Question 1

Which of the following statements is FALSE?

Accepted Answer

A) In general,the difference between the cost of capital and the IRR is the maximum amount of estimation error in the cost of capital estimate that can exist without altering the original decision. 
B) The IRR can provide information on how sensitive your analysis is to errors in the estimate of your cost of capital. 
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) If the cost of capital estimate is more than the IRR,the NPV will be positive. 
A) In general,the difference between the cost of capital and the IRR is the maximum amount of estimation error in the cost of capital estimate that can exist without altering the original decision. 
B) The IRR can provide information on how sensitive your analysis is to errors in the estimate of your cost of capital. 
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) If the cost of capital estimate is more than the IRR,the NPV will be positive.

Question 2

Assuming that Dewey's cost of capital is 12% EAR,then the number of potential IRRs that exist for this problem is equal to:

Accepted Answer

A) 0 
B) 1 
C) 2 
D) 12 
A) 0 
B) 1 
C) 2 
D) 12

Question 3

You are trying to decide between three mutually exclusive investment opportunities.The most appropriate tool for identifying the correct decision is:

Accepted Answer

A) NPV. 
B) profitability index. 
C) IRR. 
D) incremental IRR. 
A) NPV. 
B) profitability index. 
C) IRR. 
D) incremental IRR.

Question 4

Assuming that Dewey's cost of capital is 12% EAR,then the IRR of his retainer offer is closest to:

Accepted Answer

A) -39.3% 
B) -3.3% 
C) 20.0% 
D) 39.3% 
A) -39.3% 
B) -3.3% 
C) 20.0% 
D) 39.3%

Question 5

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 6

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 7

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 8

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

Accepted Answer

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

Question 9

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 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 investment rule is the NPV investment rule.

Question 10

What is one of the incremental IRRs for project B over project A? Would you feel comfortable basing your decision on the incremental IRR?

Accepted Answer

@#IMG-DLM& Compute IRR = 8.95%

Question 11

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 12

Which of the following statements is FALSE?

Accepted Answer

A) The incremental IRR investment rule applies the IRR rule to the difference between the cash flows of the two mutually exclusive alternatives. 
B) When a manager must choose among mutually exclusive investments,the NPV rule provides a straightforward answer. 
C) The likelihood of multiple IRRs is greater with the regular IRR rule than with the incremental IRR rule. 
D) Problems can arise using the IRR method when the mutually exclusive investments have differences in scale. 
A) The incremental IRR investment rule applies the IRR rule to the difference between the cash flows of the two mutually exclusive alternatives. 
B) When a manager must choose among mutually exclusive investments,the NPV rule provides a straightforward answer. 
C) The likelihood of multiple IRRs is greater with the regular IRR rule than with the incremental IRR rule. 
D) Problems can arise using the IRR method when the mutually exclusive investments have differences in scale.

Question 13

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.
-Explain why the NPV decision rule might provide Larry with a different decision outcome than the IRR rule when evaluating Larry's three movie deal offer.

Accepted Answer

The NPV rule will always give the right

Question 14

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

Question 15

The IRR of Palin's book deal is closest to:

Accepted Answer

A) -27.25% 
B) -37.50% 
C) 27.25% 
D) 37.50% 
A) -27.25% 
B) -37.50% 
C) 27.25% 
D) 37.50%

Question 16

The NPV of project B is closest to:

Accepted Answer

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

Question 17

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 payback period for this project is closest to:

Accepted Answer

A) 2.1 years 
B) 3.0 years 
C) 2.0 years 
D) 2.2 years 
A) 2.1 years 
B) 3.0 years 
C) 2.0 years 
D) 2.2 years

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 IRR for this project is closest to:

Accepted Answer

A) 18.9% 
B) 22.7% 
C) 34.1% 
D) 39.1% 
A) 18.9% 
B) 22.7% 
C) 34.1% 
D) 39.1%

Question 19

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

Accepted Answer

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

Question 20

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

Accepted Answer

A) 21% 
B) 22% 
C) 15% 
D) 60% 
A) 21% 
B) 22% 
C) 15% 
D) 60%

Exam 7: Investment Decision Rules

Which of the following statements is FALSE?

Assuming that Dewey's cost of capital is 12% EAR,then the number of potential IRRs that exist for this problem is equal to:

You are trying to decide between three mutually exclusive investment opportunities.The most appropriate tool for identifying the correct decision is:

Assuming that Dewey's cost of capital is 12% EAR,then the IRR of his retainer offer is closest to:

The NPV profile graphs:

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 the following list of projects: -Assuming that your capital is constrained,which investment tool should you use to determine the correct investment decisions?

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

Which of the following statements is FALSE?

What is one of the incremental IRRs for project B over project A? Would you feel comfortable basing your decision on the incremental IRR?

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 two projects: -The payback period for project A is closest to:

The IRR of Palin's book deal is closest to:

The NPV of project B is closest to:

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

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

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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