Question 1

Which of the following statements is FALSE?

Accepted Answer

A) Problems can arise using the IRR method when the mutually exclusive investments have different cash flow patterns. 
B) The IRR is affected by the scale of the investment opportunity. 
C) Multiple incremental IRRs might exist. 
D) The incremental IRR rule assumes that the riskiness of the two projects is the same. 
A) Problems can arise using the IRR method when the mutually exclusive investments have different cash flow patterns. 
B) The IRR is affected by the scale of the investment opportunity. 
C) Multiple incremental IRRs might exist. 
D) The incremental IRR rule assumes that the riskiness of the two projects is the same.

Question 2

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 payback period for Rearden's mining operation is closest to:

Accepted Answer

A) 5.00 years. 
B) 6.00 years. 
C) 6.25 years. 
D) 6.50 years. 
A) 5.00 years. 
B) 6.00 years. 
C) 6.25 years. 
D) 6.50 years.

Question 3

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.
-The NPV of Larry's three-movie Larry Boy offer is closest to:

Accepted Answer

A) 3.5 million. 
B) -1.6 million. 
C) 1.6 million. 
D) -1.0 million. 
A) 3.5 million. 
B) -1.6 million. 
C) 1.6 million. 
D) -1.0 million.

Question 4

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

Accepted Answer

A) 25.0%. 
B) 22.7%. 
C) 24.5%. 
D) 22.2%. 
A) 25.0%. 
B) 22.7%. 
C) 24.5%. 
D) 22.2%.

Question 5

Use the table for the question(s)below.
Consider the following list of projects:  
-Assuming that your capital is constrained,which project should you invest in last?

Accepted Answer

A) Project A 
B) Project I 
C) Project D 
D) Project C 
A) Project A 
B) Project I 
C) Project D 
D) Project C

Question 6

Use the table for the question(s)below.
Consider the following list of projects:  
-Assume that your capital is constrained,so that you only have $500,000 available to invest in projects.If you invest in the optimal combination of projects given your capital constraint,then the total NPV for all the projects you invest in will be closest to:

Accepted Answer

A) $111,000. 
B) $69,000. 
C) $80,000. 
D) $58,000. 
A) $111,000. 
B) $69,000. 
C) $80,000. 
D) $58,000.

Question 7

Use the table for the question(s)below.
Consider the following list of projects:  
-Assuming that your capital is constrained,so that you only have $600,000 available to invest in projects,which projects should you invest in and in what order?

Accepted Answer

A) CBFH 
B) CBGF 
C) BCFG 
D) CBFG 
A) CBFH 
B) CBGF 
C) BCFG 
D) CBFG

Question 8

Use the table for the question(s)below.
Consider two mutually exclusive projects with the following cash flows:  
-You are considering using the incremental IRR approach to decide between the two mutually exclusive projects A & B.How many potential incremental IRRs could there be?

Accepted Answer

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

Question 9

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

Accepted Answer

A) 7.7%. 
B) 21.6%. 
C) 23.3%. 
D) 42.9%. 
A) 7.7%. 
B) 21.6%. 
C) 23.3%. 
D) 42.9%.

Question 10

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 NPV profile graphs:

Accepted Answer

A) the project's NPV over a range of discount rates. 
B) the project's IRR over a range of discount rates. 
C) the project's cash flows over a range of NPVs. 
D) the project's IRR over a range of NPVs. 
A) the project's NPV over a range of discount rates. 
B) the project's IRR over a range of discount rates. 
C) the project's cash flows over a range of NPVs. 
D) the project's IRR over a range of NPVs.

Question 11

Use the table for the question(s)below.
Consider the following two projects with cash flows in $:  
-Which of the following statements is correct?

Accepted Answer

A) You should invest in project Beta since NPVBeta > NPVAlpha. 
B) You should invest in project Alpha since IRRAlpha > IRRBeta. 
C) You should invest in project Alpha since NPVAlpha  0. 
A) You should invest in project Beta since NPVBeta > NPVAlpha. 
B) You should invest in project Alpha since IRRAlpha > IRRBeta. 
C) You should invest in project Alpha since NPVAlpha  0.

Question 12

Which of the following statements is FALSE?

Accepted Answer

A) The IRR investment rule states you should turn down any investment opportunity where the IRR is less than the opportunity cost of capital. 
B) The IRR investment rule states that you should take any investment opportunity where the IRR exceeds the opportunity cost of capital. 
C) Since the IRR rule is based upon the rate at which the NPV equals zero,like the NPV decision rule,the IRR decision rule will always identify the correct investment decisions. 
D) There are situations in which multiple IRRs exist. 
A) The IRR investment rule states you should turn down any investment opportunity where the IRR is less than the opportunity cost of capital. 
B) The IRR investment rule states that you should take any investment opportunity where the IRR exceeds the opportunity cost of capital. 
C) Since the IRR rule is based upon the rate at which the NPV equals zero,like the NPV decision rule,the IRR decision rule will always identify the correct investment decisions. 
D) There are situations in which multiple IRRs exist.

Question 13

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

Accepted Answer

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

Question 14

When using the internal rate of return (IRR)investment rule,we compare:

Accepted Answer

A) the average return on the investment opportunity to returns on all other investment opportunities in the market. 
B) the average return on the investment opportunity to returns on other alternatives in the market with equivalent risk and maturity. 
C) the NPV of the investment opportunity to the average return on the investment opportunity. 
D) the average return on the investment opportunity to the risk-free rate of return. 
A) the average return on the investment opportunity to returns on all other investment opportunities in the market. 
B) the average return on the investment opportunity to returns on other alternatives in the market with equivalent risk and maturity. 
C) the NPV of the investment opportunity to the average return on the investment opportunity. 
D) the average return on the investment opportunity to the risk-free rate of return.

Question 15

Use the table for the question(s)below.
Consider the following two projects with cash flows in $:  
-Assume that projects Alpha and Beta are mutually exclusive.The correct investment decision and the best rationale for that decision is to:

Accepted Answer

A) invest in project Beta since NPVBeta > 0. 
B) invest in project Alpha since NPVBeta  IRRA. 
D) invest in project Beta since NPVBeta > NPVAlpha > 0. 
A) invest in project Beta since NPVBeta > 0. 
B) invest in project Alpha since NPVBeta  IRRA. 
D) invest in project Beta since NPVBeta > NPVAlpha > 0.

Question 16

Which of the following statements is FALSE?

Accepted Answer

A) If there is a fixed supply of a resource available,you should rank projects by the profitability index,selecting the project with the lowest profitability index first and working your way down the list until the resource is consumed. 
B) Practitioners often use the profitability index to identify the optimal combination of projects when there is a fixed supply of resources. 
C) If there is a fixed supply of resources available,so that you cannot undertake all possible opportunities,then simply picking the highest NPV opportunity might not lead to the best decision. 
D) The profitability index is calculated as the NPV divided by the resources consumed by the project. 
A) If there is a fixed supply of a resource available,you should rank projects by the profitability index,selecting the project with the lowest profitability index first and working your way down the list until the resource is consumed. 
B) Practitioners often use the profitability index to identify the optimal combination of projects when there is a fixed supply of resources. 
C) If there is a fixed supply of resources available,so that you cannot undertake all possible opportunities,then simply picking the highest NPV opportunity might not lead to the best decision. 
D) The profitability index is calculated as the NPV divided by the resources consumed by the project.

Question 17

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.
-Assuming that Palin's cost of capital is 10%,then the NPV of her book deal is closest to:

Accepted Answer

A) $2.00 million. 
B) $2.20 million. 
C) $3.00 million. 
D) $3.73 million. 
A) $2.00 million. 
B) $2.20 million. 
C) $3.00 million. 
D) $3.73 million.

Question 18

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 profitability index for this project is closest to:

Accepted Answer

A) .44. 
B) .26. 
C) 0.39. 
D) .34. 
A) .44. 
B) .26. 
C) 0.39. 
D) .34.

Question 19

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

Accepted Answer

A) 2.9 years. 
B) 3.1 years. 
C) 2.6 years. 
D) 3.2 years. 
A) 2.9 years. 
B) 3.1 years. 
C) 2.6 years. 
D) 3.2 years.

Question 20

Which of the following statements is FALSE?

Accepted Answer

A) It is possible that an IRR does not exist for an investment opportunity. 
B) If the payback period is less than a pre-specified length of time,you accept the project. 
C) The internal rate of return (IRR)investment rule is based upon the notion that if the return on other alternatives is greater than the return on the investment opportunity,you should undertake the investment opportunity. 
D) It is possible that there is no discount rate that will set the NPV equal to zero. 
A) It is possible that an IRR does not exist for an investment opportunity. 
B) If the payback period is less than a pre-specified length of time,you accept the project. 
C) The internal rate of return (IRR)investment rule is based upon the notion that if the return on other alternatives is greater than the return on the investment opportunity,you should undertake the investment opportunity. 
D) It is possible that there is no discount rate that will set the NPV equal to zero.

Exam 7: Investment Decision Rules

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 internal rate of return (IRR)for project Beta is closest to:

Use the table for the question(s)below. Consider the following list of projects: -Assuming that your capital is constrained,which project should you invest in last?

Use the table for the question(s)below. Consider the following list of projects: -Assuming that your capital is constrained,so that you only have $600,000 available to invest in projects,which projects should you invest in and in what order?

Use the table for the question(s)below. Consider two mutually exclusive projects with the following cash flows: -You are considering using the incremental IRR approach to decide between the two mutually exclusive projects A & B.How many potential incremental IRRs could there be?

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

Use the table for the question(s)below. Consider the following two projects with cash flows in $: -Which of the following statements is correct?

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 NPV for project Alpha is closest to:

When using the internal rate of return (IRR)investment rule,we compare:

Use the table for the question(s)below. Consider the following two projects with cash flows in $: -Assume that projects Alpha and Beta are mutually exclusive.The correct investment decision and the best rationale for that decision is to:

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 payback period for project Beta 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

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