Question 1

Which of the following statements is FALSE?

Accepted Answer

A) About 75% of firms surveyed used the NPV rule for making investment decisions. 
B) 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. 
C) To decide whether to invest using the NPV rule,we need to know the cost of capital. 
D) NPV is positive only for discount rates greater than the internal rate of return. 
A) About 75% of firms surveyed used the NPV rule for making investment decisions. 
B) 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. 
C) To decide whether to invest using the NPV rule,we need to know the cost of capital. 
D) NPV is positive only for discount rates greater than the internal rate of return.

Question 2

Use the information for the question(s)below.
Boulderado has come up with a new composite snowboard.Development will take Boulderado four years and cost $250,000 per year,with the first of the four equal investments payable today upon acceptance of the project.Once in production the snowboard is expected to produce annual cash flows of $200,000 each year for 10 years.Boulderado's discount rate is 10%.
-The IRR for Boulderado's snowboard project is closest to:

Accepted Answer

A) 10.4% 
B) 10.0% 
C) 11.0% 
D) 15.1% 
A) 10.4% 
B) 10.0% 
C) 11.0% 
D) 15.1%

Question 3

The NPV for project Beta is closest to:

Accepted Answer

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

Question 4

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 profitability index for this project is closest to:

Accepted Answer

A) .44 
B) .26 
C) 0.39 
D) .34 
A) .44 
B) .26 
C) 0.39 
D) .34

Question 5

Assuming that your capital is constrained,which project should you invest in last?

Accepted Answer

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

Question 6

Use the information for the question(s)below.
Boulderado has come up with a new composite snowboard.Development will take Boulderado four years and cost $250,000 per year,with the first of the four equal investments payable today upon acceptance of the project.Once in production the snowboard is expected to produce annual cash flows of $200,000 each year for 10 years.Boulderado's discount rate is 10%.
-The NPV for Boulderado's snowboard project is closest to:

Accepted Answer

A) $228,900 
B) $46,900 
C) $51,600 
D) $23,800 
A) $228,900 
B) $46,900 
C) $51,600 
D) $23,800

Question 7

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

Question 8

Which of the following statements is FALSE?

Accepted Answer

A) When using the incremental IRR rule,you must keep track of which project is the incremental project and ensure that the incremental cash flows are initially positive and then become negative. 
B) Picking one project over another simply because it has a larger IRR can lead to mistakes. 
C) Problems arise using the IRR method when the mutually exclusive investments have differences in scale. 
D) When the risks of two projects are different,only the NPV rule will give a reliable answer. 
A) When using the incremental IRR rule,you must keep track of which project is the incremental project and ensure that the incremental cash flows are initially positive and then become negative. 
B) Picking one project over another simply because it has a larger IRR can lead to mistakes. 
C) Problems arise using the IRR method when the mutually exclusive investments have differences in scale. 
D) When the risks of two projects are different,only the NPV rule will give a reliable answer.

Question 9

Use the following information to answer the question(s)below.
Sarah Palin reportedly was paid a $11 million advance to write her book Going Rogue.The book took one year to write.In the time she spent writing,Palin could have been paid to give speeches and appear on TV news as a political commentator.Given her popularity,assume that she could have earned $8 million over the year (paid at the end of the year)she spent writing the book.
-Assuming that Palin's cost of capital is 10%,then the NPV of her book deal is closest to:

Accepted Answer

A) $2.00 million 
B) $2.20 million 
C) $3.00 million 
D) $3.75 million 
A) $2.00 million 
B) $2.20 million 
C) $3.00 million 
D) $3.75 million

Question 10

An incremental IRR of Project B over Project A is closest to:

Accepted Answer

A) 12.6% 
B) 23.3% 
C) 1.7% 
D) 17.3% 
A) 12.6% 
B) 23.3% 
C) 1.7% 
D) 17.3%

Question 11

Use the following information to answer the question(s)below.
Sarah Palin reportedly was paid a $11 million advance to write her book Going Rogue.The book took one year to write.In the time she spent writing,Palin could have been paid to give speeches and appear on TV news as a political commentator.Given her popularity,assume that she could have earned $8 million over the year (paid at the end of the year)she spent writing the book.
-Assume that once her book is finished,it is expected to generate royalties of $5 million in the first year (paid at the end of the year)and these royalties are expected to decrease by 40% per year in perpetuity.Assuming that Palin's cost of capital is 10% and given these royalties payments,the NPV of Palin's book deal is closest to:

Accepted Answer

A) $3.75 million 
B) $12.20 million 
C) $13.00 million 
D) $13.75 million 
A) $3.75 million 
B) $12.20 million 
C) $13.00 million 
D) $13.75 million

Question 12

Use the table for the question(s)below.
Consider two mutually exclusive projects with the following cash flows:  
-You are considering using the incremental IRR approach to decide between the two mutually exclusive projects A & B.How many potential incremental IRRs could there be?

Accepted Answer

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

Question 13

Use the following information to answer the question(s)below.
You are considering investing in a start up project at a cost of $100,000.You expect the project to return $500,000 to you in seven years.Given the risk of this project,your cost of capital is 20%.
-The NPV for this project is closest to:

Accepted Answer

A) $29,200 
B) $39,500 
C) $129,200 
D) $139,500 
A) $29,200 
B) $39,500 
C) $129,200 
D) $139,500

Question 14

One of the IRRs for Rearden's mining operation is closest to:

Accepted Answer

A) 0% 
B) 10.6% 
C) 12.4% 
D) 72.0% 
A) 0% 
B) 10.6% 
C) 12.4% 
D) 72.0%

Question 15

If the discount rate for project B is 15%,then what is the NPV for project B?

Accepted Answer

NPV B CF₀ = -46,775 CF₁ = 15,000

Question 16

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 17

Assume that your capital is constrained,so that you only have $500,000 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) $111,000 
B) $69,000 
C) $80,000 
D) $58,000 
A) $111,000 
B) $69,000 
C) $80,000 
D) $58,000

Question 18

Which of the following statements is FALSE?

Accepted Answer

A) The payback investment rule is based on the notion that an opportunity that pays back its initial investments quickly is a good idea. 
B) An IRR will always exist for an investment opportunity. 
C) A NPV will always exist for an investment opportunity. 
D) In general,there can be as many IRRs as the number of times the project's cash flows change sign over time. 
A) The payback investment rule is based on the notion that an opportunity that pays back its initial investments quickly is a good idea. 
B) An IRR will always exist for an investment opportunity. 
C) A NPV will always exist for an investment opportunity. 
D) In general,there can be as many IRRs as the number of times the project's cash flows change sign over time.

Question 19

The profitability index for project B is closest to:

Accepted Answer

A) 23.34 
B) 12.64 
C) 0.17 
D) 0.12 
A) 23.34 
B) 12.64 
C) 0.17 
D) 0.12

Question 20

Assume that projects Alpha and Beta are mutually exclusive.Which of the following statements is true regarding the investment decision tools' suitability for deciding between projects Alpha & Beta?

Accepted Answer

A) The incremental IRR should not be used since the projects have different lives. 
B) The incremental IRR should not be used since the projects have different discount rates. 
C) The incremental IRR should not be used since the projects have different cash flow patterns. 
D) Both the NPV and incremental IRR approaches are appropriate to solve this problem. 
A) The incremental IRR should not be used since the projects have different lives. 
B) The incremental IRR should not be used since the projects have different discount rates. 
C) The incremental IRR should not be used since the projects have different cash flow patterns. 
D) Both the NPV and incremental IRR approaches are appropriate to solve this problem.

Exam 7: Investment Decision Rules

Which of the following statements is FALSE?

The NPV for project Beta is closest to:

Assuming that your capital is constrained,which project should you invest in last?

The payback period for project B is closest to:

Which of the following statements is FALSE?

An incremental IRR of Project B over Project A is closest to:

Use the table for the question(s)below. Consider two mutually exclusive projects with the following cash flows: -You are considering using the incremental IRR approach to decide between the two mutually exclusive projects A & B.How many potential incremental IRRs could there be?

One of the IRRs for Rearden's mining operation is closest to:

If the discount rate for project B is 15%,then what is the NPV for project B?

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?

Assume that your capital is constrained,so that you only have $500,000 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 FALSE?

The profitability index for project B is closest to:

Assume that projects Alpha and Beta are mutually exclusive.Which of the following statements is true regarding the investment decision tools' suitability for deciding between projects Alpha & Beta?

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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