Chapter 9 Homework Video

According the video, one of the biggest challenges for the Net Present Value method is:

Identifying the appropriate discount rate to use.

What does mutually exclusive mean?

Taking one project means that we cannot take the other.

Calculate the Net Present Value of the following cash flows. Assume that the required return on this project is 15% Project A Initial Cost -$ 150 Year 1 $ 175 Year 2 $ 100

$78

Calculate the Profitability Index. Cost = $325 Present value of future cash flows = $350

1.08

Net Income: Year 1: $ 1,500,000 Year 2: $ 1,200,000 Year 3: $ 1,050,000 Year 4: -$ 1,400,000 Year 5: $ 1,350,000 The starting book value is $11,840,000, which will end with $0, at the end of five years.

12.5%

Calculate the crossover rate. Project A Project B Year 1 600 700 Year 2 650 800

16.5%

What is the first step in the Net Present Value (NPV) process?

Estimate the future cash flows.

All of the following are commonly cited reasons for using the Internal Rate of Return, except:

Multiple IRR's allow the company to choose the best one when evaluating projects.

The Internal Rate of Return (IRR) represents which of the following:

The discount rate that makes the net present value equal to zero.

When choosing between mutually exclusive projects, what is the best method to use?

The highest NPV is always the best option.

All of the following are useful for understanding Profitability Index, except:

The initial investment is included when calculating the present value of the future cash flows.

The Average Accounting Return (AAR) Rule states that a company will accept a project that has an average account return that:

exceeds a pre-determined target average accounting return.

All of the following are advantages of the Profitability Index, except:

It is useful for comparing mutually exclusive investments.

Calculate the Discounted Payback Period with a discount rate of 10%. Project A Initial Cost -$ 50,000 Year 1 $ 20,000 Year 2 $ 25,000 Year 3 $ 20,000

2.74 years

Calculate the Payback Period. Project A Initial Cost -$ 50,000 Year 1 $ 20,000 Year 2 $ 15,000 Year 3 $ 20,000

2.75 years

According to the video, which of the following are disadvantages of the Average Accounting Return (AAR)?

A & C only.

What are non-conventional cash flows?

A combination of cash outflows and inflows.

The Discounted Payback Period Rule states that a company will accept a project if:

The calculated payback is less than a pre-specified number of years.

The Payback Period Rule states that a company will accept a project if:

The calculated payback is less than a pre-specified number of years.

What is crossover rate?

The discount rate at which we are indifferent between two investments.

All of the following are disadvantages of the Payback Period, except:

The method incorporates the time value of money.

What is the first step when calculating the crossover rate?

To calculate the cash flow differences between each project.