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Exam 8: Net Present Value and Other Investment Criteria

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Question 21

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The reinvestment approach to the modified internal rate of return:

A) individually discounts each separate cash flow back to the present
B) reinvests all the cash flows,including the initial cash flow,to the end of the project
C) discounts all negative cash flows to the present and compounds all positive cash flows to the end of the project
D) discounts all negative cash flows back to the present and combines them with the initial cost
E) compounds all of the cash flows,except for the initial cash flow,to the end of the project

F) B) and D)
G) All of the above

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Question 22

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Angie is evaluating a proposed project and wants to answer two questions.First,what is the market value of the project? Second,how much profit will the project produce in relation to its book value.To answer these two questions,Angie should use which one of the following sets of investment analysis methods?

A) internal rate of return and payback
B) payback and profitability index
C) net present value and average accounting return
D) net present value and payback
E) profitability index and net present value

F) None of the above
G) A) and E)

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Question 23

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Which one of the following statements is correct?

Ben Lake Enterprises is currently considering a project that will produce cash inflows Of $3500 a year for three years followed by $1200 a year for two more years.The cost of the project is $10 000.What is the profitability index if the discount rate is 7 per cent?

The World Dictionary needs to purchase a new printing machine costing $1.8 million.Management is estimating that the machine will generate cash inflows of $250 000 for three years and $350 000 for the following four years.If management requires a minimum 15 per cent rate of return,should they purchase this particular machine? Why or why not?

A net present value of zero implies that an investment:

Nawano is considering an investment of $200 000 with cash inflows of $80 000;$70 000;$75 000;$10 000 and $35 000 over the next five years,respectively.What is the net present value of this investment if the relevant discount rate is 11 per cent?

Manly Manufacturing Ltd is evaluating an expansion of its business by purchasing new manufacturing equipment.The equipment has an installation cost of $26 million,which will be depreciated straight-line to zero over its three-year life.If the plant has projected net income of $2 348 000,$2 680 000,and $1 920 000 over these three years,what is the project's average accounting return (AAR) ?

The average net income of a project divided by the project's average book value is referred to as the project's:

You are considering a project which has an internal rate of return that is equal to the required return.This means that:

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 net present value rule states that you should accept a project if the NPV:

Which one of the following best expresses two mutually exclusive investments?

Nagle's Machinery is spending $97 500 to update its equipment.This is necessary if the firm wishes to be competitive in the market place and provide a wide array of product models.The company estimates that these updates will improve their cash inflows by $18 500 a year for five years.What is the payback period?

The payback period is the length of time it takes an investment to generate sufficient cash flows to enable the project to:

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

You are considering a project that has an initial outlay of $500 000.The project will generate cash inflows of $150 000 per year for four years,followed by $80 000 for one more year.Considering the discount rate of 10%,what is the profitability index?

You are using a net present value profile to compare investments A and B,which are mutually exclusive.Which one of the following statements correctly applies to the crossover point between these two?

Avalon Aviation Products are evaluating a new project.What is the net present value of this project if the discount rate is 14 per cent and the net cash flows are as per the following table?

Which one of the following is generally considered to be the best form of analysis if you have to select a single method to analyse a variety of investment opportunities?