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.
B.
C.
D.

2.

Which one of the following can be defined as a benefit-cost ratio?

A.
B.
C.
D.

3.

Payback period greater than the requirement.

Positive average accounting rate of return.
Positive net present value.
Profitability index less than 1.0.

Which one of the following indicates that a project should be rejected?

A.
B.
C.
D.

5.

Average accounting return.

Net present value.
Payback period.
Profitability index.

Which one of the following indicates that a project is expected to create value
for its owners?
A.
B.
C.
D.

4.

Average accounting rate of return.

Net present value.
Payback period.
Profitability index.

Average accounting rate of return that exceeds the requirement.

Probability index less than 1.0.
Net present value greater than zero.
Payback period that is shorter than the requirement.

Which one of the following statements is CORRECT?

A. A longer payback period is preferred over a shorter payback period.
B. The payback rule is biased in favour of long-term projects.
C. The payback period considers the timing and amount of all of a projects
cash flows.
D. The payback period ignores the time value of money.

6.

A mutually exclusive investment decision is defined as a situation where

___________.
A.
B.
C.
D.

a firm has an exclusive contract to produce a certain project

a firm must decide if it wants to expand to Melaka or Penang, or both
an investment in Project ABC prohibits you from investing in Project XYZ
one firm is the only firm capable of handling a particular project

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DBM5028 Business Finance / Chapter 8

7.

The period of time it takes an investment to generate sufficient cash flows to

recover its initial cost is called the ____________.
A.
B.
C.
D.

8.

Which one of the following is the primary advantage of payback analysis?

A.
B.
C.
D.

9.

Average accounting return.

Net present value.
Payback period.
Profitability index.

An investment has conventional cash flows and a profitability index of 1.0.

Given this, which one of the following must be true?
A.
B.
C.
D.

11.

Arbitrary cutoff point.

Ease of use.
Incorporation of the time value of money concept.
Long term bias.

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

A.
B.
C.
D.

10.

internal rate period

payback period
probability period
net present value period

The average accounting return is 1.0.

The investment never pays back.
The net present value is equal to zero.
The net present value is greater than 1.0.

Jean is considering adding a new product to its lineup. This product is expected
to generate sales for four years, after which time, the product will be
discontinued. What is the projects net present value if the firm wants to earn 11
percent rate of return?
Year
Cash Flow (RM)

12.

0
-30,000

1
8,700

2
12,300

3
18,900

4
23,400

Calculate the net present value of a project which has an initial cost of
RM77,000 and produces cash inflows of RM20,000 a year for 5 years if the
discount rate is 12 percent.

13. Jay Technologies is planning to invest in a project with an initial cost of

RM60,000. The project will produce the following cash inflows:
Year
Cash
(RM)

0
Flow -60,000

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1
30,000

2
25,000

3
18,000

4
12,000

DBM5028 Business Finance / Chapter 8

(a) What is the payback period?

(b) If the estimated payback period is 2 years, should the company accept
the project?
14.

ND Sdn. Bhd. has the following projects available. The company has
historically used a 3-year cutoff for projects. The required return is 10 percent.
Year
Project
(RM)
Project
(RM)

0
A -70,000

1
20,800

2
26,100

3
30,800

4
33,900

B -120,000

42,600

40,300

36,200

31,500

(a) What is the payback period for both projects?

(b) Which project(s) should the company accept?
15.

SY Company is considering an investment with an initial cost of RM300,000,

which will be fully depreciated over 5 years.
(a) What is the average accounting return (AAR) on this investment if it
produces the following amounts of net income?
(b) If the company targets 15% AAR, should the company accept or not
the project?
Year
Net Income

16.

1
2
3
4
RM24,000 RM25,200 RM29,700 RM20,600

5
RM17,300

An investment has an initial cost of RM400,000 and a life of four years. This
investment will be depreciated by RM80,000 a year and will generate the net
income shown below. Should this project be accepted based on the average
accounting rate of return (AAR) if the required rate is 10 percent? Why or why
not?
Year
Net Income

1
RM18,100

2
RM20,700

3
RM24,800

4
RM28,300

17. Charmaine is reviewing a project that has an initial cost of RM88,000. The
project will produce annual cash inflows, starting with Year 1, of RM10,000,
RM12,200, RM23,800, RM34,900 and finally in Year 5, RM38,300.
(a) What is the profitability index if the discount rate is 12 percent?
(b) Should Charmaine accept or reject the project?
18.

Isabelle is looking into a project that has expected cash inflows, starting with
Year 1, of RM4,000, RM5,000, RM6,000 and finally in Year 4, RM7,000. The
profitability index is 2.15 and the appropriate discount rate is 11.5 percent. How
much does Isabelle have to pay upfront if she wants to invest in this project?

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DBM5028 Business Finance / Chapter 8

19.

Clix Corporation is considering the following two projects. The company has to
put down an investment of RM50,000 for each project. The inflows related to
each project are as per table below and the required return is 11 percent.
Year
Project Andalas (RM)
Project Bakti
(RM)

1
40,000
30,000

2
25,000
40,000

3
10,000
20,000

4
25,000
10,000

(a) Based on the above information, calculate

(i) The regular payback period for both projects.
(ii) The discounted payback period for both projects.
(iii) The net present value for both projects.
(b) Based on NPV, which project would you recommend?
(c) Based on payback period, which project would you recommend?
(d) If the projects are mutually exclusive, which project(s) would you
recommend?
(e) If the projects are independent, which project(s) would you recommend?

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