Chap009 NPV
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Chapter 09 - Net Present Value and Other Investment Criteria
Chapter 09
Net Present Value and Other Investment Criteria
Multiple Choice Questions
1. A project has an initial cost of $27,400 and a market value of $32,600. What is the difference between these two values called?
A. net present value
B. internal return
C. payback value
D. profitability index
E. discounted payback
2. Which one of the following methods of project analysis is defined as computing the value of a project based upon the present value of the project's anticipated cash flows?
A. constant dividend growth model
B. discounted cash flow valuation
C. average accounting return
D. expected earnings model
E. internal rate of return
3. The length of time a firm must wait to recoup the money it has invested in a project is called the:
A. internal return period.
B. payback period.
C. profitability period.
D. discounted cash period.
E. valuation period.
4. The length of time a firm must wait to recoup, in present value terms, the money it has in invested in a project is referred to as the:
A. net present value period.
B. internal return period.
C. payback period.
D. discounted profitability period.
E. discounted payback period.
9-1
Chapter 09 - Net Present Value and Other Investment Criteria
5. A project's average net income divided by its average book value is referred to as the project's average:
A. net present value.
B. internal rate of return.
C. accounting return.
D. profitability index.
E. payback period.
6. The internal rate of return is defined as the:
A. maximum rate of return a firm expects to earn on a project.
B. rate of return a project will generate if the project in financed solely with internal funds.
C. discount rate that equates the net cash inflows of a project to zero.
D. discount rate which causes the net present value of a project to equal zero.
E. discount rate that causes the profitability index for a project to equal zero.
7. You are viewing a graph that plots the NPVs of a project to various discount rates that could be applied to the project's cash flows. What is the name given to this graph?
A. project tract
B. projected risk profile
C. NPV profile
D. NPV route
E. present value sequence
8. There are two distinct discount rates at which a particular project will have a zero net present value. In this situation, the project is said to:
A. have two net present value profiles.
B. have operational ambiguity.
C. create a mutually exclusive investment decision.
D. produce multiple economies of scale.
E. have multiple rates of return.
9-2
Chapter 09 - Net Present Value and Other Investment Criteria
9. If a firm accepts Project A it will not be feasible to also accept Project B because both projects would require the simultaneous and exclusive use of the same piece of machinery. These projects are considered to be:
A. independent.
B. interdependent.
C. mutually exclusive.
D. economically scaled.
E. operationally distinct.
10. The present value of an investment's future cash flows divided by the initial cost of the investment is called the:
A. net present value.
B. internal rate of return.
C. average accounting return.
D. profitability index.
E. profile period.
11. A project has a net present value of zero. Which one of the following best describes this project?
A. The project has a zero percent rate of return.
B. The project requires no initial cash investment.
C. The project has no cash flows.
D. The summation of all of the project's cash flows is zero.
E. The project's cash inflows equal its cash outflows in current dollar terms.
12. Which one of the following will decrease the net present value of a project?
A. increasing the value of each of the project's discounted cash inflows
B. moving each of the cash inflows back to a later time period
C. decreasing the required discount rate
D. increasing the project's initial cost at time zero
E. increasing the amount of the final cash inflow
9-3
Chapter 09 - Net Present Value and Other Investment Criteria
13. Which one of the following methods determines the amount of the change a proposed project will have on the value of a firm?
A. net present value
B. discounted payback
C. internal rate of return
D. profitability index
E. payback
14. If a project has a net present value equal to zero, then:
A. the total of the cash inflows must equal the initial cost of the project.
B. the project earns a return exactly equal to the discount rate.
C. a decrease in the project's initial cost will cause the project to have a negative NPV.
D. any delay in receiving the projected cash inflows will cause the project to have a positive NPV.
E. the project's PI must be also be equal to zero.
15. Rossiter Restaurants is analyzing a project that requires $180,000 of fixed assets. When the project ends, those assets are expected to have an aftertax salvage value of $45,000. How is the $45,000 salvage value handled when computing the net present value of the project?
A. reduction in the cash outflow at time zero
B. cash inflow in the final year of the project
C. cash inflow for the year following the final year of the project
D. cash inflow prorated over the life of the project
E. not included in the net present value
16. Which one of the following increases the net present value of a project?
A. an increase in the required rate of return
B. an increase in the initial capital requirement
C. a deferment of some cash inflows until a later year
D. an increase in the aftertax salvage value of the fixed assets
E. a reduction in the final cash inflow
9-4
Chapter 09 - Net Present Value and Other Investment Criteria
17. Net present value:
A. is the best method of analyzing mutually exclusive projects.
B. is less useful than the internal rate of return when comparing different sized projects.
C. is the easiest method of evaluation for non-financial managers to use.
D. is less useful than the profitability index when comparing mutually exclusive projects.
E. is very similar in its methodology to the average accounting return.
18. Which one of the following is a project acceptance indicator given an independent project with investing type cash flows?
A. profitability index less than 1.0
B. project's internal rate of return less than the required return
C. discounted payback period greater than requirement
D. average accounting return that is less than the internal rate of return
E. modified internal rate of return that exceeds the required return
19. Why is payback often used as the sole method of analyzing a proposed small project?
A. Payback considers the time value of money.
B. All relevant cash flows are included in the payback analysis.
C. It is the only method where the benefits of the analysis outweigh the costs of that analysis.
D. Payback is the most desirable of the various financial methods of analysis.
E. Payback is focused on the long-term impact of a project.
20. Which of the following are advantages of the payback method of project analysis?
I. works well for research and development projects
II. liquidity bias
III. ease of use
IV. arbitrary cutoff point
A. I and II only
B. I and III only
C. II and III only
D. II and IV only
E. II, III, and IV only
9-5
Chapter 09 - Net Present Value and Other Investment Criteria
21. Samuelson Electronics has a required payback period of three years for all of its projects. Currently, the firm is analyzing two independent projects. Project A has an expected payback period of 2.8 years and a net present value of $6,800. Project B has an expected payback period of 3.1 years with a net present value of $28,400. Which projects should be accepted based on the payback decision rule?
A. Project A only
B. Project B only
C. Both A and B
D. Neither A nor B
E. Answer cannot be determined based on the information given.
22. A project has a required payback period of three years. Which one of the following statements is correct concerning the payback analysis of this project?
A. The cash flows in each of the three years must exceed one-third of the project's initial cost if the project is to be accepted.
B. The cash flow in year three is ignored.
C. The project's cash flow in year three is discounted by a factor of (1 + R)
3
.
D. The cash flow in year two is valued just as highly as the cash flow in year one.
E. The project is acceptable whenever the payback period exceeds three years.
23. A project has a discounted payback period that is equal to the required payback period. Given this, which of the following statements must be true?
I. The project must also be acceptable under the payback rule.
II. The project must have a profitability index that is equal to or greater than 1.0.
III. The project must have a zero net present value.
IV. The project's internal rate of return must equal the required return.
A. I only
B. I and II only
C. II and III only
D. I, III, and IV only
E. I, II, III, and IV
9-6
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Related Questions
Compute the Profitability Index (PI) for each project?
Project A
Project B
Profitability Index (PI)
5- In light of your answers above, suppose that these two projects might be mutually exclusive or independent. According to these two assumptions, fill in the blanks in the table below with the suitable answer:
Points
Investment Criteria
If A and B are mutually exclusive, then I would select
If A and B are independent, then I would select
PBP
NPV
IRR
PI
arrow_forward
Use the information provided to answer the questions
Calculate the Accounting Rate of Return (on average investment) of Project B (expressed to twodecimal places).Calculate the Net Present Value of each project (with amounts rounded off to the nearest Rand). Use your answers from previous question to recommend the project that should be chosen. Motivateyour choice.
arrow_forward
Refer to the table below to answer the following question.
Project
Initial Investment
NPV
P
200
22
Q
180
26
R
185
38
S
380
10
The project with highest Profitability Index is
Project P
Project Q
Project R
Project S
arrow_forward
Evaluate the projects using each of the following criteria, stating which project(s) Carrium Insights Inc. should choose under each criteria and why:
i.Discounted Payback
ii.Net Present Value
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which of the following could potentially impact the NPV of a project?
1. initial investment amount
2. book value of the initial investment at the end of the project
3. opportunity costs
4. sunk costs
a. 1 and 3
b. 1,2,3 and 4
c. 1,2 and 3
d. 1,2 and 4
e. 1 and 2
arrow_forward
Mf4.
1. Calculate the Payback period
2. Calculate the Net Present Value (NPV) of both projects
3. Calculate the Internal Rate of Return (IRR) of both projects
4. Critically discuss the merits of each investment appraisal method, then discuss the result of the evaluations you have made of the two projects and advise the company which project should be undertaken
arrow_forward
Using image:
a-1. What is the payback period for each project
a-2. If you apply the payback criterion, which investment will you choose?
b-1. What is the discounted payback period for each project?
b-2. If you apply the discounted payback criterion, which investment will you choose?
c-1. What is the NPV for each project?
c-2. If you apply the NPV criterion, which investment will you choose?
d-1. What is the IRR for each project?
d-2. If you apply the IRR criterion, which investment will you choose?
e-1. What is the profitability index for each project?
e-2. If you apply the profitability index criterion, which investment will you choose?
f. Based on your answers in (a) through (e), which project will you finally choose?
arrow_forward
(question3 c,d)
c) Calculate the profitability index (PI) for each project d) Calculate the internal rate of return (IRR) for each project.
arrow_forward
Calculate the internal rate of return for project B
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which of the following do you need to know to calculate the IRR of a project?.
1. project's estimated cash flows
2. project's level of risk
3. project's required rate of return
4. project's NPV
a. 1 and 2
b. 4 only
c. 1,2 and 3
d. 1 only
e. 2 only
arrow_forward
QUESTION 5
Invest in any or all of the four projects whose relevant cash flows are given in the following table.
The firm has RM7,000,000 budgeted to fund these projects, all of which are known to be
acceptable. Initial investment for each project is the same for all projects which is RM1,600,000.
The rate of retum for all projects is equivalent to 8%.
Operating cash outflow
Project X
Project Y
Year 1
Cash Outflow
RM1,600,000 (for each project)
RM
440,000
340,000
220,000
(110,000)
( 95,000 )
105,000
Operating Cash Inflows
RM
140,000
180,000
250,000
260,000
370,000
460,000
1
2.
3.
4.
5.
6.
7.
220,000
388,000
8.
9.
Use this table for PROJECT X and Y
Period
PVIF 8%
0.9259
0.8573
3
0.7938
4
0.7350
0.6806
0.6302
7
0.5835
8
0.5403
0.5002
10
0.4632
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Question 5: Find the net present value, interpret whether the NPV suggests you should accept or reject the project, find the payback period, find the discounted payback period, find the profitability index, interpret whether the profitability index suggests you should accept or reject the project, find the internal rate of return, explain whether the internal rate of return can repay the cost of borrowing money to conduct the project, find the modified internal rate of return, and explain with the modified internal rate of return can repay the cost of borrowing money to conduct the project. All for the following situation:
The initial capital outlay is $175,000, the first-year annual operating cash flow is projected to be 20,000 but should grow by 5% per year during each of the project's 30 years, the after-tax-salvage cash flow is guessed to be $500,000, the required rate of return on this project is 15.50% and the company weighted average cost of capital is 12.50%.
arrow_forward
Refer to the table below to answer the following question.
Project
Initial Investment
NPV
IP
200
22
Q
180
26
IR
185
38
IS
380
10
The project with highest Profitability Index is
Project P
Project Q
Project R
Project S
arrow_forward
(a) Calculate the payback period for each project.
(b) Calculate the net present value (NPV) for each project.
(c) Calculate the profitability index of each project.
(d) Explain to the company which project should be implemented. Support your
answer.
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McKnight Company is considering two different, mutually exclusive capital expenditure proposals. Project A will cost $533,000, has an
expected useful life of 15 years, a salvage value of zero, and is expected to increase net annual cash flows by $72,300. Project B will
cost $366,000, has an expected useful life of 15 years, a salvage value of zero, and is expected to increase net annual cash flows by
$50,800. A discount rate of 9% is appropriate for both projects. Click here to view PV table.
Compute the net present value and profitability index of each project. (If the net present value is negative, use either a negative sign
preceding the number eg -45 or parentheses eg (45). Round present value answers to O decimal places, e.g. 125 and profitability index answers
to 2 decimal places, e.g. 15.25. For calculation purposes, use 5 decimal places as displayed in the factor table provided.)
arrow_forward
Use the information below and help the management in choosing the most desirable Project using all the following techniques:1) Payback Period Technique.2) Discounted Payback Period Technique.3) Net Present Value Technique4) Profitability Index Technique.
Based on your answer which project is better and why?
please show the steps and formula
Thanks
arrow_forward
Due to the limitations of the weighted scoring model (weighting scheme), briefly discuss how Coadycan use the following financial models for project selection.1. Net Present Value2. Payback Analysis
arrow_forward
c) Calculate the profitability index (PI) for each project
d) Calculate the internal rate of return (IRR) for each project.Note : No need excel formula !
arrow_forward
Pls refer to the attached image.
pls show formula and solution in manual calculation.
1. NPV of Project Z?
2. Payback period of Project X?
3. Payback period of Project Y?
4. Payback period of project Z?
5. Based on the calculated NPV and payback period, which project would you recommend and why? Include the implications of projects' NPVs and payback period in your explanation.
arrow_forward
Answer this question as it is pertaining to two MUTUALLY EXCLUSIVE projects on the following figure. Given r=6%, which project would you choose if you decide to use the internal rate of return (IRR) as the criterion?
Group of answer choices
Project A
Project B
Neither
Either
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Which of the following statement is correct
Select one:
a.
A project is accepted when profitability index will be greater than one
b.
All statements are correct
c.
A project is accepted when net present value is greater than zero
d.
A project is accepted when payback period is less than the other project
arrow_forward
One must know the discount rate of an investment project to compute its:
a. NPV and PI.
b. NPV and IRR.
c. PI NPV IRR and Payback Period.
4. Payback period and IRR.
arrow_forward
Net Present Value Method
Net present value (NPV) is one method that can be used to evaluate the financial viability of potential projects. It determines the present value of all future cash flows associated with potential projects and measures this against the cost of the
project. To use net present value, a required rate of return must be defined. The required rate of return is the minimum
-v acceptable rate of return that an investment must yield for it to make sense economically. Managers often choose
a required rate of return above their cost of capital to ensure that the inherent uncertainties surrounding future cash flows is addressed. This can be risky, however, as it biases the process toward short-term projects. If the NPV is positive, then
the project should be accepted
- V ; if it is negative, then the project should be rejected
V.
Let's look at a net present value example using the present value of an ordinary annuity table.
The company has a project with a 5-year life that…
arrow_forward
It is good to compute first the additional benefits that a project can give and the additional cost incurred by
implementing a project. This concept talks about
a. Law of Supply and Demand
b. Marginal Cost Benefit Analysis
c. Time Value of Money
d. Financial Ratios
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1. Compute the project profitability index for each project.
2. In order of preference, rank the four projects in terms of net present value, project profitability index and internal rate of return.
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Homework i
A company is considering three alternative investment projects with different net cash flows. The present value of net cash flows is
calculated using Excel and the results follow.
Potential Projects.
Present value of net cash flows (excluding initial investment)
Initial investment.
Complete this question by entering your answers in the tabs below.
Required A
a. Compute the net present value of each project.
b. If the company accepts all positive net present value projects, which of these will it accept?
c. If the company can choose only one project, which will it choose on the basis of net present value?
FI
Compute the net present value of each project.
Potential Projects
Project A
Present value of net cash flows
Initial investment
Net present value
2
Required B
W
F2
#
Required C
3
APR
11
80
F3
$
4
m tv
6
Project A
$ 9,972
(10,000)
2 of 8
c
F6
#
&
7
Project B
$ 10,697
(10,000)
F7
Next >
Y U
il A
8
Project C
$ 10,653
(10,000)
FB
DD
(
F9
9
FU
O
arrow_forward
If the net present value of a project is positive, the project earns a return that is
Group of answer choices
- equal to the required rate or return
- greater than the required rate of return
- equal to the accounting rate of return
- greater than the accounting rate of return
arrow_forward
Evaluation of Projects or ME Alternatives based on different Economic Worth Analysis:
AW analysis of one project
Choose...
ROR analysis of two alternatives
Choose...
PW analysis of one project
Choose...
•
ROR analysis of one project
Choose...
0
PW analysis of ME Alternatives
Choose...
The remaining undepreciated capital investment in year t is called:
Select one:
O a BVt
O b. P
OC B
O d. MV
Although land is considered as real property, it is not depreciable.
Select one:
O True
O False
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- Compute the Profitability Index (PI) for each project? Project A Project B Profitability Index (PI) 5- In light of your answers above, suppose that these two projects might be mutually exclusive or independent. According to these two assumptions, fill in the blanks in the table below with the suitable answer: Points Investment Criteria If A and B are mutually exclusive, then I would select If A and B are independent, then I would select PBP NPV IRR PIarrow_forwardUse the information provided to answer the questions Calculate the Accounting Rate of Return (on average investment) of Project B (expressed to twodecimal places).Calculate the Net Present Value of each project (with amounts rounded off to the nearest Rand). Use your answers from previous question to recommend the project that should be chosen. Motivateyour choice.arrow_forwardRefer to the table below to answer the following question. Project Initial Investment NPV P 200 22 Q 180 26 R 185 38 S 380 10 The project with highest Profitability Index is Project P Project Q Project R Project Sarrow_forward
- Evaluate the projects using each of the following criteria, stating which project(s) Carrium Insights Inc. should choose under each criteria and why: i.Discounted Payback ii.Net Present Valuearrow_forwardwhich of the following could potentially impact the NPV of a project? 1. initial investment amount 2. book value of the initial investment at the end of the project 3. opportunity costs 4. sunk costs a. 1 and 3 b. 1,2,3 and 4 c. 1,2 and 3 d. 1,2 and 4 e. 1 and 2arrow_forwardMf4. 1. Calculate the Payback period 2. Calculate the Net Present Value (NPV) of both projects 3. Calculate the Internal Rate of Return (IRR) of both projects 4. Critically discuss the merits of each investment appraisal method, then discuss the result of the evaluations you have made of the two projects and advise the company which project should be undertakenarrow_forward
- Using image: a-1. What is the payback period for each project a-2. If you apply the payback criterion, which investment will you choose? b-1. What is the discounted payback period for each project? b-2. If you apply the discounted payback criterion, which investment will you choose? c-1. What is the NPV for each project? c-2. If you apply the NPV criterion, which investment will you choose? d-1. What is the IRR for each project? d-2. If you apply the IRR criterion, which investment will you choose? e-1. What is the profitability index for each project? e-2. If you apply the profitability index criterion, which investment will you choose? f. Based on your answers in (a) through (e), which project will you finally choose?arrow_forward(question3 c,d) c) Calculate the profitability index (PI) for each project d) Calculate the internal rate of return (IRR) for each project.arrow_forwardCalculate the internal rate of return for project Barrow_forward
- which of the following do you need to know to calculate the IRR of a project?. 1. project's estimated cash flows 2. project's level of risk 3. project's required rate of return 4. project's NPV a. 1 and 2 b. 4 only c. 1,2 and 3 d. 1 only e. 2 onlyarrow_forwardQUESTION 5 Invest in any or all of the four projects whose relevant cash flows are given in the following table. The firm has RM7,000,000 budgeted to fund these projects, all of which are known to be acceptable. Initial investment for each project is the same for all projects which is RM1,600,000. The rate of retum for all projects is equivalent to 8%. Operating cash outflow Project X Project Y Year 1 Cash Outflow RM1,600,000 (for each project) RM 440,000 340,000 220,000 (110,000) ( 95,000 ) 105,000 Operating Cash Inflows RM 140,000 180,000 250,000 260,000 370,000 460,000 1 2. 3. 4. 5. 6. 7. 220,000 388,000 8. 9. Use this table for PROJECT X and Y Period PVIF 8% 0.9259 0.8573 3 0.7938 4 0.7350 0.6806 0.6302 7 0.5835 8 0.5403 0.5002 10 0.4632arrow_forwardQuestion 5: Find the net present value, interpret whether the NPV suggests you should accept or reject the project, find the payback period, find the discounted payback period, find the profitability index, interpret whether the profitability index suggests you should accept or reject the project, find the internal rate of return, explain whether the internal rate of return can repay the cost of borrowing money to conduct the project, find the modified internal rate of return, and explain with the modified internal rate of return can repay the cost of borrowing money to conduct the project. All for the following situation: The initial capital outlay is $175,000, the first-year annual operating cash flow is projected to be 20,000 but should grow by 5% per year during each of the project's 30 years, the after-tax-salvage cash flow is guessed to be $500,000, the required rate of return on this project is 15.50% and the company weighted average cost of capital is 12.50%.arrow_forward
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