Question 1

Use the table for the question(s) below.
Consider the following two projects:
  
-The 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 2

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

Accepted Answer

A)  the NPV. 
B)  the Profitability Index. 
C)  the IRR. 
D)  the Incremental IRR. 
A)  the NPV. 
B)  the Profitability Index. 
C)  the IRR. 
D)  the Incremental IRR.

Question 3

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 4

The investment rule with the Internal Rate of Return states:

Accepted Answer

A)  Take any investment opportunity whose IRR is less than the opportunity cost of capital. Turn down any opportunity whose IRR exceeds the opportunity cost of capital. 
B)  Forego any investment opportunity whose IRR exceeds the opportunity cost of capital. Take any opportunity whose IRR is less than the opportunity cost of capital. 
C)  Take any investment opportunity whose IRR exceeds the opportunity cost of capital. Turn down any opportunity whose IRR is less than the opportunity cost of capital. 
D)  None of the above 
A)  Take any investment opportunity whose IRR is less than the opportunity cost of capital. Turn down any opportunity whose IRR exceeds the opportunity cost of capital. 
B)  Forego any investment opportunity whose IRR exceeds the opportunity cost of capital. Take any opportunity whose IRR is less than the opportunity cost of capital. 
C)  Take any investment opportunity whose IRR exceeds the opportunity cost of capital. Turn down any opportunity whose IRR is less than the opportunity cost of capital. 
D)  None of the above

Question 5

Use the table for the question(s) below.
Consider the following two projects:
  
-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)  You 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)  You should invest in project Alpha since NPVAlpha Beta > 0.

Question 6

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 7

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

Accepted Answer

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

Question 8

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)  $6,000 
B)  -$867 
C)  $1,420 
D)  $867 
A)  $6,000 
B)  -$867 
C)  $1,420 
D)  $867

Question 9

When an investment decision has to be made for mutually exclusive projects and source constraints

Accepted Answer

A)  the NPV rule prevails. 
B)  the IRR rule prevails. 
C)  the Payback rule prevails. 
D)  the ROA rule prevails. 
A)  the NPV rule prevails. 
B)  the IRR rule prevails. 
C)  the Payback rule prevails. 
D)  the ROA rule prevails.

Question 10

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 profitability index for this project is closest to:

Accepted Answer

A)  0.14 
B)  0.22 
C)  0.60 
D)  0.15 
A)  0.14 
B)  0.22 
C)  0.60 
D)  0.15

Question 11

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 12

When the IRR rule is used for mutually exclusive projects,we should mainly rely on

Accepted Answer

A)  the rule of the Modified Internal Rate of Return (MIRR). 
B)  the rule of the Incremental Internal Rate of Return (IIRR). 
C)  the rule of the Net Present Value (NPV). 
D)  the rule of the normal Internal Rate of Return (IRR). 
A)  the rule of the Modified Internal Rate of Return (MIRR). 
B)  the rule of the Incremental Internal Rate of Return (IIRR). 
C)  the rule of the Net Present Value (NPV). 
D)  the rule of the normal Internal Rate of Return (IRR).

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.
-Larry should:

Accepted Answer

A)  reject the offer because the NPV  0 
C)  reject the offer because the IRR  0% 
A)  reject the offer because the NPV  0 
C)  reject the offer because the IRR  0%

Question 14

Which of the following statements is correct?

Accepted Answer

A)  From 1977 to 2001, the percentage of firms that used the NPV rule for making investment decisions increased from less than 50% to 74.9%. 
B)  From 1977 to 2001, the percentage of firms that used the NPV rule for making investment decisions increased from 9.8% to less than 50%. 
C)  From 1977 to 2001, the percentage of firms that used the NPV rule for making investment decisions increased from 9.8% to 74.9%. 
D)  From 1977 to 2001, the percentage of firms that used the NPV rule for making investment decisions decreased from 75% to 74.9%. 
A)  From 1977 to 2001, the percentage of firms that used the NPV rule for making investment decisions increased from less than 50% to 74.9%. 
B)  From 1977 to 2001, the percentage of firms that used the NPV rule for making investment decisions increased from 9.8% to less than 50%. 
C)  From 1977 to 2001, the percentage of firms that used the NPV rule for making investment decisions increased from 9.8% to 74.9%. 
D)  From 1977 to 2001, the percentage of firms that used the NPV rule for making investment decisions decreased from 75% to 74.9%.

Question 15

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

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 $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 17

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 18

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 19

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 have 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 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 20

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

Exam 8: Investment Decision Rules

Use the table for the question(s) below. Consider the following two projects: -The incremental IRR of Project B over Project A is closest to:

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

Which of the following statements is false?

The investment rule with the Internal Rate of Return states:

Use the table for the question(s) below. Consider the following two projects: -Which of the following statements is correct?

Which of the following statements is false?

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

When an investment decision has to be made for mutually exclusive projects and source constraints

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 profitability index for this project is closest to:

When the IRR rule is used for mutually exclusive projects,we should mainly rely on

Which of the following statements is correct?

Which of the following statements is correct?

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?

Which of the following statements is false?

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

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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