Question 1

When comparing two projects with different lives, why do you compute an annuity with an equivalent present value (PV)to the net present value (NPV)?

Accepted Answer

A) so that you can see which project has the greatest net present value (NPV) 
B) so that the projects can be compared on their cost or value created per year 
C) to reduce the danger that changes in the estimate of the discount rate will lead to choosing the project with a shorter timeframe 
D) to ensure that cash flows from the project with a longer life that occur after the project with the shorter life has ended are considered 
A) so that you can see which project has the greatest net present value (NPV) 
B) so that the projects can be compared on their cost or value created per year 
C) to reduce the danger that changes in the estimate of the discount rate will lead to choosing the project with a shorter timeframe 
D) to ensure that cash flows from the project with a longer life that occur after the project with the shorter life has ended are considered

Question 2

What is the decision criteria using internal rate of return (IRR)rule?

Accepted Answer

The decision criteria using in

Question 3

Consider a project with the following cash flows:   Assume the appropriate discount rate for this project is 13%. The payback period for this project is closest to ________.

Accepted Answer

A) 2.88 years 
B) 2.40 years 
C) 1.92 years 
D) 3.60 years 
A) 2.88 years 
B) 2.40 years 
C) 1.92 years 
D) 3.60 years

Question 4

When comparing mutually exclusive projects which have different scales, you must know the dollar impact of each investment rather than percentage returns.

Accepted Answer

A) True 
 B)False

Question 5

The cash flows for four projects are shown below, along with the cost of capital for these projects. If these projects are mutually exclusive, which one should be taken?

Accepted Answer

A) Year: 0 1 2 3 4 5 Cash flow: -$5000 $2000 $2000 $2000 $2000 $2000
Cost of Capital: 6.0% 
B) Year: 0 1 2 3 4 5 Cash flow: -$6000 $2500 $2500 $2500 $2500 2,500
Cost of Capital: 7.5% 
C) Year: 0 1 2 3 4 5 Cash flow: -$7000 $3000 $3000 $3000 $3000 $3000
Cost of Capital: 7.5% 
D) Year: 0 1 2 3 4 5 Cash flow: -$8000 $3200 $3200 $3200 $3200 $3200
Cost of Capital: 9.2% 
A) Year: 0 1 2 3 4 5 Cash flow: -$5000 $2000 $2000 $2000 $2000 $2000
Cost of Capital: 6.0% 
B) Year: 0 1 2 3 4 5 Cash flow: -$6000 $2500 $2500 $2500 $2500 2,500
Cost of Capital: 7.5% 
C) Year: 0 1 2 3 4 5 Cash flow: -$7000 $3000 $3000 $3000 $3000 $3000
Cost of Capital: 7.5% 
D) Year: 0 1 2 3 4 5 Cash flow: -$8000 $3200 $3200 $3200 $3200 $3200
Cost of Capital: 9.2%

Question 6

What are some potential problems in using internal rate of return (IRR)for mutually exclusive projects?

Accepted Answer

One has to be careful when eva

Question 7

Two mutually exclusive investment opportunities require an initial investment of $7 million. Investment A pays $2.0 million per year in perpetuity, while investment B pays $1.4 million in the first year, with cash flows increasing by 4% per year after that. At what cost of capital would an investor regard both opportunities as being equivalent?

Accepted Answer

A) 3% 
B) 7% 
C) 13% 
D) 15% 
A) 3% 
B) 7% 
C) 13% 
D) 15%

Question 8

An investor is considering the two investments shown above. Her cost of capital is 8%. Which of the following statements about these investments is true?

Accepted Answer

A) The investor should take investment A since it has a greater net present value (NPV). 
B) The investor should take investment A since it has a greater internal rate of return (IRR). 
C) The investor should take investment B since it has a greater net present value (NPV). 
D) The investor should take investment B since it has a greater internal rate of return (IRR). 
A) The investor should take investment A since it has a greater net present value (NPV). 
B) The investor should take investment A since it has a greater internal rate of return (IRR). 
C) The investor should take investment B since it has a greater net present value (NPV). 
D) The investor should take investment B since it has a greater internal rate of return (IRR).

Question 9

Consider the following list of projects:   You are given a budget of only $1,800,000 to invest in projects. Which projects will you select, in what order will you select them, and why?

Accepted Answer

@#IMG-DLM& @#IMG-DLM& Normally we would want to take project

Question 10

The Sisyphean Company is planning on investing in a new project. This will involve the purchase of some new machinery costing $400,000. The Sisyphean Company expects cash inflows from this project as detailed below:   The appropriate discount rate for this project is 15%. The internal rate of return (IRR)for this project is closest to ________.

Accepted Answer

A) 13% 
B) 16% 
C) 21% 
D) 24% 
A) 13% 
B) 16% 
C) 21% 
D) 24%

Question 11

The internal rate of return (IRR)rule will agree with the Net Present Value rule even when positive cash flows precede negative cash flows.

Accepted Answer

A) True 
 B)False

Question 12

The owners of a chain of fast-food restaurants spend $25 million installing donut makers in all their restaurants. This is expected to increase cash flows by $11 million per year for the next five years. If the discount rate is 5.3%, were the owners correct in making the decision to install donut makers?

Accepted Answer

A) No, as it has a net present value (NPV)of -$4.45 million. 
B) No, as it has a net present value (NPV)of -$2.22 million. 
C) Yes, as it has a net present value (NPV)of $13.34 million. 
D) Yes, as it has a net present value (NPV)of $22.23 million. 
A) No, as it has a net present value (NPV)of -$4.45 million. 
B) No, as it has a net present value (NPV)of -$2.22 million. 
C) Yes, as it has a net present value (NPV)of $13.34 million. 
D) Yes, as it has a net present value (NPV)of $22.23 million.

Question 13

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 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 14

Is there a unique way for calculating the MIRR to resolve the multiple IRR situation?

Accepted Answer

No there are several ways of c

Question 15

Which of the following best describes the Net Present Value rule?

Accepted Answer

A) Take any investment opportunity where the net present value (NPV)is not negative; turn down any opportunity when it is negative. 
B) Take any investment opportunity where the net present value (NPV)exceeds the opportunity cost of capital; turn down any opportunity where the cost of capital exceeds the net present value (NPV) 
C) When choosing among any list of investment opportunities where resources are limited, always choose those projects with the highest net present value (NPV). 
D) If the difference between the present cost of an investment and the present value (PV)of its benefits after a fixed number of years is positive the investment should be taken, otherwise it should be rejected. 
A) Take any investment opportunity where the net present value (NPV)is not negative; turn down any opportunity when it is negative. 
B) Take any investment opportunity where the net present value (NPV)exceeds the opportunity cost of capital; turn down any opportunity where the cost of capital exceeds the net present value (NPV) 
C) When choosing among any list of investment opportunities where resources are limited, always choose those projects with the highest net present value (NPV). 
D) If the difference between the present cost of an investment and the present value (PV)of its benefits after a fixed number of years is positive the investment should be taken, otherwise it should be rejected.

Question 16

Internal rate of return (IRR)can reliably be used to choose between mutually exclusive projects.

Accepted Answer

A) True 
 B)False

Question 17

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 15,000 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 u

Question 18

Martin is offered an investment where for $6000 today, he will receive $6180 in one year. He decides to borrow $6000 from the bank to make this investment. What is the maximum interest rate the bank needs to offer on the loan if Martin is at least to break even on this investment?

Accepted Answer

A) 1% 
B) 2% 
C) 3% 
D) 4% 
A) 1% 
B) 2% 
C) 3% 
D) 4%

Question 19

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 internal rate of return (IRR)will always exist for an investment opportunity. 
C) A net present value (NPV)will always exist for an investment opportunity. 
D) In general, there can be as many internal rates of return (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 internal rate of return (IRR)will always exist for an investment opportunity. 
C) A net present value (NPV)will always exist for an investment opportunity. 
D) In general, there can be as many internal rates of return (IRRs)as the number of times the project's cash flows change sign over time.

Question 20

When different investment rules give conflicting answers, then decisions should be based on the Net Present Value rule, as it is the most reliable and accurate decision rule.

Accepted Answer

A) True 
 B)False

Exam 8: Investment Decision Rules

When comparing two projects with different lives, why do you compute an annuity with an equivalent present value (PV)to the net present value (NPV)?

What is the decision criteria using internal rate of return (IRR)rule?

Consider a project with the following cash flows: Assume the appropriate discount rate for this project is 13%. The payback period for this project is closest to ________.

When comparing mutually exclusive projects which have different scales, you must know the dollar impact of each investment rather than percentage returns.

The cash flows for four projects are shown below, along with the cost of capital for these projects. If these projects are mutually exclusive, which one should be taken?

What are some potential problems in using internal rate of return (IRR)for mutually exclusive projects?

An investor is considering the two investments shown above. Her cost of capital is 8%. Which of the following statements about these investments is true?

Consider the following list of projects: You are given a budget of only $1,800,000 to invest in projects. Which projects will you select, in what order will you select them, and why?

The internal rate of return (IRR)rule will agree with the Net Present Value rule even when positive cash flows precede negative cash flows.

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 last?

Is there a unique way for calculating the MIRR to resolve the multiple IRR situation?

Which of the following best describes the Net Present Value rule?

Internal rate of return (IRR)can reliably be used to choose between mutually exclusive projects.

Martin is offered an investment where for $6000 today, he will receive $6180 in one year. He decides to borrow $6000 from the bank to make this investment. What is the maximum interest rate the bank needs to offer on the loan if Martin is at least to break even on this investment?

Which of the following statements is FALSE?

When different investment rules give conflicting answers, then decisions should be based on the Net Present Value rule, as it is the most reliable and accurate decision 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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