1. The difference between the present value of an investment?s future cash flows and its initial cost is the
2. Which statement concerning the net present value (NPV) of an investment or a financing project is correct?
3. The primary reason that company projects with positive net present values are considered acceptable is that:
4. Accepting a positive net present value (NPV) project:
5. The net present value method of capital budgeting analysis does all of the following except:
6. What is the net present value of a project with an initial cost of $36,900 and cash inflows of $13,400, $21,600, and $10,000 for Years 1 to 3, respectively? The discount rate is 13 percent.
Year Project A Project B
0 –$17,000 –$20,000
1 10,500 11,500
2 7,000 8,000
3 2,600 7,000
a1. Calculate the payback period for each project
a2. Which, if either, of these projects should be chosen?
b1. What is the NPV for each project if the appropriate discount rate is 15 percent?
b2. Which, if either, of these projects should be chosen if the appropriate discount rate is 15 percent?
8. Flatte Restaurant is considering the purchase of a $9,800 soufflé maker. The soufflé maker has an economic life of five years and will be fully depreciated by the straightline method. The machine will produce 1,900 soufflés per year, with each costing $2.30 to make and priced at $5.30. Assume that the discount rate is 11 percent and the tax rate is 35 percent. What is the NPV of the project?
9. The Best Manufacturing Company is considering a new investment. Financial projections for the investment are tabulated here. The corporate tax rate is 40 percent. Assume all sales revenue is received in cash, all operating costs and income taxes are paid in cash, and all cash flows occur at the end of the year. All net working capital is recovered at the end of the project.
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