Question 1

The use of NPV as an investment criterion is said to be more reliable than using IRR.Discuss potential problems with the use of IRR, and how to reconcile the two methods' results.

Accepted Answer

The answer of The use of NPV as an investment...

Question 2

A new machine will cost $100,000 and generate after-tax cash inflows of $356,000 for four years.Find the NPV if the firm uses a 12 percent opportunity cost of capital.What is the IRR? What is the payback period?

Accepted Answer

The answer of A new machine will cost $100,000 and...

Question 3

When using a profitability index to select projects, a value of 0.63 is preferred over a value of 0.21.

Accepted Answer

A higher profitability index is preferred as it indicates a higher return on investment. Therefore, a value of 0.63 is preferred over a lower value of 0.21.

Question 4

A risky dollar is worth more than a safe one.

Accepted Answer

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Question 5

You have been assigned to evaluate a project for your firm that requires an initial investment of $200,000, is expected to last for 10 years, and is expected to produce after-tax net cash flows of $44,503 per year.If your firm's required rate of return is 14 percent, should the project be accepted?

Accepted Answer

The answer of You have been assigned to evaluate a...

Question 6

If a project has multiple IRRs, the highest one is assumed to be correct.

Accepted Answer

If a project has multiple IRRs, it means that there are multiple discount rates at which the project's net present value is equal to zero. In this scenario, it is not sufficient to rely on the highest IRR alone to make investment decisions. Instead, other measures such as net present value and profitability index should be considered to determine the viability of the project.

Question 7

The payback period considers all project cash flows.

Accepted Answer

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Question 8

Calculate the NPV for a project costing $200,000 and providing $20,000 annually for 40 years.The discount rate is 8 percent.By how much would the NPV change if the inflows were reduced to 30 years? Describe the implications of both answers.

Accepted Answer

The answer of Calculate the NPV for a project costing...

Question 9

For most managers, discounted cash flow analysis is in fact the dominant tool for project evaluation.

Accepted Answer

Discounted cash flow analysis is widely regarded as the most comprehensive and accurate way to evaluate the potential profitability of a project. It takes into account factors like the time value of money, inflation, and risk to project future cash flows and determine the present value of those cash flows. As a result, it is widely used by most managers for project evaluation.

Question 10

Discuss three reasons why a firm may want to impose soft capital rationing.

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Question 11

Evaluate the following mutually exclusive projects using IRR as a selection criterion.Assuming the discount rate to be 14 percent, which project-if either-would be selected? Project A costs $50,000 and returns $15,000 after-tax annually.Project B costs $35,000 and returns $11,000 after-tax annually.Both projects last five years.

Accepted Answer

The answer of Evaluate the following mutually exclusive projects using...

Question 12

Soft rationing should never cost the firm anything.

Accepted Answer

Soft rationing involves measures such as prioritizing projects, improving resource allocation efficiency, and maximizing utilization of existing resources without additional cost to the firm. Therefore, soft rationing should not cost the firm anything.

Question 13

The payback rule states that a project is acceptable if you get your money back within a specified period.

Accepted Answer

The payback rule does indeed state that a project is acceptable if you receive your invested money back within a set time period.

Question 14

For many firms the limits on capital funds are "soft." By this we mean that the capital rationing is not imposed by investors.

Accepted Answer

Soft capital rationing refers to the situation where a company voluntarily imposes limits on its capital expenditure, rather than being externally imposed by investors or lenders.

Question 15

When choosing among mutually exclusive projects, the choice is easy using the NPV rule.As long as at least one project has positive NPV, simply choose the project with the highest NPV.

Accepted Answer

This is because a positive NPV indicates that the project will generate more value than its initial investment, and choosing the project with the highest NPV maximizes the monetary benefits for the company or individual making the investment decision.

Question 16

A Project's payback period is the length of time necessary to generate an NPV of zero.

Accepted Answer

The payback period is the length of time required to recover the initial investment cost, not the time to generate a Net Present Value (NPV) of zero. NPV is a separate financial metric.

Question 17

When we compare assets with different lives, we should select the machine that has the lowest equivalent annual annuity.

Accepted Answer

This is because the equivalent annual annuity takes into account the initial cost, salvage value, and expected life of the asset, allowing for a more accurate comparison between assets with different lives. Choosing the asset with the lowest equivalent annual annuity would result in the lowest overall cost for the company.

Question 18

Both the NPV and the internal rate of return methods recognize that the timing of cash flows affects project value.

Accepted Answer

Both the NPV and IRR methods take into consideration the timing of cash flows and their effect on project value. The NPV method discounts all future cash flows to their present value using a discount rate, while the IRR method calculates the discount rate that equates the present value of cash inflows with the initial investment.

Question 19

Because of deficiencies associated with the payback method, it is seldom used in corporate financial analysis today.

Accepted Answer

The statement is incorrect. While the payback method has its limitations, it is still widely used in corporate financial analysis today as a quick and simple way to assess the initial investment recovery period.

Question 20

Find the IRR for a project costing $36,500 and returning $5,000 annually for the first four years, followed by $11,000 annually for three years.Hint: At a discount rate of 7 percent the Project's NPV is $2,458.91 and changes to -$1,966.86 at a discount rate of 10 percent.

Accepted Answer

The answer of Find the IRR for a project costing...

Quiz 8: Net Present Value and Other Investment Criteria