Question 1

When choosing between projects,an alternative to comparing their IRRs is:

Accepted Answer

A) to compute the incremental IRR,which tells us the discount rate at which it becomes profitable to switch from one project to the other. 
B) to compute the incremental payback period,which tells us the number of years during which it becomes profitable to switch from one project to the other. 
C) to compute the incremental NPV,which tells us the discount rate at which it becomes profitable to switch from one project to the other. 
D) There is no alternative selection criterion to comparing IRRs. 
A) to compute the incremental IRR,which tells us the discount rate at which it becomes profitable to switch from one project to the other. 
B) to compute the incremental payback period,which tells us the number of years during which it becomes profitable to switch from one project to the other. 
C) to compute the incremental NPV,which tells us the discount rate at which it becomes profitable to switch from one project to the other. 
D) There is no alternative selection criterion to comparing IRRs.

Question 2

Use the table for the question(s)below.
Consider the following two projects with cash flows in $:  
-The profitability index for project B is closest to:

Accepted Answer

A) 23.34. 
B) 12.64. 
C) 0.17. 
D) 0.12. 
A) 23.34. 
B) 12.64. 
C) 0.17. 
D) 0.12.

Question 3

Use the following information to answer the question(s)below.
Frank Dewey Esquire from the firm of Dewey,Cheatum,and Howe,has been offered an upfront retainer of $30,000 to provide legal services over the next 12 months to Taggart Transcontinental.In return for this upfront payment,Taggart Transcontinental would have access to 8 hours of legal services from Frank for each of the next 12 months.Frank's normal billable rate is $250 per hour for legal services.
-Assuming that Dewey's cost of capital is 12% EAR,then the number of potential IRRs that exist for this problem is equal to:

Accepted Answer

A) 0. 
B) 1. 
C) 2. 
D) 12. 
A) 0. 
B) 1. 
C) 2. 
D) 12.

Question 4

Use the table for the question(s)below.
Consider the following two projects with cash flows in $:  
-The NPV for project Beta is closest to:

Accepted Answer

A) $24.01. 
B) $16.92. 
C) $20.96. 
D) $14.41. 
A) $24.01. 
B) $16.92. 
C) $20.96. 
D) $14.41.

Question 5

Consider the following list of projects:   You are given a budget of only $1,800,000 to invest in projects.Which projects will you select,in what order will you select them,and why?

Accepted Answer

@#IMG-DLM& The combination of CBFGJ utilizes proje

Question 6

Use the table for the question(s)below.
Consider two mutually exclusive projects with the following cash flows:  
-If the discount rate for project B is 15%,then what is the NPV for project B?

Accepted Answer

NPV B
CF0 = -46,775
CF1 = 15,0

Question 7

Which of the following statements is FALSE?

Accepted Answer

A) About 75% of firms surveyed used the NPV rule for making investment decisions. 
B) If you are unsure of your cost of capital estimate,it is important to determine how sensitive your analysis is to errors in this estimate. 
C) To decide whether to invest using the NPV rule,we need to know the cost of capital. 
D) NPV is positive only for discount rates greater than the internal rate of return. 
A) About 75% of firms surveyed used the NPV rule for making investment decisions. 
B) If you are unsure of your cost of capital estimate,it is important to determine how sensitive your analysis is to errors in this estimate. 
C) To decide whether to invest using the NPV rule,we need to know the cost of capital. 
D) NPV is positive only for discount rates greater than the internal rate of return.

Question 8

Use the following information to answer the question(s)below.
Rearden Metals is considering opening a strip-mining operation to provide some of the raw materials needed in producing Rearden metal.The initial purchase of the land and the associated costs of opening up mining operations will cost $100 million today.The mine is expected to generate $16 million worth of ore per year for the next 12 years.At the end of the 12th year Rearden will need to spend $20 million to restore the land to its original pristine nature appearance.
-One of the IRRs for Rearden's mining operation is closest to:

Accepted Answer

A) 0%. 
B) 10.6%. 
C) 12.4%. 
D) 72.0%. 
A) 0%. 
B) 10.6%. 
C) 12.4%. 
D) 72.0%.

Question 9

Use the table for the question(s)below.
Consider the following two projects with cash flows in $:  
-The maximum number of IRRs that could exist for project B is:

Accepted Answer

A) 3. 
B) 1. 
C) 2. 
D) 0. 
A) 3. 
B) 1. 
C) 2. 
D) 0.

Question 10

Use the information for the question(s)below.
Your firm is preparing to open a new retail strip mall and you have multiple businesses that would like to lease space in it.Each business will pay a fixed amount of rent each month plus a percentage of the gross sales generated each month.The cash flows from each of the businesses have approximately the same amount of risk.The business names,square footage requirements,and monthly expected cash flows for each of the businesses that would like to lease space in your strip mall are provided below:  
-If your new strip mall will have 16,000 square feet of retail space available to be leased,to which businesses should you lease and why?

Accepted Answer

@#IMG-DLM& So,we select projects based upon their

Question 11

Use the information for the question(s)below.
The Sisyphean Company is planning on investing in a new project.This will involve the purchase of some new machinery costing $450,000.The Sisyphean Company expects cash inflows from this project as detailed below:   The appropriate discount rate for this project is 16%.
-The NPV for this project is closest to:

Accepted Answer

A) $176,270. 
B) $123,420. 
C) $450,000. 
D) $179,590. 
A) $176,270. 
B) $123,420. 
C) $450,000. 
D) $179,590.

Question 12

Use the information for the question(s)below.
Larry the Cucumber has been offered $14 million to star in the lead role of the next three Larry Boy adventure movies.If Larry takes this offer,he will have to forgo acting in other Veggie movies that would pay him $5 million at the end of each of the next three years.Assume Larry's personal cost of capital is 10% per year.
-Larry should:

Accepted Answer

A) reject the offer because the NPV  0. 
C) reject the offer because the IRR  0%. 
A) reject the offer because the NPV  0. 
C) reject the offer because the IRR  0%.

Question 13

Use the table for the question(s)below.
Consider the following two projects with cash flows in $:  
-The NPV of project A is closest to:

Accepted Answer

A) $12.04. 
B) $12.65. 
C) $15.00. 
D) $42.94. 
A) $12.04. 
B) $12.65. 
C) $15.00. 
D) $42.94.

Question 14

Use the following information to answer the question(s)below.
Rearden Metals is considering opening a strip-mining operation to provide some of the raw materials needed in producing Rearden metal.The initial purchase of the land and the associated costs of opening up mining operations will cost $100 million today.The mine is expected to generate $16 million worth of ore per year for the next 12 years.At the end of the 12th year Rearden will need to spend $20 million to restore the land to its original pristine nature appearance.
-The number of potential IRRs that exist for Rearden's mining operation is equal to:

Accepted Answer

A) 0. 
B) 1. 
C) 2. 
D) 12. 
A) 0. 
B) 1. 
C) 2. 
D) 12.

Question 15

Which of the following statements is FALSE?

Accepted Answer

A) In general,the difference between the cost of capital and the IRR is the maximum amount of estimation error in the cost of capital estimate that can exist without altering the original decision. 
B) The IRR can provide information on how sensitive your analysis is to errors in the estimate of your cost of capital. 
C) If you are unsure of your cost of capital estimate,it is important to determine how sensitive your analysis is to errors in this estimate. 
D) If the cost of capital estimate is more than the IRR,the NPV will be positive. 
A) In general,the difference between the cost of capital and the IRR is the maximum amount of estimation error in the cost of capital estimate that can exist without altering the original decision. 
B) The IRR can provide information on how sensitive your analysis is to errors in the estimate of your cost of capital. 
C) If you are unsure of your cost of capital estimate,it is important to determine how sensitive your analysis is to errors in this estimate. 
D) If the cost of capital estimate is more than the IRR,the NPV will be positive.

Question 16

Use the information for the question(s)below.
Boulderado has come up with a new composite snowboard.Development will take Boulderado four years and cost $250,000 per year,with the first of the four equal investments payable today upon acceptance of the project.Once in production the snowboard is expected to produce annual cash flows of $200,000 each year for 10 years.Boulderado's discount rate is 10%.
-The IRR for Boulderado's snowboard project is closest to:

Accepted Answer

A) 10.4%. 
B) 10.0%. 
C) 11.0%. 
D) 15.1%. 
A) 10.4%. 
B) 10.0%. 
C) 11.0%. 
D) 15.1%.

Question 17

Use the information for the question(s)below.
The Sisyphean Company is planning on investing in a new project.This will involve the purchase of some new machinery costing $450,000.The Sisyphean Company expects cash inflows from this project as detailed below:   The appropriate discount rate for this project is 16%.
-The IRR for this project is closest to:

Accepted Answer

A) 18.9%. 
B) 22.7%. 
C) 34.1%. 
D) 39.1%. 
A) 18.9%. 
B) 22.7%. 
C) 34.1%. 
D) 39.1%.

Question 18

Use the following information to answer the question(s)below.
Frank Dewey Esquire from the firm of Dewey,Cheatum,and Howe,has been offered an upfront retainer of $30,000 to provide legal services over the next 12 months to Taggart Transcontinental.In return for this upfront payment,Taggart Transcontinental would have access to 8 hours of legal services from Frank for each of the next 12 months.Frank's normal billable rate is $250 per hour for legal services.
-Assuming that Dewey's cost of capital is 12% EAR,then the NPV of his retainer offer is closest to:

Accepted Answer

A) -$7500. 
B) -$7400. 
C) $6000. 
D) $7400. 
A) -$7500. 
B) -$7400. 
C) $6000. 
D) $7400.

Question 19

Use the information for the question(s)below.
Boulderado has come up with a new composite snowboard.Development will take Boulderado four years and cost $250,000 per year,with the first of the four equal investments payable today upon acceptance of the project.Once in production the snowboard is expected to produce annual cash flows of $200,000 each year for 10 years.Boulderado's discount rate is 10%.
-Calculate the IRR for the snowboard project and use it to determine the maximum deviation allowable in the cost of capital estimate that leaves the investment decision unchanged.The maximum deviation allowable is closest to:

Accepted Answer

A) 11.0%. 
B) 0.0%. 
C) 2.5%. 
D) 1.0%. 
A) 11.0%. 
B) 0.0%. 
C) 2.5%. 
D) 1.0%.

Question 20

Use the following information to answer the question(s)below.
Sarah Palin reportedly was paid a $11 million advance to write her book Going Rogue.The book took one year to write.In the time she spent writing,Palin could have been paid to give speeches and appear on TV news as a political commentator.Given her popularity,assume that she could have earned $8 million over the year (paid at the end of the year)she spent writing the book.
-The IRR of Palin's book deal is closest to:

Accepted Answer

A) -27.27%. 
B) -37.50%. 
C) 27.27%. 
D) 37.50%. 
A) -27.27%. 
B) -37.50%. 
C) 27.27%. 
D) 37.50%.

When choosing between projects,an alternative to comparing their IRRs is:

Use the table for the question(s)below. Consider the following two projects with cash flows in $: -The profitability index for project B is closest to:

Use the table for the question(s)below. Consider the following two projects with cash flows in $: -The NPV for project Beta is closest to:

Consider the following list of projects: You are given a budget of only $1,800,000 to invest in projects.Which projects will you select,in what order will you select them,and why?

Use the table for the question(s)below. Consider two mutually exclusive projects with the following cash flows: -If the discount rate for project B is 15%,then what is the NPV for project B?

Which of the following statements is FALSE?

Use the table for the question(s)below. Consider the following two projects with cash flows in $: -The maximum number of IRRs that could exist for project B is:

Use the table for the question(s)below. Consider the following two projects with cash flows in $: -The NPV of project A is closest to:

Which of the following statements is FALSE?

The Corporation

Introduction to Financial Statement Analysis

Financial Decision Making and the Law of One Price

The Time Value of Money

Interest Rates

Valuing Bonds

Fundamentals of Capital Budgeting

Valuing Stocks

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Investor Behavior and Capital Market Efficiency

Capital Structure in a Perfect Market

Debt and Taxes

Financial Distress,managerial Incentives,and Information

Payout Policy

Capital Budgeting and Valuation With Leverage

Valuation and Financial Modeling: a Case Study

Financial Options

Option Valuation

Real Options

Raising Equity Capital

Debt Financing

Leasing

Working Capital Management

Short-Term Financial Planning

Mergers and Acquisitions

Corporate Governance

Risk Management

International Corporate Finance

Filters

Exam 7: Investment Decision Rules

When choosing between projects,an alternative to comparing their IRRs is:

Use the table for the question(s)below. Consider the following two projects with cash flows in $: -The profitability index for project B is closest to:

Use the table for the question(s)below. Consider the following two projects with cash flows in $: -The NPV for project Beta is closest to:

Consider the following list of projects: You are given a budget of only $1,800,000 to invest in projects.Which projects will you select,in what order will you select them,and why?

Use the table for the question(s)below. Consider two mutually exclusive projects with the following cash flows: -If the discount rate for project B is 15%,then what is the NPV for project B?

Which of the following statements is FALSE?

Use the table for the question(s)below. Consider the following two projects with cash flows in $: -The maximum number of IRRs that could exist for project B is:

Use the table for the question(s)below. Consider the following two projects with cash flows in $: -The NPV of project A is closest to:

Which of the following statements is FALSE?

The Corporation

Introduction to Financial Statement Analysis

Financial Decision Making and the Law of One Price

The Time Value of Money

Interest Rates

Valuing Bonds

Fundamentals of Capital Budgeting

Valuing Stocks

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Investor Behavior and Capital Market Efficiency

Capital Structure in a Perfect Market

Debt and Taxes

Financial Distress,managerial Incentives,and Information

Payout Policy

Capital Budgeting and Valuation With Leverage

Valuation and Financial Modeling: a Case Study

Financial Options

Option Valuation

Real Options

Raising Equity Capital

Debt Financing

Leasing

Working Capital Management

Short-Term Financial Planning

Mergers and Acquisitions

Corporate Governance

Risk Management

International Corporate Finance

Filters