Question 1

Use the table for the question(s) below.
Consider the following two projects:
  
-The payback period for project A is closest to:

Accepted Answer

A)  2.0 years 
B)  2.4 years 
C)  2.5 years 
D)  2.2 years 
E)  3.0 years 
A)  2.0 years 
B)  2.4 years 
C)  2.5 years 
D)  2.2 years 
E)  3.0 years

Question 2

Jenkins Security has learned that a rival has offered to supply a parking garage with security for ten years for $50,000 up front and a further $20,000 per year.If Jenkins Security offers to provide security for eight years for an upfront cost of $70,000 and a separate yearly payment,what is the maximum that this yearly payment can be so that Jenkins' offer matches the equivalent annual annuity of their rival's offer? (Assume a cost of capital of 6%.)

Accepted Answer

A)  $13,095 
B)  $13,458 
C)  $13,995 
D)  $15,521 
E)  $16,112 
A)  $13,095 
B)  $13,458 
C)  $13,995 
D)  $15,521 
E)  $16,112

Question 3

The Net Present Value rule implies that we should compare a projects net present value (NPV)to zero.

Accepted Answer

A) True 
 B)False

Question 4

When different investment rules give conflicting answers,then decisions should be based on the Net Present Value rule,as it is the most reliable and accurate decision rule.

Accepted Answer

A) True 
 B)False

Question 5

A company has identified the following investments as looking promising.Each requires an initial investment of $1.2 million.Which is the best investment?

Accepted Answer

A)  a perpetuity that generates a cash flow at the end of year 1 of $100,000, has a growth rate of 1.25%, and a cost of capital of 10% 
B)  a perpetuity that generates a cash flow at the end of year 1 of $800,000, has a growth rate of 2.25%, and a cost of capital of 12% 
C)  an investment that generates a cash flow of $400,000 at the end of each of the next five years, when the cost of capital is 6% 
D)  an investment that generates a cash flow of $200,000 at the end of each of the next ten years, when the cost of capital is 6% 
E)  an investment that generates a cash flow of $200,000 at the end of each of the next ten years, when the cost of capital is 2% 
A)  a perpetuity that generates a cash flow at the end of year 1 of $100,000, has a growth rate of 1.25%, and a cost of capital of 10% 
B)  a perpetuity that generates a cash flow at the end of year 1 of $800,000, has a growth rate of 2.25%, and a cost of capital of 12% 
C)  an investment that generates a cash flow of $400,000 at the end of each of the next five years, when the cost of capital is 6% 
D)  an investment that generates a cash flow of $200,000 at the end of each of the next ten years, when the cost of capital is 6% 
E)  an investment that generates a cash flow of $200,000 at the end of each of the next ten years, when the cost of capital is 2%

Question 6

An investor is considering the two investments shown above.Her cost of capital is 9%.Which of the following statements about these investments is true?

Accepted Answer

A)  The investor should take investment A since it has a greater net present value (NPV). 
B)  The investor should take investment A since it has a greater internal rate of return (IRR). 
C)  The investor should take investment B since it has a greater net present value (NPV). 
D)  The investor should take investment B since it has a greater internal rate of return (IRR). 
E)  The investor should take investment B since it has a shorter payback period. 
A)  The investor should take investment A since it has a greater net present value (NPV). 
B)  The investor should take investment A since it has a greater internal rate of return (IRR). 
C)  The investor should take investment B since it has a greater net present value (NPV). 
D)  The investor should take investment B since it has a greater internal rate of return (IRR). 
E)  The investor should take investment B since it has a shorter payback period.

Question 7

A consultancy calculates that it can supply crude oil assaying services to a small oil producer for $120,000 per year for five years.There are some upfront costs the consultancy will require the oil producer to absorb.What is the maximum that these upfront costs could be,if the equivalent annual annuity to the oil company is to be under $150,000,given that the cost of capital is 10%?

Accepted Answer

A)  $30,000 
B)  $113,724 
C)  $128,698 
D)  $150,000 
E)  $94,784 
A)  $30,000 
B)  $113,724 
C)  $128,698 
D)  $150,000 
E)  $94,784

Question 8

You have an investment opportunity that will cost $50,000 today and will return $54,000 in one year.If interest rates are 4%,what is the NPV of this investment?

Accepted Answer

A)  $1,923 
B)  $4,000 
C)  $2,000 
D)  $50,000 
E)  $0 
A)  $1,923 
B)  $4,000 
C)  $2,000 
D)  $50,000 
E)  $0

Question 9

A janitorial services firm is considering two brands of industrial vacuum cleaner to equip their staff.Option A will cost $1500,will require servicing of $200 per year,and last five years.Option B will cost $1000,require servicing of $100 per year,and last three years.If the cost of capital is 8%,which is the better option,given that the firm has an ongoing requirement for vacuum cleaners?

Accepted Answer

A)  Option A, since it has a lower equivalent annual annuity. 
B)  Option B, since it has a lower equivalent annual annuity. 
C)  Option A, since it has a greater equivalent annual annuity. 
D)  Option B, since it has a greater equivalent annual annuity. 
E)  Both options have the same equivalent annual annuity. 
A)  Option A, since it has a lower equivalent annual annuity. 
B)  Option B, since it has a lower equivalent annual annuity. 
C)  Option A, since it has a greater equivalent annual annuity. 
D)  Option B, since it has a greater equivalent annual annuity. 
E)  Both options have the same equivalent annual annuity.

Question 10

The payback rule is based on the idea that an opportunity that pays back its initial investment quickly is a worthwhile opportunity.

Accepted Answer

A) True 
 B)False

Question 11

Use the table for the question(s) below.
Consider the following two projects:
  
-The profitability index for project A is closest to:

Accepted Answer

A)  0.12 
B)  21.65 
C)  0.17 
D)  12.04 
E)  1.14 
A)  0.12 
B)  21.65 
C)  0.17 
D)  12.04 
E)  1.14

Question 12

You are looking for a car and have narrowed your choice down to two options.You can buy a new car at a cost of $23,995,which has an estimated life of 12 years and annual maintenance costs of $750 per year.Your second option is a used car at a cost of $14,225,with an estimated remaining life of 7 years and annual maintenance costs of $1,800 per year.Which is the cheaper option,given your borrowing cost of 7%?

Accepted Answer

A)  The new car, since its costs have a lower PV 
B)  The used car, since its costs have a lower PV 
C)  The new car, since it has a lower equivalent annual annuity. 
D)  The used car, since it has a lower equivalent annual annuity. 
E)  The used car, since it has a higher equivalent annual annuity. 
A)  The new car, since its costs have a lower PV 
B)  The used car, since its costs have a lower PV 
C)  The new car, since it has a lower equivalent annual annuity. 
D)  The used car, since it has a lower equivalent annual annuity. 
E)  The used car, since it has a higher equivalent annual annuity.

Question 13

If WiseGuy Inc is choosing one of the above mutually exclusive projects (Project A or Project B),given a discount rate of 8%,which should the company choose?

Accepted Answer

A)  Project A 
B)  Project B 
C)  Neither project, - both have a NPV of 0. 
D)  Both projects - both have positive NPV. 
E)  Neither project - both have negative NPV. 
A)  Project A 
B)  Project B 
C)  Neither project, - both have a NPV of 0. 
D)  Both projects - both have positive NPV. 
E)  Neither project - both have negative NPV.

Question 14

When using equivalent annual annuities to compare the costs of projects with different lives,you should not consider any changes in the expected replacement cost of equipment.

Accepted Answer

A) True 
 B)False

Question 15

Use the information for the question(s) below.
  
-The owner of a hair salon spends $1,000,000 to renovate its premises,estimating that this will increase her cash flow by $220,000 per year.She constructs the above graph,which shows the net present value (NPV)as a function of the discount rate.At what discount rate does her decision to renovate become untenable?

Accepted Answer

A)  3.0% 
B)  3.3% 
C)  4.0% 
D)  4.8% 
E)  5.0% 
A)  3.0% 
B)  3.3% 
C)  4.0% 
D)  4.8% 
E)  5.0%

Question 16

What is the present value (PV)of an investment?

Accepted Answer

A)  the amount that an investment would yield if the benefit were realized today 
B)  the difference between the cost of the investment and the benefit of the investment in dollars today 
C)  the amount you need to invest at the current interest rate to re-create the cash flow from the investment 
D)  the amount by which the cash flow of an investment exceeds or falls short of the cash flow generated by the same amount of money invested at market rate 
E)  the amount of profit the investment would return if all benefits were realized today 
A)  the amount that an investment would yield if the benefit were realized today 
B)  the difference between the cost of the investment and the benefit of the investment in dollars today 
C)  the amount you need to invest at the current interest rate to re-create the cash flow from the investment 
D)  the amount by which the cash flow of an investment exceeds or falls short of the cash flow generated by the same amount of money invested at market rate 
E)  the amount of profit the investment would return if all benefits were realized today

Question 17

You are considering an investment opportunity that will cost you $50,000 up front,and return two payments of $30,000,with the first payment 4 years from today.What is the IRR for this investment?

Accepted Answer

A)  3.4% 
B)  4.1% 
C)  7.6% 
D)  20% 
E)  15% 
A)  3.4% 
B)  4.1% 
C)  7.6% 
D)  20% 
E)  15%

Question 18

The cash flows for four projects are shown below,along with the cost of capital for these projects.If these projects are mutually exclusive,which one should be taken?

Accepted Answer

A)   
Cost of Capital: 6% 
B)   
Cost of Capital: 7% 
C)   
Cost of Capital: 8% 
D)   
Cost of Capital: 9% 
E)   
Cost of Capital: 8% 
A)   
Cost of Capital: 6% 
B)   
Cost of Capital: 7% 
C)   
Cost of Capital: 8% 
D)   
Cost of Capital: 9% 
E)   
Cost of Capital: 8%

Question 19

Use the information for the question(s) below.
  
-A manufacturer of video games develops a new game over two years.This costs $850,000 per year with one payment made immediately and the other at the end of two years.When the game is released,it is expected to make $1.2 million per year for three years after that.The net present value (NPV)of this investment at a cost of capital of 9% indicates that this is a worthwhile investment.By how much would the cost of capital have to increase for the NPV to be zero?

Accepted Answer

A)  7% 
B)  9% 
C)  12% 
D)  16% 
E)  19% 
A)  7% 
B)  9% 
C)  12% 
D)  16% 
E)  19%

Question 20

Which of the following decision rules is best defined as the amount of time it takes to pay back the initial investment?

Accepted Answer

A)  internal rate of return (IRR) 
B)  profitability index 
C)  net present value (NPV) 
D)  payback period 
E)  incremental IRR 
A)  internal rate of return (IRR) 
B)  profitability index 
C)  net present value (NPV) 
D)  payback period 
E)  incremental IRR

Use the table for the question(s) below. Consider the following two projects: -The payback period for project A is closest to:

The Net Present Value rule implies that we should compare a projects net present value (NPV)to zero.

When different investment rules give conflicting answers,then decisions should be based on the Net Present Value rule,as it is the most reliable and accurate decision rule.

A company has identified the following investments as looking promising.Each requires an initial investment of $1.2 million.Which is the best investment?

An investor is considering the two investments shown above.Her cost of capital is 9%.Which of the following statements about these investments is true?

You have an investment opportunity that will cost $50,000 today and will return $54,000 in one year.If interest rates are 4%,what is the NPV of this investment?

The payback rule is based on the idea that an opportunity that pays back its initial investment quickly is a worthwhile opportunity.

Use the table for the question(s) below. Consider the following two projects: -The profitability index for project A is closest to:

If WiseGuy Inc is choosing one of the above mutually exclusive projects (Project A or Project B),given a discount rate of 8%,which should the company choose?

When using equivalent annual annuities to compare the costs of projects with different lives,you should not consider any changes in the expected replacement cost of equipment.

What is the present value (PV)of an investment?

You are considering an investment opportunity that will cost you $50,000 up front,and return two payments of $30,000,with the first payment 4 years from today.What is the IRR for this investment?

The cash flows for four projects are shown below,along with the cost of capital for these projects.If these projects are mutually exclusive,which one should be taken?

Which of the following decision rules is best defined as the amount of time it takes to pay back the initial investment?

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

The Valuation Principle: the Foundation of Financial Decision Making

The Time Value of Money

Interest Rates

Bonds

Valuing Stocks

Fundamentals of Capital Budgeting

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

Determining the Cost of Capital

Risk and the Pricing of Options

Raising Equity Capital

Debt Financing

Capital Structure

Payout Policy

Financial Modelling and Pro Forma Analysis

Working Capital Management

Short Term Financial Planning

Risk Management

International Corporate Finance

Leasing

Mergers and Acquisitions

Corporate Governance

Filters

Exam 8: Investment Decision Rules

Use the table for the question(s) below. Consider the following two projects: -The payback period for project A is closest to:

The Net Present Value rule implies that we should compare a projects net present value (NPV)to zero.

When different investment rules give conflicting answers,then decisions should be based on the Net Present Value rule,as it is the most reliable and accurate decision rule.

A company has identified the following investments as looking promising.Each requires an initial investment of $1.2 million.Which is the best investment?

An investor is considering the two investments shown above.Her cost of capital is 9%.Which of the following statements about these investments is true?

You have an investment opportunity that will cost $50,000 today and will return $54,000 in one year.If interest rates are 4%,what is the NPV of this investment?

The payback rule is based on the idea that an opportunity that pays back its initial investment quickly is a worthwhile opportunity.

Use the table for the question(s) below. Consider the following two projects: -The profitability index for project A is closest to:

If WiseGuy Inc is choosing one of the above mutually exclusive projects (Project A or Project B),given a discount rate of 8%,which should the company choose?

When using equivalent annual annuities to compare the costs of projects with different lives,you should not consider any changes in the expected replacement cost of equipment.

What is the present value (PV)of an investment?

You are considering an investment opportunity that will cost you $50,000 up front,and return two payments of $30,000,with the first payment 4 years from today.What is the IRR for this investment?

The cash flows for four projects are shown below,along with the cost of capital for these projects.If these projects are mutually exclusive,which one should be taken?

Which of the following decision rules is best defined as the amount of time it takes to pay back the initial investment?

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

The Valuation Principle: the Foundation of Financial Decision Making

The Time Value of Money

Interest Rates

Bonds

Valuing Stocks

Fundamentals of Capital Budgeting

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

Determining the Cost of Capital

Risk and the Pricing of Options

Raising Equity Capital

Debt Financing

Capital Structure

Payout Policy

Financial Modelling and Pro Forma Analysis

Working Capital Management

Short Term Financial Planning

Risk Management

International Corporate Finance

Leasing

Mergers and Acquisitions

Corporate Governance

Filters