Question 1

Assuming that your capital is constrained,what is the fifth project that you should invest in?

Accepted Answer

A) Project H 
B) Project I 
C) Project B 
D) Project A 
A) Project H 
B) Project I 
C) Project B 
D) Project A

Question 2

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

Accepted Answer

A) $20.96 
B) $16.92 
C) $24.01 
D) $14.41 
A) $20.96 
B) $16.92 
C) $24.01 
D) $14.41

Question 3

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 = 14,0

Question 4

When choosing between projects,an alternative to comparing their IRRs is:

Accepted Answer

A) to compute the incremental IRR,which tells us the discount rate at which it becomes profitable to switch from one project to the other. 
B) to compute the incremental payback period,which tells us the number of years during which it becomes profitable to switch from one project to the other. 
C) to compute the incremental NPV,which tells us the discount rate at which it becomes profitable to switch from one project to the other. 
D) There is no alternative selection criterion to comparing IRRs. 
A) to compute the incremental IRR,which tells us the discount rate at which it becomes profitable to switch from one project to the other. 
B) to compute the incremental payback period,which tells us the number of years during which it becomes profitable to switch from one project to the other. 
C) to compute the incremental NPV,which tells us the discount rate at which it becomes profitable to switch from one project to the other. 
D) There is no alternative selection criterion to comparing IRRs.

Question 5

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

Question 6

Which of the following statements is FALSE?

Accepted Answer

A) Problems can arise using the IRR method when the mutually exclusive investments have different cash flow patterns. 
B) The IRR is affected by the scale of the investment opportunity. 
C) Multiple incremental IRRs might exist. 
D) The incremental IRR rule assumes that the riskiness of the two projects is the same. 
A) Problems can arise using the IRR method when the mutually exclusive investments have different cash flow patterns. 
B) The IRR is affected by the scale of the investment opportunity. 
C) Multiple incremental IRRs might exist. 
D) The incremental IRR rule assumes that the riskiness of the two projects is the same.

Question 7

The maximum number of IRRs that could exist for project B is:

Accepted Answer

A) 3 
B) 1 
C) 2 
D) 0 
A) 3 
B) 1 
C) 2 
D) 0

Question 8

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 9

Calculate the IRR for the snow board project and use it to determine the maximum deviation allowable in the cost of capital estimate that leaves the investment decision unchanged.The maximum deviation allowable is closest to:

Accepted Answer

A) 11.0% 
B) 0.0% 
C) 2.5% 
D) 1.0% 
A) 11.0% 
B) 0.0% 
C) 2.5% 
D) 1.0%

Question 10

The internal rate of return rule can result in the wrong decision if the projects being compared have:

Accepted Answer

A) differences in scale. 
B) differences in timing. 
C) differences in NPV. 
D) A and B are correct. 
A) differences in scale. 
B) differences in timing. 
C) differences in NPV. 
D) A and B are correct.

Question 11

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 15,000 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

Question 12

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) 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) Fifty percent of firms surveyed reported using the payback rule for making decisions.

Question 13

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 Alpha. 
C) invest in project Beta since IRRB > IRRA. 
D) invest in project Beta since NPVBeta > NPVAlpha > 0. 
A) invest in project Beta since NPVBeta > 0. 
B) invest in project Alpha since NPVBeta Alpha. 
C) invest in project Beta since IRRB > IRRA. 
D) invest in project Beta since NPVBeta > NPVAlpha > 0.

Question 14

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 NPV for this project is closest to:

Accepted Answer

A) $176,270 
B) $123,420 
C) $450,000 
D) $179,590 
A) $176,270 
B) $123,420 
C) $450,000 
D) $179,590

Question 15

Use the following information to answer the question(s)below.
Frank Dewey Esquire from the firm of Dewey,Cheatum,and Howe,has been offered an upfront retainer of $30,000 to provide legal services over the next 12 months to Taggart Transcontinental.In return for this upfront payment,Taggart Transcontinental would have access to 8 hours of legal services from Frank for each of the next 12 months.Frank's normal billable rate is $250 per hour for legal services.
-Assuming that Dewey's cost of capital is 12% EAR,then the NPV of his retainer offer is closest to:

Accepted Answer

A) -$7500 
B) -$7400 
C) $6000 
D) $7400 
A) -$7500 
B) -$7400 
C) $6000 
D) $7400

Question 16

Consider the following list of projects:
   
You are given a budget of only $1,800,000 to invest in projects.Which projects will you select,in what order will you select them,and why?

Accepted Answer

The answer of Consider the following list of projects:
 ...

Question 17

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

Accepted Answer

A) 12.0 
B) 12.6 
C) 15.0 
D) 42.9 
A) 12.0 
B) 12.6 
C) 15.0 
D) 42.9

Question 18

Use the table for the question(s)below.
Consider a project with the following cash flows:  
-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 19

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 20

Which of the following statements is correct?

Accepted Answer

A) You should invest in project Beta since NPVBeta > 0. 
B) You should invest in project Alpha since IRRAlpha > IRRBeta. 
C) Your should invest in project Alpha since NPVAlpha Beta > 0. 
A) You should invest in project Beta since NPVBeta > 0. 
B) You should invest in project Alpha since IRRAlpha > IRRBeta. 
C) Your should invest in project Alpha since NPVAlpha Beta > 0.

Exam 7: Investment Decision Rules

Assuming that your capital is constrained,what is the fifth project that you should invest in?

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

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?

When choosing between projects,an alternative to comparing their IRRs is:

Which of the following statements is correct?

Which of the following statements is FALSE?

The maximum number of IRRs that could exist for project B is:

Which of the following statements is FALSE?

Calculate the IRR for the snow board project and use it to determine the maximum deviation allowable in the cost of capital estimate that leaves the investment decision unchanged.The maximum deviation allowable is closest to:

The internal rate of return rule can result in the wrong decision if the projects being compared have:

Which of the following statements is FALSE?

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:

Consider the following list of projects: You are given a budget of only $1,800,000 to invest in projects.Which projects will you select,in what order will you select them,and why?

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

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

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:

Which of the following statements is correct?

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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