Question 1

What is the decision criteria while using the payback rule?

Accepted Answer

The payback rule does not have

Question 2

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 project should you invest in and in what order?

Accepted Answer

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

Question 3

A company that creates education products is planning to create a suite of books to help customers prepare for high-stakes tests for entry into college and grad school.They have 33 in-house writers to create these books.Due to the expertise needed in creating this content it will not be possible to hire temporary writers within the planned time-frame.Which projects should be undertaken?

Accepted Answer

A)  Prep for the College Entry Test and Prep for the Law School Entry Test 
B)  Prep for the College Entry Test and Prep for the Grad School Entry Test 
C)  Prep for the Dental School Entry Test, Prep for the Grad School Entry Test, and Prep for the Medical School Entry Test 
D)  Prep for the Grad School Entry Test, Prep for the Law School Entry Test, and Prep for the Medical School Entry Test 
E)  Prep for the Dental School Entry Test, Prep for the Grad School Entry Test, and Prep for the Law School Entry Test 
A)  Prep for the College Entry Test and Prep for the Law School Entry Test 
B)  Prep for the College Entry Test and Prep for the Grad School Entry Test 
C)  Prep for the Dental School Entry Test, Prep for the Grad School Entry Test, and Prep for the Medical School Entry Test 
D)  Prep for the Grad School Entry Test, Prep for the Law School Entry Test, and Prep for the Medical School Entry Test 
E)  Prep for the Dental School Entry Test, Prep for the Grad School Entry Test, and Prep for the Law School Entry Test

Question 4

A small department store in a mall has the opportunity to rent an additional 20,000 square feet of space for five years.It can divide up this space between the above new departments.Each department will require a different amount of space,and each department is expected to make a yearly profit as shown,for each of the next five years.The discount rate is 10%.Based on this information,what departments should be added?

Accepted Answer

A)  Pet, Fabrics, Hardware, and Shoe Repair 
B)  Fabrics, Luggage, Hardware, Watches, and Shoe Repair 
C)  Pets, Fabrics, Book, and Luggage 
D)  Pet, Fabrics, Luggage, Hardware, and Shoe Repair 
E)  Fabrics, Book, Luggage and Shoe Repair 
A)  Pet, Fabrics, Hardware, and Shoe Repair 
B)  Fabrics, Luggage, Hardware, Watches, and Shoe Repair 
C)  Pets, Fabrics, Book, and Luggage 
D)  Pet, Fabrics, Luggage, Hardware, and Shoe Repair 
E)  Fabrics, Book, Luggage and Shoe Repair

Question 5

Use the information for the question(s) below.
  
-A communications company installs cable to service a new area.They estimate the cost of installing the cable is $17 million,but they will receive a cash flow of $1.4 million per year indefinitely.The net present value (NPV)of this investment at a cost of capital of 6.5% 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)  0.83% 
B)  1.74% 
C)  3.25% 
D)  5.37% 
E)  8.24% 
A)  0.83% 
B)  1.74% 
C)  3.25% 
D)  5.37% 
E)  8.24%

Question 6

A print shop has contracted to print a number of jobs within 24 hours.Any jobs not completely printed within this time will result in a penalty,as shown in the table above.However too many jobs have been accepted,and not all can be printed.Which jobs should be printed in the next 24 hours?

Accepted Answer

A)  Job D and Job A 
B)  Job C and Job B 
C)  Job C, Job B, and Job E 
D)  Job D, Job A, and Job E 
E)  Job C, Job D, and Job E 
A)  Job D and Job A 
B)  Job C and Job B 
C)  Job C, Job B, and Job E 
D)  Job D, Job A, and Job E 
E)  Job C, Job D, and Job E

Question 7

A furniture store offers no money down and no payment for two years.You decide to purchase a table,which you will take home today,and pay the $1,500 purchase price two years from now.If interest rates are 7%,what is the NPV of this offer?

Accepted Answer

A)  -$1500 
B)  $189.84 
C)  $98.13 
D)  $0 
E)  $217.35 
A)  -$1500 
B)  $189.84 
C)  $98.13 
D)  $0 
E)  $217.35

Question 8

What is the Net Present Value rule?

Accepted Answer

The Net Present Value rule sta

Question 9

Use the table for the question(s) below.
Consider the following two projects:
  
-What is a safe method to use when confronted with mutually exclusive projects?

Accepted Answer

Generally the net present valu

Question 10

When comparing two projects with different lives,why do you compute an annuity with an equivalent present value (PV)to the net present value (NPV)?

Accepted Answer

A)  so that you can see which project has the greatest net present value (NPV) 
B)  so that the projects can be compared on their cost or value created per year 
C)  to reduce the danger that changes in the estimate of the discount rate will lead to choosing the project with a shorter time frame 
D)  to ensure that cash flows from the project with a longer life that occur after the project with the shorter life has ended are considered 
E)  to avoid complications arising from alternating cash inflows and outflows 
A)  so that you can see which project has the greatest net present value (NPV) 
B)  so that the projects can be compared on their cost or value created per year 
C)  to reduce the danger that changes in the estimate of the discount rate will lead to choosing the project with a shorter time frame 
D)  to ensure that cash flows from the project with a longer life that occur after the project with the shorter life has ended are considered 
E)  to avoid complications arising from alternating cash inflows and outflows

Question 11

You are considering an investment opportunity that will cost you $20,000 up front,but return $5,000 per year for the next 10 years.What is the IRR for this investment?

Accepted Answer

A)  21.4% 
B)  250% 
C)  20% 
D)  25% 
E)  22.5% 
A)  21.4% 
B)  250% 
C)  20% 
D)  25% 
E)  22.5%

Question 12

You have an investment opportunity in Germany that requires an investment of $250,000 today and will produce a cash flow of €208,650 in one year with no risk.Suppose the risk-free rate of interest in Germany is 7% and the current competitive exchange rate is €0.78 to $1.00.What is the net present value (NPV)of this project? Would you take the project?

Accepted Answer

A)  NPV = 0; No 
B)  NPV = $2358; No 
C)  NPV = $2358; Yes 
D)  NPV = $13,650; Yes 
E)  NPV = $36,225; Yes 
A)  NPV = 0; No 
B)  NPV = $2358; No 
C)  NPV = $2358; Yes 
D)  NPV = $13,650; Yes 
E)  NPV = $36,225; Yes

Question 13

When different projects put different demands on a limited resource,then net present value (NPV)is always the best way to choose the best project.

Accepted Answer

A) True 
 B)False

Question 14

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

Accepted Answer

A)  invest in project A, since NPVB  IRRA. 
C)  invest in project B, since NPVB > NPVA. 
D)  invest in project A, since NPVA > 0. 
E)  invest in project A, since IRRA > IRRB. 
A)  invest in project A, since NPVB  IRRA. 
C)  invest in project B, since NPVB > NPVA. 
D)  invest in project A, since NPVA > 0. 
E)  invest in project A, since IRRA > IRRB.

Question 15

A convenience store owner is contemplating putting a large neon sign over his store.It would cost $50,000,but is expected to bring an additional $24,000 of profit to the store every year for five years.Would this project be worthwhile if evaluated using a payback period of two years or less and if the cost of capital is 10%?

Accepted Answer

A)  Yes, since it will pay back its initial investment in two years. 
B)  Yes, since the value of the cash flows into the store, in present dollars, are greater than the initial investment. 
C)  Yes, since the cash flows after two years are greater than the initial investment. 
D)  No, since the value of the cash flows over the first two years are less than the initial investment. 
E)  Yes, since the NPV is positive. 
A)  Yes, since it will pay back its initial investment in two years. 
B)  Yes, since the value of the cash flows into the store, in present dollars, are greater than the initial investment. 
C)  Yes, since the cash flows after two years are greater than the initial investment. 
D)  No, since the value of the cash flows over the first two years are less than the initial investment. 
E)  Yes, since the NPV is positive.

Question 16

A florist is buying a number of motorcycles to expand its delivery service.These will cost $87,000,but are expected to increase profits by $3000 per month over the next four years.What is the payback period in this case?

Accepted Answer

A)  12 months 
B)  18 months 
C)  24 months 
D)  29 months 
E)  36 months 
A)  12 months 
B)  18 months 
C)  24 months 
D)  29 months 
E)  36 months

Question 17

Which of the following best describes the Net Present Value rule?

Accepted Answer

A)  Take any investment opportunity where the net present value (NPV) is not negative; turn down any opportunity when it is negative. 
B)  Take any investment opportunity where the net present value (NPV) exceeds the opportunity cost of capital; turn down any opportunity where the cost of capital exceeds the net present value (NPV). 
C)  When choosing among any list of investment opportunities where resources are limited, always choose those projects with the highest net present value (NPV). 
D)  If the difference between the present cost of an investment and the present value (PV) of its benefits after a fixed number of years is positive the investment should be taken, otherwise it should be rejected. 
E)  If the NPV is positive and the initial investment will be recovered within a certain time period, the investment should be taken. 
A)  Take any investment opportunity where the net present value (NPV) is not negative; turn down any opportunity when it is negative. 
B)  Take any investment opportunity where the net present value (NPV) exceeds the opportunity cost of capital; turn down any opportunity where the cost of capital exceeds the net present value (NPV). 
C)  When choosing among any list of investment opportunities where resources are limited, always choose those projects with the highest net present value (NPV). 
D)  If the difference between the present cost of an investment and the present value (PV) of its benefits after a fixed number of years is positive the investment should be taken, otherwise it should be rejected. 
E)  If the NPV is positive and the initial investment will be recovered within a certain time period, the investment should be taken.

Question 18

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 dollar value should the NPV profile cross the vertical axis?

Accepted Answer

A)  $780,000 
B)  $1,000,000 
C)  $220,000 
D)  The vertical axis crossing point cannot be calculated since the cash inflows are a perpetuity. 
E)  Cannot be determined because inadequate information is given. 
A)  $780,000 
B)  $1,000,000 
C)  $220,000 
D)  The vertical axis crossing point cannot be calculated since the cash inflows are a perpetuity. 
E)  Cannot be determined because inadequate information is given.

Question 19

Use the table for the question(s) below.
Consider a project with the following cash flows:
  
-What is the IRR for this project?

Accepted Answer

A)  4.59% 
B)  8.63% 
C)  15.91% 
D)  21.86% 
E)  44.63% 
A)  4.59% 
B)  8.63% 
C)  15.91% 
D)  21.86% 
E)  44.63%

Question 20

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

Accepted Answer

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

What is the decision criteria while using the payback rule?

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 project should you invest in and in what order?

A print shop has contracted to print a number of jobs within 24 hours.Any jobs not completely printed within this time will result in a penalty,as shown in the table above.However too many jobs have been accepted,and not all can be printed.Which jobs should be printed in the next 24 hours?

A furniture store offers no money down and no payment for two years.You decide to purchase a table,which you will take home today,and pay the $1,500 purchase price two years from now.If interest rates are 7%,what is the NPV of this offer?

What is the Net Present Value rule?

Use the table for the question(s) below. Consider the following two projects: -What is a safe method to use when confronted with mutually exclusive projects?

When comparing two projects with different lives,why do you compute an annuity with an equivalent present value (PV)to the net present value (NPV)?

You are considering an investment opportunity that will cost you $20,000 up front,but return $5,000 per year for the next 10 years.What is the IRR for this investment?

When different projects put different demands on a limited resource,then net present value (NPV)is always the best way to choose the best project.

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

A florist is buying a number of motorcycles to expand its delivery service.These will cost $87,000,but are expected to increase profits by $3000 per month over the next four years.What is the payback period in this case?

Which of the following best describes the Net Present Value rule?

Use the table for the question(s) below. Consider a project with the following cash flows: -What is the IRR for this project?

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

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

What is the decision criteria while using the payback rule?

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 project should you invest in and in what order?

A print shop has contracted to print a number of jobs within 24 hours.Any jobs not completely printed within this time will result in a penalty,as shown in the table above.However too many jobs have been accepted,and not all can be printed.Which jobs should be printed in the next 24 hours?

A furniture store offers no money down and no payment for two years.You decide to purchase a table,which you will take home today,and pay the $1,500 purchase price two years from now.If interest rates are 7%,what is the NPV of this offer?

What is the Net Present Value rule?

Use the table for the question(s) below. Consider the following two projects: -What is a safe method to use when confronted with mutually exclusive projects?

When comparing two projects with different lives,why do you compute an annuity with an equivalent present value (PV)to the net present value (NPV)?

You are considering an investment opportunity that will cost you $20,000 up front,but return $5,000 per year for the next 10 years.What is the IRR for this investment?

When different projects put different demands on a limited resource,then net present value (NPV)is always the best way to choose the best project.

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

A florist is buying a number of motorcycles to expand its delivery service.These will cost $87,000,but are expected to increase profits by $3000 per month over the next four years.What is the payback period in this case?

Which of the following best describes the Net Present Value rule?

Use the table for the question(s) below. Consider a project with the following cash flows: -What is the IRR for this project?

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

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