CF1.4.1.1

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

• the required cash inflows exceed the actual cash inflows

• they create value for the owners of the firm

• they have advantages compared with other methods

Net present value

• cannot be used when deciding between two mutually exclusive projects.

• is not as widely used in practice as payback and discounted payback

• is more useful than the internal rate of return when comparing different sized projects.

Payback is frequently used to analyze independent projects because:

• discounting of all cash flows

• it is easy and quick to calculate

• all relevant cash flows are included in the analysis

The internal rate of return for investment project:

• is used primarily to rank projects of varying sizes

• is the rate generated solely by the cash flows of the investment

• is the rate that causes the net present value of a project to equal the project’s initial cost

The internal rate of return tends to be:

• extremely accurate even when cash flow estimates are faulty.

• ignored by most financial managers

• easier for managers to comprehend than the net present value.

The profitability index:

• method is most commonly used when deciding between mutually exclusive projects of varying size

• is useful as a decision tool when investment funds are limited and all available funds are allocated

• produces results which typically are difficult to comprehend

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 10 percent.

• 646.21

• 4000,75

• -1195.12

Aniv is reviewing a project with an initial cost of $38,700 and cash inflows of $9,800, $16,400, and $21,000 for Years 1 to 3, respectively. Should the project be accepted if it has been assigned a required return of 9.75 percent? Why or why not?

• no; because the IRR exceeds the required return by .43 percent

• no; because the IRR is lower than the required return by .35 percent

• yes; because the IRR exceeds the required return by .34 percent