Question 1

Which of the following statements is FALSE?

Accepted Answer

A) The IRR investment rule will identify the correct decision in many,but not all,situations. 
B) By setting the NPV equal to zero and solving for r,we find the IRR. 
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) The simplest,though least accurate,investment rule is the NPV investment rule. 
A) The IRR investment rule will identify the correct decision in many,but not all,situations. 
B) By setting the NPV equal to zero and solving for r,we find the IRR. 
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) The simplest,though least accurate,investment rule is the NPV investment rule.

Question 2

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 $600,000 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) $65,000. 
B) $80,000. 
C) $69,000. 
D) $111,000. 
A) $65,000. 
B) $80,000. 
C) $69,000. 
D) $111,000.

Question 3

Use the table for the question(s)below.
Consider a project with the following cash flows in $:  
-Assume the appropriate discount rate for this project is 15%.The payback period for this project is closest to:

Accepted Answer

A) 3.0 years. 
B) 2.5 years. 
C) 2.0 years. 
D) 4.0 years. 
A) 3.0 years. 
B) 2.5 years. 
C) 2.0 years. 
D) 4.0 years.

Question 4

Which of the following statements is FALSE?

Accepted Answer

A) When using the incremental IRR rule,you must keep track of which project is the incremental project and ensure that the incremental cash flows are initially positive and then become negative. 
B) Picking one project over another simply because it has a larger IRR can lead to mistakes. 
C) Problems arise using the IRR method when the mutually exclusive investments have differences in scale. 
D) When the risks of two projects are different,only the NPV rule will give a reliable answer. 
A) When using the incremental IRR rule,you must keep track of which project is the incremental project and ensure that the incremental cash flows are initially positive and then become negative. 
B) Picking one project over another simply because it has a larger IRR can lead to mistakes. 
C) Problems arise using the IRR method when the mutually exclusive investments have differences in scale. 
D) When the risks of two projects are different,only the NPV rule will give a reliable answer.

Question 5

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.Which of the following statements is true regarding the investment decision tools' suitability for deciding between projects Alpha & Beta?

Accepted Answer

A) The incremental IRR should not be used since the projects have different lives. 
B) The incremental IRR should not be used since the projects have different discount rates. 
C) The incremental IRR should not be used since the projects have different cash flow patterns. 
D) Both the NPV and incremental IRR approaches are appropriate to solve this problem. 
A) The incremental IRR should not be used since the projects have different lives. 
B) The incremental IRR should not be used since the projects have different discount rates. 
C) The incremental IRR should not be used since the projects have different cash flow patterns. 
D) Both the NPV and incremental IRR approaches are appropriate to solve this problem.

Question 6

Use the following information to answer the question(s)below.
You are considering investing in a start-up project at a cost of $100,000.You expect the project to return $500,000 to you in seven years.Given the risk of this project,your cost of capital is 20%.
-The IRR for this project is closest to:

Accepted Answer

A) 15.60%. 
B) 18.95%. 
C) 20.00%. 
D) 25.85%. 
A) 15.60%. 
B) 18.95%. 
C) 20.00%. 
D) 25.85%.

Question 7

Use the table for the question(s)below.
Consider two mutually exclusive projects with the following cash flows:  
-Assuming that the discount rate for project A is 16% and the discount rate for B is 15%,then given that these are mutually exclusive projects,which project would you take and why?

Accepted Answer

NPV A
CF0 = -41,215
CF1 = 12,500
CF2 = 1

Question 8

The decision you should take regarding this project is:

Accepted Answer

A) reject the project since the NPV is negative. 
B) reject the project since the NPV is positive. 
C) accept the project since the IRR  20%. 
A) reject the project since the NPV is negative. 
B) reject the project since the NPV is positive. 
C) accept the project since the IRR  20%.

Question 9

Which of the following statements is FALSE?

Accepted Answer

A) The payback investment rule is based on the notion that an opportunity that pays back its initial investments quickly is a good idea. 
B) An IRR will always exist for an investment opportunity. 
C) An NPV will always exist for an investment opportunity. 
D) In general,there can be as many IRRs as the number of times the project's cash flows change sign over time. 
A) The payback investment rule is based on the notion that an opportunity that pays back its initial investments quickly is a good idea. 
B) An IRR will always exist for an investment opportunity. 
C) An NPV will always exist for an investment opportunity. 
D) In general,there can be as many IRRs as the number of times the project's cash flows change sign over time.

Question 10

Use the table for the question(s)below.
Consider the following list of projects:  
-Assuming that your capital is constrained,which investment tool should you use to determine the correct investment decisions?

Accepted Answer

A) Profitability Index 
B) Incremental IRR 
C) NPV 
D) IRR 
A) Profitability Index 
B) Incremental IRR 
C) NPV 
D) IRR

Question 11

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.
-Assume that once her book is finished,it is expected to generate royalties of $5 million in the first year (paid at the end of the year)and these royalties are expected to decrease by 40% per year in perpetuity.Assuming that Palin's cost of capital is 10% and given these royalties payments,the NPV of Palin's book deal is closest to:

Accepted Answer

A) $3.75 million. 
B) $12.20 million. 
C) $13.00 million. 
D) $13.75 million. 
A) $3.75 million. 
B) $12.20 million. 
C) $13.00 million. 
D) $13.75 million.

Question 12

Which of the following statements is FALSE?

Accepted Answer

A) The profitability index measures the value created in terms of NPV per unit of resource consumed. 
B) The profitability index is the ratio of value created to resources consumed. 
C) The profitability index can be easily adapted for determining the correct investment decisions when multiple resource constraints exist. 
D) The profitability index measures the "bang for your buck." 
A) The profitability index measures the value created in terms of NPV per unit of resource consumed. 
B) The profitability index is the ratio of value created to resources consumed. 
C) The profitability index can be easily adapted for determining the correct investment decisions when multiple resource constraints exist. 
D) The profitability index measures the "bang for your buck."

Question 13

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 accept project A since its IRR > 15%. B) You should reject project B since its NPV > 0. C) You should accept project A since its NPV < 0. D) You should accept project B since its IRR < 15%. A) You should accept project A since its IRR > 15%. B) You should reject project B since its NPV > 0. C) You should accept project A since its NPV < 0. D) You should accept project B since its IRR < 15%.

Question 14

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

Accepted Answer

A) $12.64. 
B) $23.30. 
C) $12.05. 
D) $15.00. 
A) $12.64. 
B) $23.30. 
C) $12.05. 
D) $15.00.

Question 15

Which of the following statements is FALSE?

Accepted Answer

A) The incremental IRR need not exist. 
B) If a change in the timing of the cash flows does not affect the NPV,then the change in timing will not impact the IRR. 
C) Although the incremental IRR rule can provide a reliable method for choosing among projects,it can be difficult to apply correctly. 
D) When projects are mutually exclusive,it is not enough to determine which projects have positive NPVs. 
A) The incremental IRR need not exist. 
B) If a change in the timing of the cash flows does not affect the NPV,then the change in timing will not impact the IRR. 
C) Although the incremental IRR rule can provide a reliable method for choosing among projects,it can be difficult to apply correctly. 
D) When projects are mutually exclusive,it is not enough to determine which projects have positive NPVs.

Question 16

You are opening up a brand-new retail strip mall.You presently have more potential retail outlets wanting to locate in your mall than you have space available.What is the most appropriate tool to use if you are trying to determine the optimal allocation of your retail space?

Accepted Answer

A) IRR 
B) Payback period 
C) NPV 
D) Profitability index 
A) IRR 
B) Payback period 
C) NPV 
D) Profitability index

Question 17

Use the following information to answer the question(s)below.
You are considering investing in a start-up project at a cost of $100,000.You expect the project to return $500,000 to you in seven years.Given the risk of this project,your cost of capital is 20%.
-The NPV for this project is closest to:

Accepted Answer

A) $29,200. 
B) $39,500. 
C) $129,200. 
D) $139,500. 
A) $29,200. 
B) $39,500. 
C) $129,200. 
D) $139,500.

Question 18

Which of the following statements is FALSE?

Accepted Answer

A) The payback rule is useful in cases where the cost of making an incorrect decision might not be large enough to justify the time required for calculating the NPV. 
B) The payback rule is reliable because it considers the time value of money and depends on the cost of capital. 
C) For most investment opportunities,expenses occur initially and cash is received later. 
D) Over fifty percent of firms surveyed reported using the payback rule for making decisions. 
A) The payback rule is useful in cases where the cost of making an incorrect decision might not be large enough to justify the time required for calculating the NPV. 
B) The payback rule is reliable because it considers the time value of money and depends on the cost of capital. 
C) For most investment opportunities,expenses occur initially and cash is received later. 
D) Over fifty percent of firms surveyed reported using the payback rule for making decisions.

Question 19

Use the table for the question(s)below.
Consider a project with the following cash flows in $:  
-If the appropriate discount rate for this project is 15%,then the NPV is closest to:

Accepted Answer

A) $6000. 
B) -$867. 
C) $1420. 
D) $867. 
A) $6000. 
B) -$867. 
C) $1420. 
D) $867.

Question 20

Which of the following statements is FALSE?

Accepted Answer

A) In general,the IRR rule works for a stand-alone project if all of the project's positive cash flows precede its negative cash flows. 
B) There is no easy fix for the IRR rule when there are multiple IRRs. 
C) The payback rule is primarily used because of its simplicity. 
D) No investment rule that ignores the set of alternative investment opportunities can be optimal. 
A) In general,the IRR rule works for a stand-alone project if all of the project's positive cash flows precede its negative cash flows. 
B) There is no easy fix for the IRR rule when there are multiple IRRs. 
C) The payback rule is primarily used because of its simplicity. 
D) No investment rule that ignores the set of alternative investment opportunities can be optimal.

Exam 7: Investment Decision Rules

Which of the following statements is FALSE?

Use the table for the question(s)below. Consider a project with the following cash flows in $: -Assume the appropriate discount rate for this project is 15%.The payback period for this project is closest 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 $: -Assume that projects Alpha and Beta are mutually exclusive.Which of the following statements is true regarding the investment decision tools' suitability for deciding between projects Alpha & Beta?

Use the table for the question(s)below. Consider two mutually exclusive projects with the following cash flows: -Assuming that the discount rate for project A is 16% and the discount rate for B is 15%,then given that these are mutually exclusive projects,which project would you take and why?

The decision you should take regarding this project is:

Which of the following statements is FALSE?

Use the table for the question(s)below. Consider the following list of projects: -Assuming that your capital is constrained,which investment tool should you use to determine the correct investment decisions?

Which of the following statements is FALSE?

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

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

Which of the following statements is FALSE?

You are opening up a brand-new retail strip mall.You presently have more potential retail outlets wanting to locate in your mall than you have space available.What is the most appropriate tool to use if you are trying to determine the optimal allocation of your retail space?

Which of the following statements is FALSE?

Use the table for the question(s)below. Consider a project with the following cash flows in $: -If the appropriate discount rate for this project is 15%,then the NPV 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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