Use the following to answer the following question(s).
The information below describes a project with an initial cash outlay of $10,000 and a required return of 12%.
After-tax cash inflow
Year 1 $6,000
Year 2 $2,000
Year 3 $2,000
Year 4 $2,000
Which of the following statements is correct?
A) The project should be accepted since its NPV is $353.87.
B) The project should be rejected since its NPV is -$353.87.
C) The project should be accepted since it has a payback of less than four years.
D) The project should be rejected since its NPV is -$23.91.
Suppose you determine that the NPV of a project is $1,525,855. What does that mean?
A) In all cases, investing in this project would be better than investing in a project that has an NPV of $850,000.
B) The project would add value to the firm.
C) Under all conditions, the project's payback would be less than the profitability index.
D) Other investment criteria might need to be considered.
Project January has a NPV of $50,000, project December has a NPV of $40,000. Which of the following circumstances could make it possible to choose December over January?
A) January has a shorter payback period.
B) The projects are mutually exclusive.
C) The projects have unequal lives.
D) The projects are mandated.
The present value of the total costs over a five year period for Project April is $50,000. The net present value of total costs over a 4 year period for Project October is $40,000. The company uses a discount rate of 9%. Which project should it choose and why?
A) April because it has a higher net present value (NPV).
B) April because is has a higher equivalent annual cost (EAC).
C) October because it has a shorter life.
D) October because it has a lower equivalent annual cost (EAC).
Warchester Inc. is considering the purchase of copying equipment that will require an initial investment of $15,000 and $4,000 per year in annual operating costs over the equipment's estimated useful life of 5 years. The company will use a discount rate of 8.5%. What is the equivalent annual cost?
A) $4,000
B) $7,000
C) $6,152.51
D) $7,806.49
Answer: D
Artie's Soccer Ball Company is considering a project with the following cash flows:
Initial outlay = $750,000
Incremental after-tax cash flows from operations Years 1-4 = $250,000 per year
Compute the NPV of this project if the company's discount rate is 12%.
A) $9,337
B) $7,758
C) $4,337
D) $2,534
