FNCE 370 - Lesson 7: NPV and Other Investment Criteria

Lesson 7: NPV and Other Investment Criteria

Question 2

Project Phoenix costs $1.25 million and yields annual cost savings of $200,000 for seven years. The assets involved in the project can be salvaged for $100,000 at the end of the project. Ignoring taxes, what is the payback period for Project Phoenix?

Select one:

a. 6 years

b. 6 years and 1.7 months

c.6 years and 2 months

d. 6 years and 3 months

e. 7 years

Question 3

Fargo Inc. is considering a project that will require an initial investment of $2 million. The project will provide incremental cash inflows of $600,000 for the next five years. If the required return on the project is 15%, what is its discounted payback? Should the project be given the go-ahead if the company's investment cutoff threshold is five years?

Select one:

a. 3 years and 11.55 months; yes

b. 4 years and 10 months; yes

c. 4 years and 11.55 months; yes

d. 5 years; no

e. 5 years and 1 month; no

Question 4

A project will generate the following cash flows. The required rate of return is 10%. If the profitability index is 1.2, what is the initial investment for this project?

Year

Cash flow

1

$5,000

2

$6,000

3

$7,000

4

$8,000

5

$9,000

6

$10,000

Select one:

a. 26,217.06

b. $31,460.47

c. $37,500.00

d. $37,752.57

e. $60,476.08

Question 5

A project will generate the following cash flows. If the required rate of return is 12%, what is the project's net present value?

Year

Cash flow

0

-$28,000

1

$5,000

2

$6,000

3

$7,000

4

$8,000

5

$9,000

6

$10,000

Select one:

a. $17,000.00

b. $16,790.47

c. $3,460.47

d. $1,487.21

e. -$3,072.47

Question 6

Mr. Gallagher is considering replacing his 10-year-old car with a new one. The new car will cost $20,000, taking into consideration the trade-in value of the old car. The new car will save Mr. Gallagher $3,000 per year in terms of gasoline, repairs, and maintenance. Mr. Gallagher plans to keep this new car for 10 years. What is the internal rate of return on the new car?

Select one:

a. 5.00%

b. 8.14%

c. 9.43%

d. 10.41%

e. 15%

Question 7

A project will cost $20,000 today and yield cash inflows of $15,000 and $25,000 at the end of Year 1 and Year 2, respectively. At the end of Year 3, the project will require an additional clean-up cost of $5,000. The required rate of return for similar projects is 10%. What is the MIRR of this project if we use the reinvestment approach?

Select one:

a. 38.90%

b. 24.32%

c. 48.03%

d. 61.80%

e. 26.67%