59154 tutorial 8

8/18/2019 59154 Tutorial 8

1/4

DBM5028 Business Finance / Chapter 8

TUTORIAL 8

NET PRESENT VALUE AND OTHER INVESTMENT CRITERIA

1. Which one of the following is generally considered to be the best form of

analysis if you have to select a single method to analyse a variety of investment

opportunities?

A. Average accounting rate of return.

B. Net present value.

C. Paybac period.

!. Profitability inde".

#. Which one of the following can be defined as a benefit$cost ratio?

A. Average accounting return.


C. Paybac period.!. Profitability inde".

%. Which one of the following indicates that a pro&ect is e"pected to create value

for its owners?

A. Paybac period greater than the re'uirement.

B. Positive average accounting rate of return.

C. Positive net present value.

!. Profitability inde" less than 1.(.

). Which one of the following indicates that a pro&ect should be re&ected?

A. Average accounting rate of return that e"ceeds the re'uirement.

B. Probability inde" less than 1.(.

C. Net present value greater than *ero.

!. Paybac period that is shorter than the re'uirement.

+. Which one of the following statements is CORRECT?

A. A longer paybac period is preferred over a shorter paybac period.

B. ,he paybac rule is biased in favour of long$term pro&ects.C. ,he paybac period considers the timing and amount of all of a pro&ect-s

cash flows.

!. ,he paybac period ignores the time value of money.

. A mutually e"clusive investment decision is defined as a situation where

///////////.

A. a firm has an e"clusive contract to produce a certain pro&ect

B. a firm must decide if it wants to e"pand to 0elaa or Penang or both

C. an investment in Pro&ect ABC prohibits you from investing in Pro&ect 234

!. one firm is the only firm capable of handling a particular pro&ect

550367836NA96006:;68B8B 1

8/18/2019 59154 Tutorial 8

2/4


ase of use.

C. ncorporation of the time value of money concept.

!. 7ong term bias.

@. Which one of the following analytical methods is based on net income?

A. Average accounting return.


C. Paybac period.

!. Profitability inde".

1(. An investment has conventional cash flows and a profitability inde" of 1.(.

iven this which one of the following must be true?

A. ,he average accounting return is 1.(.

B. ,he investment never pays bac.

C. ,he net present value is e'ual to *ero.

!. ,he net present value is greater than 1.(.

11. ean is considering adding a new product to its lineup. ,his product is e"pected

to generate sales for four years after which time the product will be

discontinued. What is the pro&ect-s net present value if the firm wants to earn 11

percent rate of return?

3ear ( 1 # % )

Cash :low 90D $%(((( =

8/18/2019 59154 Tutorial 8

3/4


aD What is the paybac period?

bD f the estimated paybac period is # years should the company accept

the pro&ect?

1). N! 8dn. Bhd. has the following pro&ects available. ,he company has

historically used a %$year cutoff for pro&ects. ,he re'uired return is 1( percent.

3ear ( 1 # % )

Pro&ect A

90D

$

8/18/2019 59154 Tutorial 8

4/4


1@. Cli" Corporation is considering the following two pro&ects. ,he company has to

put down an investment of 90+(((( for each pro&ect. ,he inflows related to

each pro&ect are as per table below and the re'uired return is 11 percent.

3ear 1 # % )

Pro&ect Andalas 90D )(((( #+((( 1(((( #+(((Pro&ect Bati 90D %(((( )(((( #(((( 1((((

aD Based on the above information calculate

iD ,he regular paybac period for both pro&ects.

iiD ,he discounted paybac period for both pro&ects.

iiiD ,he net present value for both pro&ects.

bD Based on NPG which pro&ect would you recommend?

cD Based on paybac period which pro&ect would you recommend?

dD f the pro&ects are mutually e"clusive which pro&ectsD would you

recommend?

eD f the pro&ects are independent which pro&ectsD would you recommend?

550367836NA96006:;68B8B )

59154 tutorial 8

Documents