Fin chapter 12

Today, Crunchy Snacks is investing $487,000 in a new oven. As a result, the company expects its cash flows to increase by $62,000 a year for the next two years and by $98,000 a year for the following three years. How long must the firm wait until it recovers all of its initial investment?

The project never pays back.

Which one of the following statements is correct?

When the internal rate of return is greater than the required return, the net present value is positive.

If an investment is producing a return that is equal to the required return, the investment's net present value will be:

Zero.

Generally, the simulation models for projects are developed using a

Computer

The net present value:

Decreases as the required rate of return increases.

Which one of the following is the primary advantage of payback analysis?

Ease of use

Which one of the following is most closely related to the net present value profile?

Internal rate of return

The profitability index reflects the value created per dollar:

Invested

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

Which one of the following methods of analysis is most appropriate to use when two investments are mutually exclusive?

Net present value

Which one of the following methods of analysis has the greatest bias towards short-term projects?

Payback

Which one of the following methods of analysis ignores the time value of money?

Payback

Which one of the following indicates that a project is expected to create value for its owners?

Positive net present value

You were recently hired by a firm as a project analyst. The owner of the firm is unfamiliar with financial analysis and only wants to know 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 a project is definitely acceptable

Profitability index greater than 1.0

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.

The internal rate of return is unreliable as an indicator of whether or not an investment should be accepted given which one of the following?

The investment is mutually exclusive with another investment under consideration