90. Based upon the profitability index (PI) and the information provided in the problem, you should:
A. accept both project A and project B.B. accept project A and reject project B.C. accept project B and reject project A.D. reject both project A and project B.E. disregard the PI method in this case.5-27
Chapter 05 - Net Present Value and Other Investment Rules
91. A $25 investment produces $27.50 at the end of the year with no risk. Which of the following is true?
92. Consider an investment with an initial cost of $20,000 and is that expected to last for 5 years. The expected cash flows in years 1 and 2 are $5,000, in years 3 and 4 are $5,500 and in year 5 is $1,000. The total cash inflow is expected to be $22,000 or an average of $4,400 per year. Compute the payback period in years.
93. An investment with an initial cost of $15,000 produces cash flows of $5,000 annually for 5 years. If the cash flow is evenly spread out over the year and the firm can borrow at 10%, the discounted payback period is _____ years.
94. An investment project has the cash flow stream of $-250, $75, $125, $100, and $50. The cost of capital is 12%. What is the discounted payback period?
A. 3.15 yearsB. 3.38 yearsC. 3.45 yearsD. 3.60 years
E. 4.05 years
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Chapter 05 - Net Present Value and Other Investment Rules
95. An investment cost $10,000 with expected cash flows of $3,000 for 5 years. The discount rate is 15.2382%. The NPV is ___ and the IRR is ___ for the project.
Essay Questions
96. List and briefly discuss the advantages and disadvantages of the internal rate of return
(IRR) rule. 97. Explain the differences and similarities between net present value (NPV) and the profitability index (PI). 5-29
Chapter 05 - Net Present Value and Other Investment Rules
98. Given the goal of maximization of firm value and shareholder wealth, we have stressed
the importance of net present value (NPV). And yet, many financial decision-makers at some of the most prominent firms in the world continue to use less desirable measures such as the payback period and the average accounting return (AAR). Why do you think this is the case? 99. The Ziggy Trim and Cut Company can purchase equipment on sale for $4,300. The asset has a three-year life, will produce a cash flow of $1,200 in the first and second year, and $3,000 in the third year. The interest rate is 12%. Calculate the project's payback. Also, calculate the project's IRR. Should the project be taken? Check your answer by computing the project's NPV. 100. The Ziggy Trim and Cut Company can purchase equipment on sale for $4,300. The asset has a three-year life, will produce a cash flow of $1,200 in the first and second year, and $3,000 in the third year. The interest rate is 12%. Calculate the project's Discounted Payback and Profitability Index assuming end of year cash flows. Should the project be taken? If the Average Accounting Return was positive, how would this affect your decision?
