1. Considering the following 2 mutually exclusive projects. Using the equivalent annual annuity method and cost of capital of 10%, which project should be selected?
Year Project A cash flow Project B cash flow
0 (20,000) (20,000)
1 15,000 5,000
2 20,000 10,000
2. The internal rate of return is the interest that makes the present value of a project cash inflow (greater than the present value of its cash outflows, less than the present value of its cash outflows, or equal to the present value of its cash outflows)
3. The payback method is deficient in that it (disregards the time value of money, is based on arithmetic rather than algebra)
4. Project A has annual cash flows of 200.00 for the next three years. Project B has annual cash flows of 100.00 for the next three years and then annual cash flows of 500.00 for the following four years. Assuming both projects have an initial cost of 500.00, which project is better based on the payback period criteria?
5. A project generates a revenue of 100.00 today for a service to be performed one year from today at a cost of 110.00, What is the discount rate that will make the NPV greater than 0?
6. Is the predictable and typical pattern of cash flow involved in all major projects for a firm?
7. IF we have a project which, after applying a “cost of capital” or “discount rate” of 10% delivers a positive 20,000 NPV, can I conclude that the IRR for the project must be less than 10%
8. When have projects that have unequal lives an easy way to arrive at a correct decision as to which project is to be picked is to use the Equivalent Annual Annuity method: Which does this translate to (NPV into a series of annuities in the future, IRR into an NPV, NPV into equal NPV amount in the future)
9. Based on five years MACRS depreciation schedule, depreciation will occur over a ____period of time. IS that 6,5,4.5 or 7 years
10. Cash flows have been estimated in detail for the first six years of a new ventures life. Management feels the new business will go on indefinitely, and will probably grow at an average rate of 3% per year starting at $50M in year seven. The project is being evaluated using a cost of capital of 11%. What is the contribution of this terminal value assumption to the sixth year cash flow?