Question 1

What is the decision criterion while using the payback rule?

Accepted Answer

The payback rule does not have any decision criteria. Consequently, decision making using payback rule is rather subjective.

Question 2

Which of the following statements is FALSE?

Accepted Answer

A) In general, the difference between the cost of capital and the internal rate of return (IRR)is the maximum amount of estimation error in the cost of capital estimate that can exist without altering the original decision. 
B) The internal rate of return (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 internal rate of return (IRR), the net present value (NPV)will be positive. 
A) In general, the difference between the cost of capital and the internal rate of return (IRR)is the maximum amount of estimation error in the cost of capital estimate that can exist without altering the original decision. 
B) The internal rate of return (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 internal rate of return (IRR), the net present value (NPV)will be positive. D

Question 3

What is the general shape of the net present value (NPV)profile?

Accepted Answer

The net present value (NPV)profile for most projects is a downward sloping graph cutting the x-axis at the project internal rate of return (IRR).

Question 4

The present value (PV)of an investment is ________.

Accepted Answer

A) the amount that an investment would yield if the benefit were realized today 
B) the difference between the cost of the investment and the benefit of the investment in dollars today 
C) the amount you need to invest at the current interest rate to re-create the cash flow from the investment 
D) the amount by which the cash flow of an investment exceeds or falls short of the cash flow generated by the same amount of money invested at market rate 
A) the amount that an investment would yield if the benefit were realized today 
B) the difference between the cost of the investment and the benefit of the investment in dollars today 
C) the amount you need to invest at the current interest rate to re-create the cash flow from the investment 
D) the amount by which the cash flow of an investment exceeds or falls short of the cash flow generated by the same amount of money invested at market rate

Question 5

A company that creates education products is planning to create a suite of books to help customers prepare for high-stakes tests for entry into college and grad school. They have 33 in-house writers to create these books. Due to the expertise needed in creating this content it will not be possible to hire temporary writers within the planned time-frame. Which projects should be undertaken?

Accepted Answer

A) Prep for the College Entry Test and Prep for the Law School Entry Test 
B) Prep for the College Entry Test and Prep for the Grad School Entry Test 
C) Prep for the Dental School Entry Test, Prep for the Grad School Entry Test, and Prep for the Medical School Entry Test 
D) Prep for the Grad School Entry Test, Prep for the Law School Entry Test, and Prep for the Medical School Entry Test 
A) Prep for the College Entry Test and Prep for the Law School Entry Test 
B) Prep for the College Entry Test and Prep for the Grad School Entry Test 
C) Prep for the Dental School Entry Test, Prep for the Grad School Entry Test, and Prep for the Medical School Entry Test 
D) Prep for the Grad School Entry Test, Prep for the Law School Entry Test, and Prep for the Medical School Entry Test

Question 6

Given the cash flows in the table above, the point at which the NPV profile crosses the vertical axis is ________.

Accepted Answer

A) $0 
B) $12,000 
C) 23% 
D) 19% 
A) $0 
B) $12,000 
C) 23% 
D) 19%

Question 7

Consider the following two projects:   The net present value (NPV)for project beta is closest to ________.

Accepted Answer

A) $21.67 
B) $14.45 
C) $18.06 
D) $12.64 
A) $21.67 
B) $14.45 
C) $18.06 
D) $12.64

Question 8

Consider the following two projects:   The profitability index for project A is closest to ________.

Accepted Answer

A) 0.16 
B) 32.28 
C) 0.24 
D) 16.14 
A) 0.16 
B) 32.28 
C) 0.24 
D) 16.14

Question 9

Peter has a business opportunity that requires him to invest $10,000 today, and receive $12,000 in one year. He can either use $10,000 that he already has for this investment or borrow the money from his bank at an interest rate of 10%. However, the $10,000 he has right now is needed for urgent repairs to his home, repairs that will cost at least $15,000 if he delays them for a year. What is the best alternative for Peter out of the following choices?

Accepted Answer

A) No, since the net present value (NPV)of the investment, should he take it, is less than the net present value (NPV)of the home repairs if he delays them for one year. 
B) Yes, since he can borrow the $10,000 from a bank, repair his home, invest $10,000 in the business opportunity, which, since it has a NPV > 0 will mean he will still come out ahead after repaying the loan. 
C) Yes, since the net present value (NPV)of the investment is greater than zero he can invest the $10,000 in the business opportunity, and then next year use this money plus the benefit from this money to make the necessary home repairs. 
D) Yes, since the net present value (NPV)of the investment, should he take it, is greater than the net present value (NPV)of the home repairs if he delays them for one year. 
A) No, since the net present value (NPV)of the investment, should he take it, is less than the net present value (NPV)of the home repairs if he delays them for one year. 
B) Yes, since he can borrow the $10,000 from a bank, repair his home, invest $10,000 in the business opportunity, which, since it has a NPV > 0 will mean he will still come out ahead after repaying the loan. 
C) Yes, since the net present value (NPV)of the investment is greater than zero he can invest the $10,000 in the business opportunity, and then next year use this money plus the benefit from this money to make the necessary home repairs. 
D) Yes, since the net present value (NPV)of the investment, should he take it, is greater than the net present value (NPV)of the home repairs if he delays them for one year.

Question 10

Use the information for the question(s)below.  
-The owner of a hair salon spends $1,000,000 to renovate its premises, estimating that this will increase her cash flow by $220,000 per year. She constructs the above graph, which shows the net present value (NPV)as a function of the discount rate. At what dollar value should the NPV profile cross the vertical axis?

Accepted Answer

A) $780,000 
B) $1,000,000 
C) Cannot be determined because inadequate information is given. 
D) The vertical axis crossing point cannot be calculated since the cash inflows are in perpetuity. 
A) $780,000 
B) $1,000,000 
C) Cannot be determined because inadequate information is given. 
D) The vertical axis crossing point cannot be calculated since the cash inflows are in perpetuity.

Question 11

When different projects put different demands on a limited resource, then net present value (NPV)is always the best way to choose the best project.

Accepted Answer

A) True 
 B)False

Question 12

Should personal preferences for cash today versus cash tomorrow play a role in the net present value (NPV)decision-making process?

Accepted Answer

No; personal preferences for c

Question 13

An investor is considering a project that will generate $900,000 per year for four years. In addition to upfront costs, at the completion of the project at the end of the fifth year there will be shut-down costs of $400,000. If the cost of capital is 4.4%, based on the MIRR, at what upfront costs does this project cease to be worthwhile?

Accepted Answer

A) $2.62 million 
B) $2.91 million 
C) $3.21 million 
D) $3.50 million 
A) $2.62 million 
B) $2.91 million 
C) $3.21 million 
D) $3.50 million

Question 14

Consider the following two projects:   The net present value (NPV)of project A is closest to ________.

Accepted Answer

A) 20.5 
B) 22.5 
C) 25.6 
D) 51.2 
A) 20.5 
B) 22.5 
C) 25.6 
D) 51.2

Question 15

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 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 16

When using equivalent annual annuities to compare the costs of projects with different lives, you should not consider any changes in the expected replacement cost of equipment.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following is true regarding the profitability index?

Accepted Answer

A) It does not use the net present value (NPV)to assess benefits. 
B) It is very simple to compute. 
C) Attention must be taken when using it to make sure that all of the constrained resource is utilized. 
D) It is unreliable when used for choosing between different projects. 
A) It does not use the net present value (NPV)to assess benefits. 
B) It is very simple to compute. 
C) Attention must be taken when using it to make sure that all of the constrained resource is utilized. 
D) It is unreliable when used for choosing between different projects.

Question 18

Use the information for the question(s)below.  
-If WiseGuy Inc. uses IRR rule to choose projects, which of the projects (Project A or Project B) will rank highest?

Accepted Answer

A) Project A 
B) Project B 
C) Project A and Project B have the same ranking. 
D) Cannot calculate a payback period without a discount rate. 
A) Project A 
B) Project B 
C) Project A and Project B have the same ranking. 
D) Cannot calculate a payback period without a discount rate.

Question 19

Which of the following decision rules is best defined as the amount of time it takes to pay back the initial investment?

Accepted Answer

A) internal rate of return (IRR) 
B) profitability index 
C) net present value (NPV) 
D) payback period 
A) internal rate of return (IRR) 
B) profitability index 
C) net present value (NPV) 
D) payback period

Question 20

Which of the following is NOT a limitation of the payback period rule?

Accepted Answer

A) It does not account for the time value of money. 
B) It is difficult to calculate. 
C) It ignores cash flows after payback. 
D) It does not account for changes in the discount rate. 
A) It does not account for the time value of money. 
B) It is difficult to calculate. 
C) It ignores cash flows after payback. 
D) It does not account for changes in the discount rate.

Exam 8: Investment Decision Rules

What is the decision criterion while using the payback rule?

Which of the following statements is FALSE?

What is the general shape of the net present value (NPV)profile?

The present value (PV)of an investment is ________.

Given the cash flows in the table above, the point at which the NPV profile crosses the vertical axis is ________.

Consider the following two projects: The net present value (NPV)for project beta is closest to ________.

Consider the following two projects: The profitability index for project A is closest to ________.

When different projects put different demands on a limited resource, then net present value (NPV)is always the best way to choose the best project.

Should personal preferences for cash today versus cash tomorrow play a role in the net present value (NPV)decision-making process?

Consider the following two projects: The net present value (NPV)of project A is closest to ________.

When using equivalent annual annuities to compare the costs of projects with different lives, you should not consider any changes in the expected replacement cost of equipment.

Which of the following is true regarding the profitability index?

Use the information for the question(s)below. -If WiseGuy Inc. uses IRR rule to choose projects, which of the projects (Project A or Project B) will rank highest?

Which of the following decision rules is best defined as the amount of time it takes to pay back the initial investment?

Which of the following is NOT a limitation of the payback period rule?

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

Time Value of Money: an Introduction

Time Value of Money: Valuing Cash Flow Streams

Interest Rates

Bonds

Stock Valuation

Fundamentals of Capital Budgeting

Stock Valuation: a Second Look

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

The Cost of Capital

Raising Equity Capital

Debt Financing

Capital Structure

Payout Policy

Financial Modeling and Pro Forma Analysis

Working Capital Management

Short-Term Financial Planning

Option Applications and Corporate Finance

Mergers and Acquisitions

International Corporate Finance

Leasing

Insurance and Risk Management

Corporate Governance

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