HW M9CH9 FIN

A project has a net present value of zero. Given this information: a) the project's cash inflows equal its cash outflows in current dollar terms. b) the project has a zero percent rate of return. c) the project requires no initial cash investment. d) the summation of all of the project's cash flows is zero. e) the project has no cash flows.

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

Which one of the following methods of project analysis is defined as computing the value of a project based on the present value of the project's anticipated cash flows? a) Average accounting return b) Constant dividend growth model c) Expected earnings model d) Internal rate of return e) Discounted cash flow valuation

Constant dividend growth model

A project has an initial cost of $52,700 and a market value of $61,800. What is the difference between these two values called? a) Net present value b) Payback value c) Discounted payback d) Profitability index e) Accounting return

Net present value

Which one of the following methods predicts the amount by which the value of a firm will change if a project is accepted? a) Discounted payback b) Internal rate of return c) Net present value d) Payback e) Profitability index

Net present value

A firm evaluates all of its projects by using the NPV decision rule. Year Cash Flow 0 -$28,000 1 24,000 2 13,000 3 10,000 a. At a required return of 23 percent, what is the NPV for this project? b. At a required return of 34 percent, what is the NPV for this project?

Present value of inflows=24500/1.23+130000/1.23^2+10000/1.23^3 =$30553 NPV=Present value of inflows-Present value of outflows =$30553-$28000 =$5,479(Approx) B. Present value of inflows=24000/1.34+13000/1.34^2+10000/1.34^3 =$29306 NPV=Present value of inflows-Present value of outflows =$29306-$28000 =$(1,306.46)

Bui Bakery has a required payback period of two years for all of its projects. Currently, the firm is analyzing two independent projects. Project X has an expected payback period of 1.4 years and a net present value of $6,100. Project Z has an expected payback period of 2.6 years with a net present value of $18,600. Which project(s) should be accepted based on the payback decision rule? a) Neither X nor Z b) Either, but not both projects c) Project Z only d) Project X only e)Both X and Z

Project X only

Quiz M9Ch9

Quiz M9Ch9

Why is payback often used as the sole method of analyzing a proposed small project? a) Payback is the most desirable of the various financial methods of analysis. b)The benefits of payback analysis usually outweigh the costs of the analysis. c)Payback considers the time value of money. d) Payback is focused on the long-term impact of a project. e) All relevant cash flows are included in the payback analysis.

The benefits of payback analysis usually outweigh the costs of the analysis.

An investment project costs $19,400 and has annual cash flows of $4,100 for six years. a. What is the discounted payback period if the discount rate is zero percent? b. What is the discounted payback period if the discount rate is 5 percent? c. What is the discounted payback period if the discount rate is 19 percent?

a. R = 0%:($19,400/$4,100) = 4.73 years discounted payback = regular payback = 4.73 years b. R = 5%:4100/1.05 + 4100/1.052 + 4100/1.053 + 4100/1.054 + 4100/1.055 = $17,750.85 $4,100/1.056 = $3,059.48 discounted payback = 5 + ($19,400 - 17,750.85)/$3,059.48 = 5.54 years c.R = 19%:$4,100(PVIFA19%, 6) = $13,980.09 The project never pays back.

A project has the following cash flows: Year Cash Flow 0 $65,300 1 -31,300 2 -49,200 a. What is the IRR for this project? b. What is the NPV of this project, if the required return is 10.5 percent? c. NPV at 0 percent? d. NPV at 21 percent?

a. The IRR of the project is: $65,300 = $31,300/(1+IRR) + $49,200/(1+IRR)2 Using a spreadsheet, financial calculator, or trial and error to find the root of the equation, we find that: IRR = 14.02% b. At an interest rate of 10.5 percent, the NPV is: NPV = $65,300 - $31,300/1.105 - $49,200/1.105^2 NPV = $-3,319.81 c. At an interest rate of zero percent, we can add cash flows, so the NPV is: NPV = $65,300 - 31,300 - 49,200 NPV = $-15,200.00 d. And at an interest rate of 21 percent, the NPV is: NPV = $65,300 - $31,300/1.21 - $49,200/1.21^2 NPV = $5,827.97

Mutually exclusive projects are best defined as competing projects that: a) both require the total use of the same limited resource. b) would need to commence on the same day. c) both have negative cash outflows at time zero. d) have the same life span. e) have the same initial start-up costs.

both require the total use of the same limited resource.

The length of time a firm must wait to recoup, in present value terms, the money it has invested in a project is referred to as the: a) internal return period. b) discounted payback period. c) discounted profitability period. d) net present value period. e) payback period.

discounted payback period.

The internal rate of return: a) is rarely used in the business world today. b) is best used when comparing mutually exclusive projects. c) is principally used to evaluate small dollar projects. may produce multiple rates of return when cash flows are conventional. d) is easy to understand.

is easy to understand.

The net present value of a project will increase if: a) some of the cash inflows are deferred until a later year. b) the initial capital requirement increases. c) the required rate of return increases. d) the final cash inflow decreases. e) the aftertax salvage value of the fixed assets increases.

the aftertax salvage value of the fixed assets increases.

If a project has a net present value equal to zero, then: a) any delay in receiving the projected cash inflows will cause the project to have a positive NPV. b) a decrease in the project's initial cost will cause the project to have a negative NPV. c) the project's PI must also be equal to zero. the project earns a return exactly equal to the discount rate. d) the total of the cash inflows must equal the initial cost of the project.

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

Javangula Foods is considering two mutually exclusive projects and has determined that the crossover rate for these projects is 12.3 percent. Given this information, you know that: a)the project that is acceptable at a discount rate of 12 percent should be rejected at a discount rate of 13 percent. b) both projects have a zero NPV at a discount rate of 12.3 percent. c) both projects have a negative NPV at discount rates greater than 12.3 percent. d) neither project will be accepted if the discount rate is less than 12.3 percent. e) both projects provide an internal rate of return of 12.3 percent.

the project that is acceptable at a discount rate of 12 percent should be rejected at a discount rate of 13 percent.