1026 Words5 Pages

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

• net present value.

• internal rate of return.

• payback period.

• proﬁtability index.

• discounted payback period.

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

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

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

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

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

• An investment*…show more content…*

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 ?

a. Compute the incremental net income of the investment for each year. (Do not round intermediatecalculations.)

Year 1 Year 2 Year 3 Year 4

Net income $ ____ $ _____ $ _____ $____

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

Year 0 Year 1 Year 2 Year 3 Year 4

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

c. Suppose the appropriate

• net present value.

• internal rate of return.

• payback period.

• proﬁtability index.

• discounted payback period.

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

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

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

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

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

• An investment

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 ?

a. Compute the incremental net income of the investment for each year. (Do not round intermediatecalculations.)

Year 1 Year 2 Year 3 Year 4

Net income $ ____ $ _____ $ _____ $____

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

Year 0 Year 1 Year 2 Year 3 Year 4

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

c. Suppose the appropriate

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