FIN 571 Connect Problems

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FIN 571 Week 5 Connect Problems

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

net present value.

internal rate of return.

payback period.

protability index.

discounted payback period.

Which statement concerning the net present value (NPV) of an

investment or a nancing project is correct?

A nancing 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 ow.

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 inows than total cash
outows, should always be accepted.

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

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

they create value for the owners of the rm.

the project's rate of return exceeds the rate of ination.

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

the required cash inows exceed the actual cash inows.

the investment's cost exceeds the present value of the cash inows.

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 ows is equal to the
projects cost.

ignores the inherent risks within the project.

guarantees all cash ow assumptions will be realized.

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

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

incorporate risk into the analysis.

consider all relevant cash ow information.

use all of a project's cash ows.

discount all future cash ows.

provide a specic anticipated rate of return.

What is the net present value of a project with an initial cost of

$36,900 and cash inows 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

Maxwell Software, Inc., has the following mutually exclusive

projects.
Year

Project A

Project B

$17,000

$20,000

10,500

11,500

7,000

8,000

2,600

7,000

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?

Project __
b-1. What is the NPV for each project if the appropriate discount rate
is 15 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 15 percent?
Project __

Flatte Restaurant is considering the purchase of a $9,900 souffl

maker. The souffl maker has an economic life of six years and will
be fully depreciated by the straight-line method. The machine will
produce 1,950 souffls per year, with each costing $2.35 to make
and priced at $5.20. Assume that the discount rate is 14 percent and
the tax rate is 40 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

$_____

Should the company make the purchase?

Yes/No

The Best Manufacturing Company is considering a new investment.

Financial projections for the investment are tabulated here. The
corporate tax rate is 38 percent. Assume all sales revenue is
received in cash, all operating costs and income taxes are paid in
cash, and all cash ows occur at the end of the year. All net working
capital is recovered at the end of the project.
Year 0

Year 1
Year 4

Year 2

Year 3

Investment

$29,000

Sales revenue
$13,000

$ 15,000$15,500

$16,000

Operating costs
2,600

3,200

3,300

3,400

Depreciation
7,250
7,250

7,250

7,250

Net working capital spending

350 ?

350

400

450

a. Compute the incremental net income of the investment for each

year. (Do not round intermediate calculations.)
Year 1

Year 2

Net income
a

$ _____

Year 4
$ _____

$____

Compute the incremental cash ows of the investment for each year.
(Do not round intermediate calculations. A negative answer should
be indicated by a minus sign.)
3
Cash ow
$ _____

$ ____

Year 3

Year 0
Year 4
$ _____

Year 1
$ _____

Year 2
$ _____

Year
$ _____

Suppose the appropriate discount rate is 12 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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