Question 1

Which of the following statements is correct?

Accepted Answer

A)  When firms make an investment decision, they should treat stand-alone projects the same as exclusive projects. 
B)  When firms make an investment decision, they should not treat stand-alone projects the same as exclusive projects. 
C)  There are no differences between stand-alone projects and exclusive projects when an investment decision is made. 
D)  Both A and B 
A)  When firms make an investment decision, they should treat stand-alone projects the same as exclusive projects. 
B)  When firms make an investment decision, they should not treat stand-alone projects the same as exclusive projects. 
C)  There are no differences between stand-alone projects and exclusive projects when an investment decision is made. 
D)  Both A and B B

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%.
-Take any investment opportunity where the IRR ________ the opportunity cost of capital.Turn down any opportunity whose IRR is ________ than the opportunity cost of capital.

Accepted Answer

A)  exceeds; less 
B)  exceeds; higher 
C)  less than; less 
D)  less than; higher 
A)  exceeds; less 
B)  exceeds; higher 
C)  less than; less 
D)  less than; higher A

Question 3

Unconventional cash flows normally means

Accepted Answer

A)  that you have cash outflows at the beginning of the investment and have cash inflows afterwards. 
B)  that you have cash inflows at the beginning of the investment and have cash outflows afterwards. 
C)  that you have major cash outflows at the beginning of the investment and have both cash outflows and cash inflows afterwards. 
D)  none of the above. 
A)  that you have cash outflows at the beginning of the investment and have cash inflows afterwards. 
B)  that you have cash inflows at the beginning of the investment and have cash outflows afterwards. 
C)  that you have major cash outflows at the beginning of the investment and have both cash outflows and cash inflows afterwards. 
D)  none of the above. B

Question 4

Use the table for the question(s) below.
Consider the following two projects:
  
-The internal rate of return (IRR)for project Beta is closest to:

Accepted Answer

A)  25.0% 
B)  22.7% 
C)  24.5% 
D)  22.2% 
A)  25.0% 
B)  22.7% 
C)  24.5% 
D)  22.2%

Question 5

Use the table for the question(s) below.
Consider two mutually exclusive projects with the following cash flows:
  
-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 6

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

Question 7

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 8

Which of the following statements is false?

Accepted Answer

A)  In general, the IRR rule works for a stand-alone project if all of the project's positive cash flows precede its negative cash flows. 
B)  There is no easy fix for the IRR rule when there are multiple IRRs. 
C)  The payback rule is primarily used because of its simplicity. 
D)  No investment rule that ignores the set of alternative investment alternatives can be optimal. 
A)  In general, the IRR rule works for a stand-alone project if all of the project's positive cash flows precede its negative cash flows. 
B)  There is no easy fix for the IRR rule when there are multiple IRRs. 
C)  The payback rule is primarily used because of its simplicity. 
D)  No investment rule that ignores the set of alternative investment alternatives can be optimal.

Question 9

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 10

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 11

Which of the following statements is false?

Accepted Answer

A)  The incremental IRR need not exist. 
B)  If a change in the timing of the cash flows does not affect the NPV, then the change in timing will not impact the IRR. 
C)  Although the incremental IRR rule can provide a reliable method for choosing among projects, it can be difficult to apply correctly. 
D)  When projects are mutually exclusive, it is not enough to determine which projects have positive NPVs. 
A)  The incremental IRR need not exist. 
B)  If a change in the timing of the cash flows does not affect the NPV, then the change in timing will not impact the IRR. 
C)  Although the incremental IRR rule can provide a reliable method for choosing among projects, it can be difficult to apply correctly. 
D)  When projects are mutually exclusive, it is not enough to determine which projects have positive NPVs.

Question 12

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 13

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 14

Use the table for the question(s) below.
Consider the following two projects:
  
-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 15

What is the incremental IRR 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%.The answe

Question 16

Use the table for the question(s) below.
Consider the following list of projects:
  
-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 17

Use the table for the question(s) below.
Consider two mutually exclusive projects with the following cash flows:
  
-If the discount rate for project A is 16%,then what is the NPV for project A?

Accepted Answer

NPV A CF₀ = -41,215 CF₁ = 12,500

Question 18

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%.
-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 19

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 20

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)  An 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)  An 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.

Exam 8: Investment Decision Rules

Which of the following statements is correct?

Unconventional cash flows normally means

Use the table for the question(s) below. Consider the following two projects: -The internal rate of return (IRR)for project Beta is closest to:

Use the table for the question(s) below. Consider two mutually exclusive projects with the following cash flows: -If the discount rate for project B is 15%,then what is the NPV for project B?

Use the table for the question(s) below. Consider the following two projects: -The payback period for 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:

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?

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:

Which of the following statements is false?

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

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

Use the table for the question(s) below. Consider two mutually exclusive projects with the following cash flows: -If the discount rate for project A is 16%,then what is the NPV for project A?

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?

Which of the following statements is false?

The Corporation

Introduction to Financial Statement Analysis

Arbitrage and Financial Decision Making

The Time Value of Money

Interest Rates

Valuing Bonds

Valuing Stocks

Fundamentals of Capital Budgeting

Capital Markets and the Pricing of Risk

Optimal Portfolio Choice and the Capital Asset Pricing Model

Estimating the Cost of Capital

Investor Behaviour and Capital Market Efficiency

Financial Options

Option Valuation

Real Options

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 Modelling: a Case Study

The Mechanics of 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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