# The difference between the present value of an investment?s future cash flows and its initial cost..

The difference between the present value of an investment?s future cash flows and its initial cost is the:

net present value.

internal rate of return.

payback period.

profitability index.

discounted payback period.

References

Multiple ChoiceSection: 5.1 Net Present Value and Other Investment Rules

2.

Which statement concerning the net present value (NPV) of an investment or a financing project is correct?

A financing project should be accepted if, and only if, the NPV is exactly equal to zero.

An investment project should be accepted only if the NPV is equal to the initial cash flow.

Any type of project should be accepted if the NPV is positive and rejected if it is negative.

Any type of project with greater total cash inflows than total cash outflows, should always be accepted.

An investment project that has positive cash flows for every time period after the initial investment should be accepted.

References

Multiple ChoiceSection: 5.1 Net Present Value and Other Investment Rules

3.

The primary reason that company projects with positive net present values are considered acceptable is that:

they create value for the owners of the firm.

the project’s rate of return exceeds the rate of inflation.

they return the initial cash outlay within three years or less.

the required cash inflows exceed the actual cash inflows.

the investment’s cost exceeds the present value of the cash inflows.

References

Multiple ChoiceSection: 5.1 Net Present Value and Other Investment Rules

4.

Accepting a positive net present value (NPV) project:

indicates the project will pay back within the required period of time.

means the present value of the expected cash flows is equal to the project’s cost.

ignores the inherent risks within the project.

guarantees all cash flow assumptions will be realized.

is expected to increase the stockholders’ value by the amount of the NPV.

References

Multiple ChoiceSection: 5.1 Net Present Value and Other Investment Rules

5.

The net present value method of capital budgeting analysis does all of the following except:

incorporate risk into the analysis.

consider all relevant cash flow information.

use all of a project’s cash flows.

discount all future cash flows.

provide a specific anticipated rate of return.

References

Multiple ChoiceSection: 5.1 Net Present Value and Other Investment Rules

6.

What is the net present value of a project with an initial cost of $36,900 and cash inflows of $13,400, $21,600, and $10,000 for Years 1 to 3, respectively? The discount rate is 13 percent.

−$287.22

−$1,195.12

−$1,350.49

$204.36

$797.22

References

Multiple ChoiceSection: 5.1 Net Present Value and Other Investment Rules

7.

Maxwell Software, Inc., has the following mutually exclusive projects.

Year

Project A

Project B

0

–$29,000

–$32,000

1

16,500

17,500

2

13,000

11,500

3

3,800

13,000

a-1.

Calculate the payback period for each project. (Do not round intermediate calculations and round your answers to 3 decimal places, e.g., 32.161.)

Payback period

Project A

Project B

a-2.

Which, if either, of these projects should be chosen?

b-1.

What is the NPV for each project if the appropriate discount rate is 14 percent? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

NPV

Project A

Project B

b-2.

Which, if either, of these projects should be chosen if the appropriate discount rate is 14 percent?

References

WorksheetSection: 5.2 The Payback Period Method

Maxwell Software, Inc., has the following mutually exclusive projects.

Year

Project A

Project B

0

–$29,000

–$32,000

1

16,500

17,500

2

13,000

11,500

3

3,800

13,000

a-1.

Calculate the payback period for each project. (Do not round intermediate calculations and round your answers to 3 decimal places, e.g., 32.161.)

Payback period

Project A

years

Project B

years

a-2.

Which, if either, of these projects should be chosen?

b-1.

What is the NPV for each project if the appropriate discount rate is 14 percent? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

NPV

Project A

$

Project B

$

b-2.

Which, if either, of these projects should be chosen if the appropriate discount rate is 14 percent?

8.

Down Under Boomerang, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.61 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which it will be worthless. The project is estimated to generate $2,050,000 in annual sales, with costs of $745,000. The tax rate is 30 percent and the required return is 15 percent.

What is the project’s NPV? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

NPV

References

WorksheetSection: 6.2 The Baldwin Company: An Example

Down Under Boomerang, Inc., is considering a new three-year expansion project that requires an initial fixed asset investment of $2.61 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which it will be worthless. The project is estimated to generate $2,050,000 in annual sales, with costs of $745,000. The tax rate is 30 percent and the required return is 15 percent.

What is the project’s NPV? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

NPV

$

9.

The Best Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated here. The corporate tax rate is 40 percent. Assume all sales revenue is received in cash, all operating costs and income taxes are paid in cash, and all cash flows occur at the end of the year. All net working capital is recovered at the end of the project.

Year 0

Year 1

Year 2

Year 3

Year 4

Investment

$

34,000

Sales revenue

$

17,500

$

18,000

$

18,500

$

15,500

Operating costs

3,700

3,800

3,900

3,100

Depreciation

8,500

8,500

8,500

8,500

Net working capital spending

400

450

500

400

?

a.

Compute the incremental net income of the investment for each year. (Do not round intermediate calculations.)

Year 1

Year 2

Year 3

Year 4

Net income

b.

Compute the incremental cash flows of the investment for each year. (Do not round intermediate calculations. A negative answer should be indicated by a minus sign.)

Year 0

Year 1

Year 2

Year 3

Year 4

Cash flow

c.

Suppose the appropriate discount rate is 10 percent. What is the NPV of the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

NPV

References

WorksheetSection: 6.1 Incremental Cash Flows: The Key to Capital BudgetingSection: 6.2 The Baldwin Company: An Example

The Best Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated here. The corporate tax rate is 40 percent. Assume all sales revenue is received in cash, all operating costs and income taxes are paid in cash, and all cash flows occur at the end of the year. All net working capital is recovered at the end of the project.

Year 0

Year 1

Year 2

Year 3

Year 4

Investment

$

34,000

Sales revenue

$

17,500

$

18,000

$

18,500

$

15,500

Operating costs

3,700

3,800

3,900

3,100

Depreciation

8,500

8,500

8,500

8,500

Net working capital spending

400

450

500

400

?

a.

Compute the incremental net income of the investment for each year. (Do not round intermediate calculations.)

Year 1

Year 2

Year 3

Year 4

Net income

$

$

$

$

b.

Compute the incremental cash flows of the investment for each year. (Do not round intermediate calculations. A negative answer should be indicated by a minus sign.)

Year 0

Year 1

Year 2

Year 3

Year 4

Cash flow

$

$

$

$

$

c.

Suppose the appropriate discount rate is 10 percent. What is the NPV of the project? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

NPV

$

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