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Exam 8: Net Present Value and Other Investment Criteria

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Question 61

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An investment has an initial cost of $462,000 and will generate the net income amounts shown below.This investment will be depreciated straight-line to zero over the four-year life of the project.Should this project be accepted based on the average accounting rate of return if the required rate is 14.75 percent? Why or why not? $\begin{array} { | c | r | } \hline \text { Year } & \text { Net Income } \\\hline 1 & \$ 27,000 \\\hline 2 & 24,800 \\\hline 3 & 37,500 \\\hline 4 & 45,000 \\\hline\end{array}$

A) Yes, because the AAR is equal to 14.75 percent
B) Yes, because the AAR is greater than 14.75 percent
C) Yes, because the AAR is less than 14.75 percent
D) No, because the AAR is greater than 14.75 percent
E) No, because the AAR is less than 14.75 percent

F) B) and C)
G) B) and E)

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Question 62

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Which one of the following is specifically designed to compute the rate of return on a project that has a multiple negative cash flows that are interrupted by one or more positive cash flows?

A) Average accounting return
B) Profitability index
C) Internal rate of return
D) Indexed rate of return
E) Modified internal rate of return

F) D) and E)
G) C) and D)

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Question 63

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A project has the following cash flows.What is the payback period? $\begin{array} { | c | r | } \hline \text { Year } & \text { Cash Flow } \\\hline 0 & - \$ 14,500 \\\hline 1 & 2,200 \\\hline 2 & 4,800 \\\hline 3 & 6,500 \\\hline 4 & 7,600 \\\hline\end{array}$

.Which one of the following indicates that a project should be rejected? Assume the cash flows are normal,i.e.,the initial cash flow is negative.

Which one of the following can be defined as a benefit-cost ratio?

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?

Which one of the following statements is correct?

Chasteen,Inc.,is considering an investment with an initial cost of $145,000 that would be depreciated straight-line to a zero book value over the life of the project.The cash inflows generated by the project are estimated at $76,000 for the first two years and $30,000 for the following two years.What is the internal rate of return?

A project has the following cash flows.What is the internal rate of return? $\begin{array} { | c | r | } \hline \text { Year } & \text { Cash Flow } \\\hline 0 & - \$ 33,800 \\\hline 1 & 12,360 \\\hline 2 & 14,680 \\\hline 3 & 16,710 \\\hline\end{array}$