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methods of investment analysis
1. After reading the chapter identify one primary strength and one primary weakness for each of the following methods of investment analysis.
Net present value:
Strength:
Weakness:
Internal rate of return:
Strength:
Weakness:
Profitability index:
Strength:
Weakness:
Payback:
Strength:
Weakness:
2. Calculate the answers to the following problems.
What is the payback period for a project with the following cash flows?
3. Lester’s Feed Mill is spending $230,000 to update its facility. The company estimates that this investment will improve its cash inflows by $46,500 a year for 10 years. What is the payback period?
4. A project has the following cash flows. What is the internal rate of return?
6. A project has the following cash flows. What is the internal rate of return?
7. You are considering an investment for which you require a 14 percent rate of return. The investment costs $58,900 and will produce cash inflows of $25,000 for 3 years. Should you accept this project based on its internal rate of return? Why or why not?
8. You are considering the following two mutually exclusive projects. The crossover point is _____ and project _____ should be accepted at a 12 percent discount rate.
9. The Black Horse is currently considering a project that will produce cash inflows of $12,000 a year for three years followed by $6,500 in year four. The cost of the project is $38,000. What is the profitability index if the discount rate is 7 percent?
10. You are considering the following two mutually exclusive projects. The required return on each project is 14 percent. Which project should you accept and what is the best reason for that decision?
11. If a project with conventional cash flows has a payback period less than the projects life, what will be the algebraic sign of the NPV? Why?
