FIN 571 Week 5 Connect Problems -

**Question 1**

**The difference between the present value of an investment?s future cash ﬂows and its initial cost is the:**

**Answers**

A. net present value.

B. internal rate of return.

C. payback period.

D. proﬁtability index.

E. discounted payback period.

**Question 2**

**Which statement concerning the net present value (NPV) of an investment or a ﬁnancing project is correct?**

**Answers**

A. A ﬁnancing project should be accepted if, and only if, the NPV is exactly equal to zero.

B. An investment project should be accepted only if the NPV is equal to the initial cash ﬂow.

C. Any type of project should be accepted if the NPV is positive and rejected if it is negative.

D. Any type of project with greater total cash inﬂows than total cash outﬂows, should always be accepted.

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

**Question 3**

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

**Answers**

A. they create value for the owners of the ﬁrm.

B. the project's rate of return exceeds the rate of inﬂation.

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

D. the required cash inﬂows exceed the actual cash inﬂows.

E. the investment's cost exceeds the present value of the cash inﬂows.

**Question 4**

**Accepting a positive net present value (NPV) project:**

**Answers**

A. indicates the project will pay back within the required period of time.

B. means the present value of the expected cash ﬂows is equal to the project’s cost.

C. ignores the inherent risks within the project.

D. guarantees all cash ﬂow assumptions will be realized.

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

**Question 5**

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

**Answers**

A. incorporate risk into the analysis.

B. consider all relevant cash ﬂow information.

C. use all of a project's cash ﬂows.

D. discount all future cash ﬂows.

E. provide a speciﬁc anticipated rate of return.

**Question 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.**

**Answers**

A. −$287.22

B. −$1,195.12

C. −$1,350.49

D. $204.36

E. $797.22

**Question 7**

**Maxwell Software, Inc., has the following mutually exclusive projects.**

**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**

**Answers**

A. 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

B. Which, if either, of these projects should be chosen?

Project __

C. 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 $____

D. Which, if either, of these projects should be chosen if the appropriate discount rate is 15 percent?

Project __

**Question 8**

**Flatte Restaurant is considering the purchase of a $9,900 soufflé maker. The soufflé maker has an economic life of six years and will be fully depreciated by the straight-line method. The machine will produce 1,950 soufflés 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.**

**Answers **

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

**Question 9**

**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 flows occur at the end of the year. All net working capital is recovered at the end of the project.**

** Year 0 Year 1 Year 2 Year 3 Year 4**

**Investment $ 29,000**

**Sales revenue $ 15,000 $15,500 $16,000 $13,000**

**Operating costs 3,200 3,300 3,400 2,600**

**Depreciation 7,250 7,250 7,250 7,250**

**Net working capital spending 350 400 450 350 ?**

**Compute the incremental net income of the investment for each year. (Do not round intermediate calculations.)**

Year 1 Year 2 Year 3 Year 4

Net income $ **____** $ **_____** $ **_____** $____

**Compute the incremental cash flows of the investment for each year. (Do not round intermediate calculations. A negative answer should be indicated by a minus sign.)**

Year 0 Year 1 Year 2 Year 3 Year 4

Cash flow $ **_____** $ _____ $ _____ $ _____ $ _____

**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 $_____