent? Year Cash Flow 0 -$11,520 1 81 2 650 3 880 4 2,300 5 15,800 A. $2,861.62 B. $2,311.92 C. $2,900.15 D. $3,248.87 E. $3,545.60 NPV = -$11,520 + $81 / 1.07 + $650 / 1.072 + $880 / 1.073 + $2,300 / 1.074 + $15,800 / 1.075

$2,861.62

The Black Horse is currently considering a project that will produce cash inflows of $11,000 a year for three years followed by $6,500 in Year 4. The cost of the project is $38,000. What is the profitability index if the discount rate is 9 percent?

.85

You are considering the following two mutually exclusive projects. What is the crossover point? Year: Project A; Project B 0: -$52,000; -$52,000 1: $0; $12,000 2: $33,000; $29,000 3: $40,000; $27,000

22.08 percent

Diamond Enterprises is considering a project that will produce cash inflows of $41,650 a year for three years followed by $49,000 in Year 4. What is the internal rate of return if the initial cost of the project is $142,000?

8.42 percent

What is the net present value of a project with the following cash flows if the discount rate is 15 percent? Year/Cash Flow 0/-48100 1/15600 2/28900 3/15200 A. -$2,687.98 B. -$1,618.48 C. $1,044.16 D. $1,035.24 E. $9,593.19

A. -$2,687.98 NPV = - $48,100 + $15,600 / 1.15 + $28,900 / 1.152 + $15,200 / 1.153 NPV = -$2,687.98

In which one of the following situations would the payback method be the preferred method of analysis?

Investment funds available only for a limited period of time

Generally speaking, payback is best used to evaluate which type of projects?

Low-cost, short-term

Molly is considering a project with cash inflows of $811, $924, $638, and $510 over the next four years, respectively. The relevant discount rate is 11.2 percent. What is the net present value of this project if it the start-up cost is $2,700?

NPV = -$2,700 + $811 / 1.112 + $924 / 1.1122 + $638 / 1.1123 + $510 / 1.1124 -$425.91

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

Net present value

Woodcrafters requires an average accounting return (AAR) of at least 17.5 percent on all fixed asset purchases. Currently, it is considering some new equipment costing $169,700. This equipment will have a four-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 equipment is estimated at $7,100, $13,300, $18,600, and $19,200 for the four years. Should this purchase occur based on the accounting rate of return? Why or why not?

No; because the AAR is less than 17.5 percent

Greenbriar Cotton Mill is spending $284,000 to update its facility. The company estimates that this investment will improve its cash inflows by $50,500 a year for 8 years. What is the payback period?

Payback = $284,000/$50,500 5.62 years

Services United is considering a new project that requires an initial cash investment of $26,000. The project will generate cash inflows of $2,500, $11,700, $13,500, and $10,000 over each of the next four years, respectively. How long will it take to recover the initial investment?

Payback = 2 + ($26,000 -2,500 -11,700)/$13,500 2.87 years

You were recently hired by a firm as a project analyst. The owner of the firm is unfamiliar with financial analysis and wants to know only what the expected dollar return is per dollar spent on a given project. Which financial method of analysis will provide the information that the owner requests?

Profitability index

Which one of the following indicates that an independent project is definitely acceptable?

Profitability index greater than 1.0

You are considering the following two mutually exclusive projects. The required return on each project is 14 percent. Which project should you accept and what is the best reason for that decision? Year: Project A; Project B 0: -$24,000; -$21,000 1: $9,500; $6,500 2: $16,200; $9,800 3: $8,700; $15,200

Project A; because it has the higher profitability index

An investment has conventional cash flows and a profitability index of 1.0. Given this, which one of the following must be true?

The net present value is equal to zero.

Which one of the following will occur when the internal rate of return equals the required return?

The profitability index will equal 1.0.