Question 1

Which of the following decision rules might best be used as a supplement to net present value (NPV)by a firm that favors liquidity?

Accepted Answer

A) profitability index 
B) MIRR 
C) equivalent annual annuity 
D) payback period 
A) profitability index 
B) MIRR 
C) equivalent annual annuity 
D) payback period

Question 2

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 net present value (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 3

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

Accepted Answer

A) Project H 
B) Project I 
C) Project B 
D) Project A 
A) Project H 
B) Project I 
C) Project B 
D) Project A

Question 4

What is the Net Present Value rule?

Accepted Answer

The Net Present Value rule sta

Question 5

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 project 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

Question 6

The payback rule is based on the idea that an opportunity that pays back its initial investment quickly is a worthwhile opportunity.

Accepted Answer

A) True 
 B)False

Question 7

A company buys a color printer that will cost $16,000 to buy, and last 5 years. It is assumed that it will require servicing costing $500 each year. What is the equivalent annual annuity of this deal, given a cost of capital of 8%?

Accepted Answer

A) -$3155 
B) -$3606 
C) -$4057 
D) -$4507 
A) -$3155 
B) -$3606 
C) -$4057 
D) -$4507

Question 8

A mining company plans to mine a beach for rutile. To do so will cost $14 million up front and then produce cash flows of $7 million per year for five years. At the end of the sixth year the company will incur shut-down and clean-up costs of $6 million. If the cost of capital is 13.0%, then what is the MIRR for this project?

Accepted Answer

A) -60.97% 
B) -78.39% 
C) -87.10% 
D) -95.81% 
A) -60.97% 
B) -78.39% 
C) -87.10% 
D) -95.81%

Question 9

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: -$20,000 $6000 $6000 $6000 $6000 $6000
Cost of Capital: 8.2% 
B) Year: 0 1 2 3 4 5 Cash flow: -$15,000 $4000 $4000 $4000 $4000 $4000
Cost of Capital: 7.0% 
C) Year: 0 1 2 3 4 5 Cash flow: -$18,000 $5000 $5000 $5000 $5000 $5000
Cost of Capital: 7.6% 
D) Year: 0 1 2 3 4 5 Cash flow: -$12,000 $4000 $4000 $4000 $4000 $4000
Cost of Capital: 5.0% 
A) Year: 0 1 2 3 4 5 Cash flow: -$20,000 $6000 $6000 $6000 $6000 $6000
Cost of Capital: 8.2% 
B) Year: 0 1 2 3 4 5 Cash flow: -$15,000 $4000 $4000 $4000 $4000 $4000
Cost of Capital: 7.0% 
C) Year: 0 1 2 3 4 5 Cash flow: -$18,000 $5000 $5000 $5000 $5000 $5000
Cost of Capital: 7.6% 
D) Year: 0 1 2 3 4 5 Cash flow: -$12,000 $4000 $4000 $4000 $4000 $4000
Cost of Capital: 5.0%

Question 10

Consider a project with the following cash flows:   If the appropriate discount rate for this project is 13%, then the net present value (NPV)is closest to ________.

Accepted Answer

A) $24,000 
B) -$1846 
C) -$3077 
D) -$2154 
A) $24,000 
B) -$1846 
C) -$3077 
D) -$2154

Question 11

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

Accepted Answer

A) 22.49 
B) 14.99 
C) 0.15 
D) 0.09 
A) 22.49 
B) 14.99 
C) 0.15 
D) 0.09

Question 12

Consider a project with the following cash flows:   Assume the appropriate discount rate for this project is 14%. The profitability index for this project is closest to ________.

Accepted Answer

A) 0.17 
B) 0.25 
C) 0.66 
D) 0.18 
A) 0.17 
B) 0.25 
C) 0.66 
D) 0.18

Question 13

A company has identified the following investments as looking promising. Each requires an initial investment of $1.2 million. Which is the best investment?

Accepted Answer

A) a perpetuity that generates a cash flow at the end of year 1 of $100,000, has a growth rate of 1.25%, and a cost of capital of 11.0% 
B) a perpetuity that generates a cash flow at the end of year 1 of $800,000, has a growth rate of 2.25%, and a cost of capital of 11.8% 
C) an investment that generates a cash flow of $400,000 at the end of each of the next five years, when the cost of capital is 6.1% 
D) an investment that generates a cash flow of $200,000 at the end of each of the next ten years, when the cost of capital is 6.1% 
A) a perpetuity that generates a cash flow at the end of year 1 of $100,000, has a growth rate of 1.25%, and a cost of capital of 11.0% 
B) a perpetuity that generates a cash flow at the end of year 1 of $800,000, has a growth rate of 2.25%, and a cost of capital of 11.8% 
C) an investment that generates a cash flow of $400,000 at the end of each of the next five years, when the cost of capital is 6.1% 
D) an investment that generates a cash flow of $200,000 at the end of each of the next ten years, when the cost of capital is 6.1%

Question 14

When an alternative decision rule disagrees with the net present value (NPV), the NPV should be followed.

Accepted Answer

A) True 
 B)False

Question 15

Under what situation can the net present value (NPV)profile be upward sloping?

Accepted Answer

The net present value (NPV)profile can b

Question 16

How can you calculate the y-intercept of a net present value (NPV)profile without using TVM concepts?

Accepted Answer

The y-intercept of a net prese

Question 17

The owner of a number of gas stations is considering installing coffee machines in his gas stations. It will cost $270,000 to install the coffee machines, and they are expected to boost cash flows by $120,536 per year for their five-year working life. What must the cost of capital be if this investment has a profitability index of 1?

Accepted Answer

A) 1.89% 
B) 3.78% 
C) 7.55% 
D) 9.44% 
A) 1.89% 
B) 3.78% 
C) 7.55% 
D) 9.44%

Question 18

A firm has an opportunity to invest $95,000 today that will yield $109,250 in one year. If interest rates are 4%, what is the net present value (NPV)of this investment?

Accepted Answer

A) $10,048 
B) $11,053 
C) $16,077 
D) $14,250 
A) $10,048 
B) $11,053 
C) $16,077 
D) $14,250

Question 19

Jenkins Security has learned that a rival has offered to supply a parking garage with security for ten years for $45,000 up front and a further $15,000 per year. If Jenkins Security offers to provide security for eight years for an upfront cost of $60,000 and a separate yearly payment, by what maximum amount can this yearly payment be over $20,000, so that Jenkins' offer matches the equivalent annual annuity of their rival's offer? (Assume a cost of capital of 5%.)

Accepted Answer

A) -$89 
B) -$94 
C) -$100 
D) -$111 
A) -$89 
B) -$94 
C) -$100 
D) -$111

Question 20

Net present value (NPV)is usefully supplemented by internal rate of return (IRR), since IRR gives a good indication of the sensitivity of any decision made to changes in the discount rate.

Accepted Answer

A) True 
 B)False

Exam 8: Investment Decision Rules

Which of the following decision rules might best be used as a supplement to net present value (NPV)by a firm that favors liquidity?

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

What is the Net Present Value rule?

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 project should you invest in and in what order?

The payback rule is based on the idea that an opportunity that pays back its initial investment quickly is a worthwhile opportunity.

A company buys a color printer that will cost $16,000 to buy, and last 5 years. It is assumed that it will require servicing costing $500 each year. What is the equivalent annual annuity of this deal, given a cost of capital of 8%?

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?

Consider a project with the following cash flows: If the appropriate discount rate for this project is 13%, then the net present value (NPV)is closest to ________.

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

Consider a project with the following cash flows: Assume the appropriate discount rate for this project is 14%. The profitability index for this project is closest to ________.

A company has identified the following investments as looking promising. Each requires an initial investment of $1.2 million. Which is the best investment?

When an alternative decision rule disagrees with the net present value (NPV), the NPV should be followed.

Under what situation can the net present value (NPV)profile be upward sloping?

How can you calculate the y-intercept of a net present value (NPV)profile without using TVM concepts?

A firm has an opportunity to invest $95,000 today that will yield $109,250 in one year. If interest rates are 4%, what is the net present value (NPV)of this investment?

Net present value (NPV)is usefully supplemented by internal rate of return (IRR), since IRR gives a good indication of the sensitivity of any decision made to changes in the discount rate.

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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