Question 1

Which of the following is true regarding the profitability index?

Accepted Answer

A)  It does not use the net present value (NPV) to assess benefits. 
B)  It is very simple to compute. 
C)  Attention must be taken when using it to make sure that all of the constrained resource is utilized. 
D)  It is unreliable when used for choosing between different projects. 
E)  It ignores cash flows after the cutoff 
A)  It does not use the net present value (NPV) to assess benefits. 
B)  It is very simple to compute. 
C)  Attention must be taken when using it to make sure that all of the constrained resource is utilized. 
D)  It is unreliable when used for choosing between different projects. 
E)  It ignores cash flows after the cutoff

Question 2

Net present value (NPV)is usefully supplemented by internal rate of return (IRR),since IRR gives a good indication of the sensitivity of any decision made to changes in the discount rate.

Accepted Answer

A) True 
 B)False

Question 3

Which of the following decision rules might best be used as a supplement to net present value (NPV)by a firm that favours liquidity?

Accepted Answer

A)  profitability index 
B)  IRR 
C)  equivalent annual annuity 
D)  payback period 
E)  incremental IRR 
A)  profitability index 
B)  IRR 
C)  equivalent annual annuity 
D)  payback period 
E)  incremental IRR

Question 4

Use the table for the question(s) below.
Consider the following two projects:
  
-The net present value (NPV)of project B is closest to:

Accepted Answer

A)  12.6 
B)  23.3 
C)  12.0 
D)  15.0 
E)  14.2 
A)  12.6 
B)  23.3 
C)  12.0 
D)  15.0 
E)  14.2

Question 5

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

Accepted Answer

A)  invest in project Beta, since NPVBₑtₐ > 0. 
B)  invest in project Alpha, since NPVBₑtₐ  IRRAlphₐ. 
D)  invest in project Beta, since NPVBₑtₐ > NPVAlphₐ > 0. 
E)  invest in project Alpha, since IRRAlphₐ > IRRBₑtₐ. 
A)  invest in project Beta, since NPVBₑtₐ > 0. 
B)  invest in project Alpha, since NPVBₑtₐ  IRRAlphₐ. 
D)  invest in project Beta, since NPVBₑtₐ > NPVAlphₐ > 0. 
E)  invest in project Alpha, since IRRAlphₐ > IRRBₑtₐ.

Question 6

A lottery winner can take $6 million now or be paid $600,000 at the end of each of the next 16 years.The winner calculates the internal rate of return (IRR)of taking the money at the end of each year and,estimating that the discount rate across this period will be 6%,decides to take the money at the end of each year.Was her decision correct?

Accepted Answer

A)  Yes, because it agrees with the Net Present Value rule. 
B)  Yes, because it agrees with the payback rule. 
C)  Yes, because it agrees with both the Net Present Value rule and the payback rule. 
D)  No, because it disagrees with the Net Present Value rule. 
E)  No, because it disagrees with the payback rule. 
A)  Yes, because it agrees with the Net Present Value rule. 
B)  Yes, because it agrees with the payback rule. 
C)  Yes, because it agrees with both the Net Present Value rule and the payback rule. 
D)  No, because it disagrees with the Net Present Value rule. 
E)  No, because it disagrees with the payback rule.

Question 7

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

Question 8

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 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 has 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 9

Net present value (NPV)is the difference between the present value (PV)of the benefits and the present value (PV)of the costs of a project or investment.

Accepted Answer

A) True 
 B)False

Question 10

A security company offers to provide CCTV coverage for a parking garage for ten years for an initial payment of $50,000 and additional payments of $20,000 per year.What is the equivalent annual annuity of this deal,given a cost of capital of 6%?

Accepted Answer

A)  -$14,720 
B)  -$19,720 
C)  -$20,000 
D)  -$26,793 
E)  -$31,011 
A)  -$14,720 
B)  -$19,720 
C)  -$20,000 
D)  -$26,793 
E)  -$31,011

Question 11

Use the information for the question(s) below.
An independent film maker is considering producing a new movie. The initial cost for making this movie will be $20 million today. Once the movie is completed, in one year, the movie will be sold to a major studio for $25 million. Rather than paying for the $20 million investment entirely using its own cash, the film maker is considering raising additional funds by issuing a security that will pay investors $11 million in one year. Suppose the risk-free rate of interest is 10%.
-Refer to the information above.Without issuing the new security,the net present value (NPV)for this project is closest to what amount? Should the film maker make the investment?

Accepted Answer

A)  $1.7 million; Yes 
B)  $1.7 million; No 
C)  $2.7 million; Yes 
D)  $2.7 million; No 
E)  $5.0 million; Yes. 
A)  $1.7 million; Yes 
B)  $1.7 million; No 
C)  $2.7 million; Yes 
D)  $2.7 million; No 
E)  $5.0 million; Yes.

Question 12

A lawn maintenance company compares two ride-on mowers-the Excelsior,which has an expected working-life of six years,and the Grassassinator,which has a working life of four years.After examining the equivalent annual annuities of each mower,the company decides to purchase the Excelsior.Which of the following,if true,would be most likely to make them change that decision?

Accepted Answer

A)  Fuel prices are expected to rise and raise the annual running costs of all mowers. 
B)  The mower is only expected to be needed for three years. 
C)  The prices of equivalent mowers are expected to grow in the future as lawnmower manufacturers consolidate. 
D)  The number of customers requiring lawn-mowing services is expected to sharply increase in the near future. 
E)  Mower technology is expected to improve significantly in the near future. 
A)  Fuel prices are expected to rise and raise the annual running costs of all mowers. 
B)  The mower is only expected to be needed for three years. 
C)  The prices of equivalent mowers are expected to grow in the future as lawnmower manufacturers consolidate. 
D)  The number of customers requiring lawn-mowing services is expected to sharply increase in the near future. 
E)  Mower technology is expected to improve significantly in the near future.

Question 13

Use the information for the question(s) below.
  
-If WiseGuy Inc.uses the payback period rule to choose projects,which of the projects will rank highest?

Accepted Answer

A)  Project A 
B)  Project B 
C)  Project C 
D)  Project D 
E)  Project E 
A)  Project A 
B)  Project B 
C)  Project C 
D)  Project D 
E)  Project E

Question 14

A local government awards a landscaping company a contract worth $1.2 million per year for five years for maintaining public parks.The landscaping company will need to buy some new machinery before they can take on the contract.If the cost of capital is 7%,what is the most that this equipment could cost if the contract is to be worthwhile for the landscaping company?

Accepted Answer

A)  $4.55 million 
B)  $4.61 million 
C)  $4.92 million 
D)  $5.26 million 
E)  $6.00 million 
A)  $4.55 million 
B)  $4.61 million 
C)  $4.92 million 
D)  $5.26 million 
E)  $6.00 million

Question 15

Use the information for the question(s) below.
  
-A mining company will spend $28 million in order to exploit a low-grade placer deposit of gold ore.They estimate the deposit will produce profits of $6 million per year for six years.They calculate the net present value (NPV)using an estimated cost of capital of 6%.What is the maximum that the cost of capital can deviate from this estimate that still makes the decision to mine worthwhile?

Accepted Answer

A)  1.60% 
B)  1.66% 
C)  1.69% 
D)  1.72% 
E)  1.76% 
A)  1.60% 
B)  1.66% 
C)  1.69% 
D)  1.72% 
E)  1.76%

Question 16

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 first?

Accepted Answer

A)  Project C 
B)  Project G 
C)  Project B 
D)  Project F 
E)  Project H 
A)  Project C 
B)  Project G 
C)  Project B 
D)  Project F 
E)  Project H

Question 17

You wish to buy a new lawnmower and you are deciding between a gas powered lawn mower and an electric mower.The electric mower costs $275 more than the gas mower,but you estimate that it will save you $40 per year by using cheaper electricity relative to gasoline.If the expected lifetime of both mowers is 30 years,and the cost of capital of 5%,what is the NPV of getting an electric mower instead of a gas mower?

Accepted Answer

A)  $40 
B)  $340 
C)  -$235 
D)  -$275 
E)  $925 
A)  $40 
B)  $340 
C)  -$235 
D)  -$275 
E)  $925

Question 18

Peter has a business opportunity that requires him to invest $10,000 today,and receive $12,000 in one year.He can either use $10,000 that he already has for this investment or borrow the money from his bank at an interest rate of 10%.However,the $10,000 he has right now is needed for urgent repairs to his home,repairs that will cost at least $15,000 if he delays them for a year.Should Peter undertake the investment?

Accepted Answer

A)  No, since the net present value (NPV) of the investment, should he take it, is less than the net present value (NPV) of the home repairs if he delays them for one year. 
B)  Yes, since he can borrow the $10,000 from a bank, repair his home, invest $10,000 in the business opportunity, which, since it has a NPV > 0 will mean he will still come out ahead after repaying the loan. 
C)  Yes, since the net present value (NPV) of the investment is greater than zero he can invest the $10,000 in the business opportunity, and then next year use this money plus the benefit from this money to make the necessary home repairs. 
D)  Yes, since the net present value (NPV) of the investment, should he take it, is greater than the net present value (NPV) of the home repairs if he delays them for one year. 
E)  No, since the net present value (NPV) of both the investment and the repairs are the same. 
A)  No, since the net present value (NPV) of the investment, should he take it, is less than the net present value (NPV) of the home repairs if he delays them for one year. 
B)  Yes, since he can borrow the $10,000 from a bank, repair his home, invest $10,000 in the business opportunity, which, since it has a NPV > 0 will mean he will still come out ahead after repaying the loan. 
C)  Yes, since the net present value (NPV) of the investment is greater than zero he can invest the $10,000 in the business opportunity, and then next year use this money plus the benefit from this money to make the necessary home repairs. 
D)  Yes, since the net present value (NPV) of the investment, should he take it, is greater than the net present value (NPV) of the home repairs if he delays them for one year. 
E)  No, since the net present value (NPV) of both the investment and the repairs are the same.

Question 19

Most corporations measure the value of a project in terms of which of the following?

Accepted Answer

A)  discount value 
B)  discount factor 
C)  future value (FV) 
D)  present value (PV) 
E)  market value 
A)  discount value 
B)  discount factor 
C)  future value (FV) 
D)  present value (PV) 
E)  market value

Question 20

The following show four mutually exclusive investments.Which is the best investment?

Accepted Answer

A)  Initial investment: $1.1 million; Cash flow in year 1: $160,000; Annual Growth Rate: 2%; Cost of Capital: 9.0% 
B)  Initial investment: $1.2 million; Cash flow in year 1: $150,000; Annual Growth Rate: 2%; Cost of Capital:7.0% 
C)  Initial investment: $1.3 million; Cash flow in year 1: $160,000; Annual Growth Rate: 1%; Cost of Capital: 6% 
D)  Initial investment: $1.4 million; Cash flow in year 1: $150,000; Annual Growth Rate: 2%; Cost of Capital: 8% 
E)  Initial investment: $1.5 million; Cash flow in year 1: $160,000; Annual Growth Rate: 1.5%; Cost of Capital: 7% 
A)  Initial investment: $1.1 million; Cash flow in year 1: $160,000; Annual Growth Rate: 2%; Cost of Capital: 9.0% 
B)  Initial investment: $1.2 million; Cash flow in year 1: $150,000; Annual Growth Rate: 2%; Cost of Capital:7.0% 
C)  Initial investment: $1.3 million; Cash flow in year 1: $160,000; Annual Growth Rate: 1%; Cost of Capital: 6% 
D)  Initial investment: $1.4 million; Cash flow in year 1: $150,000; Annual Growth Rate: 2%; Cost of Capital: 8% 
E)  Initial investment: $1.5 million; Cash flow in year 1: $160,000; Annual Growth Rate: 1.5%; Cost of Capital: 7%

Which of the following is true regarding the profitability index?

Net present value (NPV)is usefully supplemented by internal rate of return (IRR),since IRR gives a good indication of the sensitivity of any decision made to changes in the discount rate.

Which of the following decision rules might best be used as a supplement to net present value (NPV)by a firm that favours liquidity?

Use the table for the question(s) below. Consider the following two projects: -The net present value (NPV)of project B is closest to:

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

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?

Net present value (NPV)is the difference between the present value (PV)of the benefits and the present value (PV)of the costs of a project or investment.

A security company offers to provide CCTV coverage for a parking garage for ten years for an initial payment of $50,000 and additional payments of $20,000 per year.What is the equivalent annual annuity of this deal,given a cost of capital of 6%?

Use the information for the question(s) below. -If WiseGuy Inc.uses the payback period rule to choose projects,which of the projects will rank highest?

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 first?

Most corporations measure the value of a project in terms of which of the following?

The following show four mutually exclusive investments.Which is the best 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

Which of the following is true regarding the profitability index?

Net present value (NPV)is usefully supplemented by internal rate of return (IRR),since IRR gives a good indication of the sensitivity of any decision made to changes in the discount rate.

Which of the following decision rules might best be used as a supplement to net present value (NPV)by a firm that favours liquidity?

Use the table for the question(s) below. Consider the following two projects: -The net present value (NPV)of project B is closest to:

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

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?

Net present value (NPV)is the difference between the present value (PV)of the benefits and the present value (PV)of the costs of a project or investment.

A security company offers to provide CCTV coverage for a parking garage for ten years for an initial payment of $50,000 and additional payments of $20,000 per year.What is the equivalent annual annuity of this deal,given a cost of capital of 6%?

Use the information for the question(s) below. -If WiseGuy Inc.uses the payback period rule to choose projects,which of the projects will rank highest?

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 first?

Most corporations measure the value of a project in terms of which of the following?

The following show four mutually exclusive investments.Which is the best 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