Question 1

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

Accepted Answer

A) It does not consider the time value of money. 
B) Lacks a decision criterion that is economically based. 
C) It is difficult to calculate. 
D) It does not consider cash flows occurring after the payback period. 
A) It does not consider the time value of money. 
B) Lacks a decision criterion that is economically based. 
C) It is difficult to calculate. 
D) It does not consider cash flows occurring after the payback period.

Question 2

A janitorial services firm is considering two brands of industrial vacuum cleaners to equip their staff. Option A will cost $1,500, require servicing of $200 per year, and it will last five years. Option B will cost $1,000, require servicing of $100 per year, and it will last three years. If the cost of capital is 8%, which is the better option, given that the firm has an ongoing requirement for vacuum cleaners?

Accepted Answer

A) Option A, since it has a lower equivalent annual annuity. 
B) Option B, since it has a lower equivalent annual annuity. 
C) Option A, since it has a greater equivalent annual annuity. 
D) Option B, since it has a greater equivalent annual annuity. 
A) Option A, since it has a lower equivalent annual annuity. 
B) Option B, since it has a lower equivalent annual annuity. 
C) Option A, since it has a greater equivalent annual annuity. 
D) Option B, since it has a greater equivalent annual annuity.

Question 3

A firm is considering several mutually exclusive investment opportunities. The best way to choose between them is which of the following?

Accepted Answer

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

Question 4

A lottery winner can take $6 million now or be paid $600,000 at the end of each of the next 16 years. The winner calculates the internal rate of return (IRR)of taking the money at the end of each year and, estimating that the discount rate across this period will be 4%, decides to take the money at the end of each year. Was her decision correct?

Accepted Answer

A) Yes, because it agrees with the Net Present Value rule. 
B) Yes, because it agrees with the payback rule. 
C) Yes, because it agrees with both the Net Present Value rule and the payback rule. 
D) Yes, because it disagrees with the Net Present Value rule. 
A) Yes, because it agrees with the Net Present Value rule. 
B) Yes, because it agrees with the payback rule. 
C) Yes, because it agrees with both the Net Present Value rule and the payback rule. 
D) Yes, because it disagrees with the Net Present Value rule.

Question 5

The cash flows for four investments have been identified as follows:   Based on the above information, and with an interest rate of 5%, which is the best investment?

Accepted Answer

A) Investment A 
B) Investment B 
C) Investment C 
D) Investment D 
A) Investment A 
B) Investment B 
C) Investment C 
D) Investment D

Question 6

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 discount rate does her decision to renovate become untenable?

Accepted Answer

A) 3.0% 
B) 3.3% 
C) 4.0% 
D) 4.8% 
A) 3.0% 
B) 3.3% 
C) 4.0% 
D) 4.8%

Question 7

If WiseGuy Inc is choosing one of the above mutually exclusive projects (Project A or Project B), given a discount rate of 7%, which should the company choose?

Accepted Answer

A) Project A 
B) Project B 
C) Neither project - both have negative NPV. 
D) Both projects - both have positive NPV. 
A) Project A 
B) Project B 
C) Neither project - both have negative NPV. 
D) Both projects - both have positive NPV.

Question 8

What is the decision criterion using the Net Present Value rule?

Accepted Answer

The decision criteria using th

Question 9

Tanner is choosing between two investment options. He can invest $500 now and get (guaranteed)$550 in one year, or invest $500 now and get (guaranteed)$531.40 back later today. The risk-free rate is 3.5%. Which investment should Tanner prefer?

Accepted Answer

A) $531.40 later today, since $1 today is worth more than $1 in one year. 
B) $550 in one year, since it is $50 more than he invested rather than $31.40 more than he invested. 
C) Neither - both investments have a negative NPV. 
D) Tanner should be indifferent between the two investments, since both are equivalent to the same amount of cash today. 
A) $531.40 later today, since $1 today is worth more than $1 in one year. 
B) $550 in one year, since it is $50 more than he invested rather than $31.40 more than he invested. 
C) Neither - both investments have a negative NPV. 
D) Tanner should be indifferent between the two investments, since both are equivalent to the same amount of cash today.

Question 10

Which of the following situations can lead to IRR giving a different decision than NPV?

Accepted Answer

A) delayed investment 
B) multiple IRRs 
C) differences in project scale 
D) All of the above can lead to IRR giving a different decision than NPV. 
A) delayed investment 
B) multiple IRRs 
C) differences in project scale 
D) All of the above can lead to IRR giving a different decision than NPV.

Question 11

What is a safe method to use when confronted with mutually exclusive projects?

Accepted Answer

Generally the net present valu

Question 12

An investor has a budget of $35 million. He can invest in the projects shown above. If the cost of capital is 8%, what investment or investments should he make?

Accepted Answer

A) Project A 
B) Project B 
C) Project B and Project C 
D) Project C and Project D 
A) Project A 
B) Project B 
C) Project B and Project C 
D) Project C and Project D

Question 13

An investor is considering the two investments shown above. 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) Neither investment should be taken since they both have a negative net present value (NPV). 
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) Neither investment should be taken since they both have a negative net present value (NPV).

Question 14

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 net present value (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 net present value (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 15

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 net present value (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 16

A consultancy calculates that it can supply crude oil assaying services to a small oil producer for $115,000 per year for five years. There are some upfront costs the consultancy will require the oil producer to absorb. What is the maximum that these upfront costs could be, if the equivalent annual annuity to the oil company is to be under $160,000, given that the cost of capital is 9%?

Accepted Answer

A) $45,000 
B) $175,034 
C) $201,289 
D) $160,000 
A) $45,000 
B) $175,034 
C) $201,289 
D) $160,000

Question 17

A security firm is offered $80,000 in one year for providing CCTV coverage of a property. The cost of providing this coverage to the security firm is $74,000, payable now, and the interest rate is 8.5%. Should the firm take the contract?

Accepted Answer

A) Yes, since net present value (NPV)is positive. 
B) It does not matter whether the contract is taken or not, since NPV = 0. 
C) Yes, since net present value (NPV)is negative. 
D) No, since net present value (NPV)is negative. 
A) Yes, since net present value (NPV)is positive. 
B) It does not matter whether the contract is taken or not, since NPV = 0. 
C) Yes, since net present value (NPV)is negative. 
D) No, since net present value (NPV)is negative.

Question 18

The timeline of an investment is shown above. If the cost of capital is 8%, what is the profitability index of this investment?

Accepted Answer

A) 0.110 
B) 0.121 
C) 0.275 
D) 0.441 
A) 0.110 
B) 0.121 
C) 0.275 
D) 0.441

Question 19

An auto-parts company is deciding whether to sponsor a racing team for a cost of $1 million. The sponsorship would last for three years and is expected to increase cash flows by $570,000 per year. If the discount rate is 6.9%, what will be the change in the value of the company if it chooses to go ahead with the sponsorship?

Accepted Answer

A) $498,597 
B) $747,896 
C) $797,756 
D) $847,615 
A) $498,597 
B) $747,896 
C) $797,756 
D) $847,615

Question 20

Most corporations measure the value of a project in terms of which of the following?

Accepted Answer

A) discount value 
B) discount factor 
C) future value (FV) 
D) present value (PV) 
A) discount value 
B) discount factor 
C) future value (FV) 
D) present value (PV)

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

A firm is considering several mutually exclusive investment opportunities. The best way to choose between them is which of the following?

The cash flows for four investments have been identified as follows: Based on the above information, and with an interest rate of 5%, which is the best investment?

If WiseGuy Inc is choosing one of the above mutually exclusive projects (Project A or Project B), given a discount rate of 7%, which should the company choose?

What is the decision criterion using the Net Present Value rule?

Tanner is choosing between two investment options. He can invest $500 now and get (guaranteed)$550 in one year, or invest $500 now and get (guaranteed)$531.40 back later today. The risk-free rate is 3.5%. Which investment should Tanner prefer?

Which of the following situations can lead to IRR giving a different decision than NPV?

What is a safe method to use when confronted with mutually exclusive projects?

An investor has a budget of $35 million. He can invest in the projects shown above. If the cost of capital is 8%, what investment or investments should he make?

An investor is considering the two investments shown above. Which of the following statements about these investments is true?

Which of the following statements is FALSE?

A security firm is offered $80,000 in one year for providing CCTV coverage of a property. The cost of providing this coverage to the security firm is $74,000, payable now, and the interest rate is 8.5%. Should the firm take the contract?

The timeline of an investment is shown above. If the cost of capital is 8%, what is the profitability index of this investment?

Most corporations measure the value of a project in terms of which of the following?

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

Filters

Exam 8: Investment Decision Rules

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

A firm is considering several mutually exclusive investment opportunities. The best way to choose between them is which of the following?

The cash flows for four investments have been identified as follows: Based on the above information, and with an interest rate of 5%, which is the best investment?

If WiseGuy Inc is choosing one of the above mutually exclusive projects (Project A or Project B), given a discount rate of 7%, which should the company choose?

What is the decision criterion using the Net Present Value rule?

Tanner is choosing between two investment options. He can invest $500 now and get (guaranteed)$550 in one year, or invest $500 now and get (guaranteed)$531.40 back later today. The risk-free rate is 3.5%. Which investment should Tanner prefer?

Which of the following situations can lead to IRR giving a different decision than NPV?

What is a safe method to use when confronted with mutually exclusive projects?

An investor has a budget of $35 million. He can invest in the projects shown above. If the cost of capital is 8%, what investment or investments should he make?

An investor is considering the two investments shown above. Which of the following statements about these investments is true?

Which of the following statements is FALSE?

A security firm is offered $80,000 in one year for providing CCTV coverage of a property. The cost of providing this coverage to the security firm is $74,000, payable now, and the interest rate is 8.5%. Should the firm take the contract?

The timeline of an investment is shown above. If the cost of capital is 8%, what is the profitability index of this investment?

Most corporations measure the value of a project in terms of which of the following?

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

Filters