25 May Question 21) The assignment of a discount rate to each project is an integral part of the NPV process.
Question
21) The assignment of a discount rate to each project is an integral part of the NPV process.
22) To determine the current value of a project, discount all future cash flows to the present and add up all cash inflow and outflow.
Comment: To determine the current value of a project, discount all future cash flows to the present, add up all cash inflow, and SUBTRACT all cash outflow.
23) Finding the equivalent annual annuity (EAA) is a good way to deal with projects with unequal lives and should only be used with mutually exclusive projects.
24) To be considered acceptable, a project must have an NPV greater than 1.0
25) Suzie, Inc. wants to analyze the NPV profile for a five-year project that is considered to be very risky. The project’s initial outlay or cost is $80,000 and it has respective cash inflows for years 1, 2, 3, 4 and 5 of $15,000, $25,000, $35,000, $45,000 and $55,000. Suzie wants to know how the NPV will change for the following required rates of returns: 9%, 14%, 19%, 24%, and 29%. From the NPV profile, at about what rate will the NPV be equal to zero?
26) Hubbard, Inc. is considering Project A and Project B, which are two mutually exclusively projects with unequal lives. Project A is an eight-year project that has an initial outlay or cost of $18,000. Its future cash inflows for years 1 through 8 are the same at $3,800. Project B is a six-year project that has an initial outlay or cost of $16,000. Its future cash inflows for years 1 through 6 are the same at $3,600. Hubbard uses the equivalent annual annuity (EAA) method and has a discount rate of 11.50%. Which, if any, project will Hubbard accept?
9.4 Internal Rate of Return
1) The most popular alternative to NPV for capital budgeting decisions is the ________ method. A) internal rate of return (IRR)
B) payback period
C) discounted payback period D) profitability index
2) The IRR is the discount rate that produces a zero NPV or the specific discount rate at which the present value of the cost equals ________.
A) the future value of the present cash outflows
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