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FIN 571 Week 5 Connect Problems -

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 project that has positive cash ﬂows for every time period after the initial investment should be accepted.

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

they create value for the owners of the ﬁrm. the project's rate of return exceeds the rate of inﬂation. they return the initial cash outlay within three years or less. the required cash inﬂows exceed the actual cash inﬂows. the investment's cost exceeds the present value of the cash inﬂows.

4. Accepting a positive net present value (NPV) project:

indicates the project will pay back within the required period of time. means the present value of the expected cash ﬂows is equal to the project’s cost. ignores the inherent risks within the project. guarantees all cash ﬂow assumptions will be realized. is expected to increase the stockholders’ value by the amount of the NPV.

5. The net present value method of capital budgeting analysis does all of the following except:

incorporate risk into the analysis.

consider all relevant cash ﬂow information.

use all of a project's cash ﬂows.

discount all future cash ﬂows.

provide a speciﬁc anticipated rate of return.

6. 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 13 percent.

−$287.22

−$1,195.12

−$1,350.49

$204.36

$797.22

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