AACSB: Reflective thinkingBloom's: AnalysisDifficulty: BasicLearning Objective: 9-1 and 9-7Section: 9.7Topic: Profitability index and net present value9-115

Chapter 09 - Net Present Value and Other Investment Criteria103. How does the net present value (NPV) decision rule relate to the primary goal of financial management, which is creating wealth for shareholders? The NPV rule states that a project should be accepted if the NPV is positive and rejected if the NPV is negative. This aligns with the goal of creating wealth for a firm's shareholders as only projects which create wealth are approved for acceptance. Managers are indifferent to projects with zero NPVs, which is okay because such projects neither create nor destroy shareholder wealth.AACSB: Reflective thinkingBloom's: AnalysisDifficulty: BasicLearning Objective: 9-1Section: 9.1Topic: Net present valueMultiple Choice Questions104. An investment project provides cash flows of $1,190 per year for 10 years. If the initial cost is $8,000, what is the payback period? Payback = $8,000/$1,190 = 6.72 yearsAACSB: AnalyticBloom's: ApplicationDifficulty: BasicLearning Objective: 9-2Section: 9.2Topic: Payback9-116

Chapter 09 - Net Present Value and Other Investment Criteria105. An investment project costs $21,500 and has annual cash flows of $4,200 for 6 years. If the discount rate is 20 percent, what is the discounted payback period? AACSB: AnalyticBloom's: ApplicationDifficulty: BasicLearning Objective: 9-3Section: 9.3Topic: Discounted payback106. You're trying to determine whether to expand your business by building a new manufacturing plant. The plant has an installation cost of $12 million, which will be depreciated straight-line to zero over its 4-year life. The plant has projected net income of $1,095,000, $902,000, $1,412,000, and $1,724,000 over these 4 years. What is the average accounting return? AACSB: AnalyticBloom's: ApplicationDifficulty: BasicLearning Objective: 9-4Section: 9.4Topic: Average accounting return9-117

Chapter 09 - Net Present Value and Other Investment Criteria107. A firm evaluates all of its projects by applying the IRR rule. The required return for the following project is 21 percent. The IRR is _____ percent and the firm should ______ the project.A. 23.67 percent; rejectB. 24.26 percent; acceptC. 24.26 percent; rejectD.26.30 percent; acceptE. 26.30 percent; rejectAACSB: AnalyticBloom's: ApplicationDifficulty: BasicLearning Objective: 9-5Section: 9.5Topic: Internal rate of return9-118

Chapter 09 - Net Present Value and Other Investment Criteria

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