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Exam 8: Investment Decision Rules

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Question 41

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A florist is buying a number of motorcycles to expand its delivery service. These will cost $78,000 but are expected to increase profits by $3000 per month over the next four years. What is the payback period in this case?

A) 10.40 months
B) 15.60 months
C) 19.50 months
D) 26.00 months

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Question 42

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Use the information for the question(s) below. -The owner of a hair salon spends $1,000,000 to renovate its premises, estimating that this will increase her cash flow by $220,000 per year. She constructs the above graph, which shows the net present value (NPV) as a function of the discount rate. At what dollar value should the NPV profile cross the vertical axis?

A) $780,000
B) $1,000,000
C) Cannot be determined because inadequate information is given.
D) The vertical axis crossing point cannot be calculated since the cash inflows are in perpetuity.

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Question 43

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A manufacturer of video games develops a new game over two years. This costs $830,000 per year with one payment made immediately and the other at the end of two years. When the game is released, it is expected to make $1.20 million per year for three years after that. What is the net present value (NPV) of this decision if the cost of capital is 10%?

An investor is considering a project that will generate $900,000 per year for four years. In addition to upfront costs, at the completion of the project at the end of the fifth year there will be shut-down costs of $400,000. If the cost of capital is 4.4%, based on the MIRR, at what upfront costs does this project cease to be worthwhile?

Which of the following situations can lead to IRR giving a different decision than NPV?

How do you apply the Net Present Value rule when multiple projects are available and you have the added constraint of accepting only one project?

Which of the following decision rules is best defined as the amount of time it takes to pay back the initial investment?

Use the table for the question(s) below. Consider the following list of projects: -Assuming that your capital is constrained, so that you only have $600,000 available to invest in projects, which project should you invest in and in what order?

What is the decision criterion using the Net Present Value rule?

A security company offers to provide CCTV coverage for a parking garage for ten years for an initial payment of $50,000 and additional payments of $30,000 per year. What is the equivalent annual annuity of this deal, given a cost of capital of 5%?

The cash flows for four projects are shown below, along with the cost of capital for these projects. If these projects are mutually exclusive, which one should be taken?

A firm is considering several mutually exclusive investment opportunities. The best way to choose between them is which of the following?

You are considering investing in a zero-coupon bond that will pay you its face value of $1000 in twelve years. If the bond is currently selling for $496.97, then the internal rate of return (IRR) for investing in this bond is closest to ________.

A convenience store owner is contemplating putting a large neon sign over his store. It would cost $50,000, but is expected to bring an additional $24,000 of profit to the store every year for five years. Would this project be worthwhile if evaluated using a payback period of two years or less and if the cost of capital is 10%?

A janitorial services firm is considering two brands of industrial vacuum cleaners to equip their staff. Option A will cost $1,500, require servicing of $200 per year, and it will last five years. Option B will cost $1,000, require servicing of $100 per year, and it will last three years. If the cost of capital is 8%, which is the better option, given that the firm has an ongoing requirement for vacuum cleaners?

Which of the following statements is FALSE?

Trial and error is the only way to compute the internal rate of return (IRR) when interest is calculated over five or more periods.

How can you calculate the y-intercept of a net present value (NPV) profile without using TVM concepts?

Consider the following list of projects: You are given a budget of only $1,800,000 to invest in projects. Which projects will you select, in what order will you select them, and why?

Consider the following two projects: The net present value (NPV) for project beta is closest to ________.