Question 1

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 2

Which of the following statements is correct?

Accepted Answer

A)  The IRR rule must be reversed for projects with conventional and unconventional cash flows. 
B)  The IRR rule must be the same for projects with conventional and unconventional cash flows. 
C)  The IRR rule must be useless for projects with conventional and unconventional cash flows. 
D)  There is no difference between when the IRR rule is used with conventional and unconventional cash flows. 
A)  The IRR rule must be reversed for projects with conventional and unconventional cash flows. 
B)  The IRR rule must be the same for projects with conventional and unconventional cash flows. 
C)  The IRR rule must be useless for projects with conventional and unconventional cash flows. 
D)  There is no difference between when the IRR rule is used with conventional and unconventional cash flows.

Question 3

Which of the following statements is false?

Accepted Answer

A)  It is possible that an IRR does not exist for an investment opportunity. 
B)  If the payback period is less than a pre-specified length of time you accept the project. 
C)  The internal rate of return (IRR) investment rule is based upon the notion that if the return on other alternatives is greater than the return on the investment opportunity you should undertake the investment opportunity. 
D)  It is possible that there is no discount rate that will set the NPV equal to zero. 
A)  It is possible that an IRR does not exist for an investment opportunity. 
B)  If the payback period is less than a pre-specified length of time you accept the project. 
C)  The internal rate of return (IRR) investment rule is based upon the notion that if the return on other alternatives is greater than the return on the investment opportunity you should undertake the investment opportunity. 
D)  It is possible that there is no discount rate that will set the NPV equal to zero.

Question 4

Which of the following statements is false?

Accepted Answer

A)  The IRR investment rule states that you should turn down any investment opportunity where the IRR is less than the opportunity cost of capital. 
B)  The IRR investment rule states that you should take any investment opportunity where the IRR exceeds the opportunity cost of capital. 
C)  Since the IRR rule is based upon the rate at which the NPV equals zero, like the NPV decision rule, the IRR decision rule will always identify the correct investment decisions. 
D)  There are situations in which multiple IRRs exist. 
A)  The IRR investment rule states that you should turn down any investment opportunity where the IRR is less than the opportunity cost of capital. 
B)  The IRR investment rule states that you should take any investment opportunity where the IRR exceeds the opportunity cost of capital. 
C)  Since the IRR rule is based upon the rate at which the NPV equals zero, like the NPV decision rule, the IRR decision rule will always identify the correct investment decisions. 
D)  There are situations in which multiple IRRs exist.

Question 5

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 6

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 7

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 years 
D)  2.2 years 
A)  2.1 years 
B)  3.0 years 
C)  2 years 
D)  2.2 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 table for the question(s) below.
Consider the following two projects:
  
-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 10

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 11

Use the table for the question(s) below.
Consider the following two projects:
  
-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 12

You are opening up a brand new retail strip mall.You presently have more potential retail outlets wanting to locate in your mall than you have space available.What is the most appropriate tool to use if you are trying to determine the optimal allocation of your retail space?

Accepted Answer

A)  IRR 
B)  Payback period 
C)  NPV 
D)  Profitability index 
A)  IRR 
B)  Payback period 
C)  NPV 
D)  Profitability index

Question 13

Which of the following statements is correct?

Accepted Answer

A)  Investment decisions should be treated separately from the related capital budgeting decisions. 
B)  Investment decisions should not be treated separately from the related capital budgeting decisions. 
C)  Investment decisions should be treated the same as the related capital budgeting decisions. 
D)  Investment decisions should be treated differently than the related capital budgeting decisions. 
A)  Investment decisions should be treated separately from the related capital budgeting decisions. 
B)  Investment decisions should not be treated separately from the related capital budgeting decisions. 
C)  Investment decisions should be treated the same as the related capital budgeting decisions. 
D)  Investment decisions should be treated differently than the related capital budgeting decisions.

Question 14

If firm's objective is to maximize wealth,

Accepted Answer

A)  the rule of the Profitability Index will always give you the correct answer. 
B)  the rule of the Net Present Value will always give you the correct answer. 
C)  the rule of the Payback Period will always give you the correct answer. 
D)  the rule of the Internal Rate of Return will always give you the correct answer. 
A)  the rule of the Profitability Index will always give you the correct answer. 
B)  the rule of the Net Present Value will always give you the correct answer. 
C)  the rule of the Payback Period will always give you the correct answer. 
D)  the rule of the Internal Rate of Return will always give you the correct answer.

Question 15

To apply the payback rule,you calculate the amount of time it takes to pay back ________,called the payback period.

Accepted Answer

A)  the all cash flows 
B)  all cash inflows 
C)  the incremental cash flows 
D)  the initial investment 
A)  the all cash flows 
B)  all cash inflows 
C)  the incremental cash flows 
D)  the initial investment

Question 16

Use the table for the question(s) below.
Consider the following list of projects:
  
-Assuming that your capital is constrained,which project should you invest in first?

Accepted Answer

A)  Project C 
B)  Project G 
C)  Project B 
D)  Project F 
A)  Project C 
B)  Project G 
C)  Project B 
D)  Project F

Question 17

Which of the following statements is false?

Accepted Answer

A)  If there is a fixed supply of resources available, you should rank projects by the profitability index, selecting the project with the lowest profitability index first and working your way down the list until the resource is consumed. 
B)  Practitioners often use the profitability index to identify the optimal combination of projects when there is a fixed supply of resources. 
C)  If there is a fixed supply of resources available, so that you cannot undertake all possible opportunities, then simply picking the highest NPV opportunity might not lead to the best decision. 
D)  The profitability index is calculated as the NPV divided by the resources consumed by the project. 
A)  If there is a fixed supply of resources available, you should rank projects by the profitability index, selecting the project with the lowest profitability index first and working your way down the list until the resource is consumed. 
B)  Practitioners often use the profitability index to identify the optimal combination of projects when there is a fixed supply of resources. 
C)  If there is a fixed supply of resources available, so that you cannot undertake all possible opportunities, then simply picking the highest NPV opportunity might not lead to the best decision. 
D)  The profitability index is calculated as the NPV divided by the resources consumed by the project.

Question 18

Which of the following statements is correct?

Accepted Answer

A)  According to a 1995 study, less than 80% of Canadian firms used the rule of NPV, but about 50% of firms used some form of discounted cash flow analysis. 
B)  According to a 1995 study, less than 50% of Canadian firms used the rule of NPV, but about 79% of firms used some form of discounted cash flow analysis. 
C)  According to a 1995 study, every Canadian firm used the rule of NPV, and about 80% of firms used some form of discounted cash flow analysis. 
D)  According to a 1995 study, no Canadian firms used the rule of NPV, but about 79% of firms used some form of discounted cash flow analysis. 
A)  According to a 1995 study, less than 80% of Canadian firms used the rule of NPV, but about 50% of firms used some form of discounted cash flow analysis. 
B)  According to a 1995 study, less than 50% of Canadian firms used the rule of NPV, but about 79% of firms used some form of discounted cash flow analysis. 
C)  According to a 1995 study, every Canadian firm used the rule of NPV, and about 80% of firms used some form of discounted cash flow analysis. 
D)  According to a 1995 study, no Canadian firms used the rule of NPV, but about 79% of firms used some form of discounted cash flow analysis.

Question 19

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 20

Use the table for the question(s) below.
Consider the following list of projects:
  
-Assuming that your capital is constrained,so that you only have $600,000 available to invest in projects,which four 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

Exam 8: Investment Decision Rules

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

Which of the following statements is correct?

Which of the following statements is false?

Which of the following statements is false?

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?

Which of the following statements is false?

Which of the following statements is false?

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

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

You are opening up a brand new retail strip mall.You presently have more potential retail outlets wanting to locate in your mall than you have space available.What is the most appropriate tool to use if you are trying to determine the optimal allocation of your retail space?

Which of the following statements is correct?

If firm's objective is to maximize wealth,

To apply the payback rule,you calculate the amount of time it takes to pay back ________,called the payback period.

Use the table for the question(s) below. Consider the following list of projects: -Assuming that your capital is constrained,which project should you invest in first?

Which of the following statements is false?

Which of the following statements is correct?

Use the table for the question(s) below. Consider the following list of projects: -Assuming that your capital is constrained,so that you only have $600,000 available to invest in projects,which four projects should you invest in and in what order?

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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