Bcor 340 chpt. 8

Net present value involves discounting an investment's:

future cash flows.

The possibility that more than one discount rate can cause the net present value of an investment to equal zero is referred to as:

multiple rates of return

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 net present value profile illustrates how the net present value of an investment is affected by which one of the following?

Discount rate

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

Ease of use

Which one of the following statements is correct?

If the internal rate of return equals the required return, the net present value will equal zero.

What is the net present value of the following cash flows if the relevant discount rate is 5.75 percent?

NPV = $11,400 + (-$2,500 / 1.0575) + (-$2,500 / 1.05752) + (-$9,500 / 1.05753) NPV = -$1,232.68

What is the net present value of a project with the following cash flows if the discount rate is 15 percent?

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

You are making an investment of $110,000 and require a rate of return of14.6 percent. You expect to receive $48,000 in the first year, $52,500 in the second year, and $55,000 in the third year. There will be a cash outflow of $900 in the fourth year to close out the investment. What is the net present value of this investment?

NPV = -$110,000 + $48,000 / 1.146 + $52,500 / 1.1462 + $55,000 / 1.1463 + (-$900 / 1.1464) NPV = $7,881.55

Corner Restaurant is considering a project with an initial cost of $211,600. The project will not produce any cash flows for the first three years. Starting in Year 4, the project will produce cash inflows of $151,000 a year for three years. This project is risky, so the firm has assigned it a discount rate of 18.6 percent. What is the project's net present value?

NPV = -$211,600 + $151,000 / 1.1864 + $151,000 / 1.1865 + $151,000 / 1.1866 NPV = -$16,670.67

What is the net present value of a project with the following cash flows if the discount rate is 13.6 percent?

NPV = -$63,600 + $18,200 / 1.136 + $34,500 / 1.1362 + $35,900 / 1.1363 NPV = $3,643.38

You are considering the following two mutually exclusive projects. What is the crossover point?

NPV = 0 = -$12,000 / (1 + IRR) + $4,000 / (1 + IRR)2 + $13,000 / (1 + IRR)3 IRR = 22.08 percent

You are considering an investment for which you require a rate of return of 8.5 percent. The investment costs $67,400 and will produce cash inflows of $25,720 for three years. Should you accept this project based on its internal rate of return? Why or why not?

NPV = 0 = -$67,400 + $25,720 / (1 + IRR) + $25,720 / (1 + IRR)2 + $25,720 / (1 + IRR)3 IRR = 7.08 percent The project should be rejected because the IRR is less than the required rate.

A project has the following cash flows. What is the internal rate of return?

NPV = 0 = -$68,700 + $19,600 / (1 + IRR) + $22,300 / (1 + IRR)2 + $27,500 / (1 + IRR)3 + $15,300 / (1 + IRR)4 IRR = 9.08 percent

A project has the following cash flows. What is the internal rate of return?

NPV = 0 = -$89,300 + $32,900 / (1 + IRR) + $64,200 / (1 + IRR)2 + $5,800 / (1 + IRR)3 IRR = 8.57%

What is the NPV of the following set of cash flows at a discount rate of zero percent? What if the discount rate is 15 percent?

NPV0 percent = -$21,400 + 11,600 / 1.0 + 13,500 / 1.02 + 12,200 / 1.03 NPV0 percent = $15,900 NPV15 percent = -$21,400 + 11,600 / 1.15 + 13,500 / 1.152 + 12,200 / 1.153 NPV15 percent = $6,916.59

What is the net present value of the following set of cash flows at a discount rate of 5 percent? At 15 percent?

NPV5% = -$23,600 + $8,200 / 1.05 + $9,100 + 1.052 + $10,600 / 1.053 NPV5% = $1,620.17 NPV5% = -$23,600 + $8,200 / 1.15 + $9,100 + 1.152 + $10,600 / 1.153 NPV5% = -$2,618.99

You are considering the following two mutually exclusive projects. The required return on each project is 12 percent. Which project should you accept and what is the best reason for that decision?

NPVA = -$32,000 + $11,500 / 1.12 + $15,900 / 1.122 + $13,200 / 1.123 NPVA = $338.74 NPVB = -$26,000 + $3,500 / 1.12 + $5,800 / 1.1222+ $24,900 / 1.123 NPVB = -$527.95 Payback has several flaws and is not the best method of comparison. The profitability index should not be used to evaluate mutually exclusive projects of varying sizes. The decision should be made based on net present value.

A project has the following cash flows. What is the payback period?

Payback = 2 + ($28,000 -11,600 -11,600)/$6,500 = 2.74 years

A project has the following cash flows. What is the payback period?

Payback = 3 + ($14,500-2,200 -4,800- 6,500)/$7,500 =3.13years

What is the payback period for a project with the following cash flows?

Payback = 3 + ($75,000 -15,000 -23,000 -35,000)/$25,000 = 3.08 years

Which one of the following statements is correct?

The payback period ignores the time value of money.

The payback method of analysis ignores which one of the following?

Time value of money

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

zero.