Question 1

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  True

Question 2

You have an investment opportunity that will cost $50,000 today and will return $54,000 in one year.If interest rates are 4%,what is the NPV of this investment?

Accepted Answer

A) $1,923 
B) $4,000 
C) $2,000 
D) $50,000 
E) $0 
A) $1,923 
B) $4,000 
C) $2,000 
D) $50,000 
E) $0 A

Question 3

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  True

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

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 6

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 
E) $90,000 
A) $111,000 
B) $69,000 
C) $80,000 
D) $58.000 
E) $90,000

Question 7

Net present value (NPV)is the difference between the present value (PV)of the benefits and the present value (PV)of the costs of a project or investment.

Accepted Answer

A) True 
 B)False

Question 8

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 net present value (NPV)for this project is closest to:

Accepted Answer

A) $176,270 
B) $123,420 
C) $450,000 
D) $179,590 
E) $497,062 
A) $176,270 
B) $123,420 
C) $450,000 
D) $179,590 
E) $497,062

Question 9

What is the Net Present Value rule?

Accepted Answer

The Net Present Value rule sta

Question 10

Use the table for the question(s)below.
Consider a project with the following cash flows:
  
-What is the IRR for this project?

Accepted Answer

A) 4.59% 
B) 8.63% 
C) 15.91% 
D) 21.86% 
E) 44.63% 
A) 4.59% 
B) 8.63% 
C) 15.91% 
D) 21.86% 
E) 44.63%

Question 11

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 time frame 
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 
E) to avoid complications arising from alternating cash inflows and outflows 
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 time frame 
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 
E) to avoid complications arising from alternating cash inflows and outflows

Question 12

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 13

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

Question 14

Use the table for the question(s)below.
Consider the following two projects:
  
-Assume that projects A and B are mutually exclusive.The correct investment decision and the best rationale for that decision is to:

Accepted Answer

A) invest in project A,since NPVB A. 
B) invest in project B,since IRRB > IRRA. 
C) invest in project B,since NPVB > NPVA. 
D) invest in project A,since NPVA > 0. 
E) invest in project A,since IRRA > IRRB. 
A) invest in project A,since NPVB A. 
B) invest in project B,since IRRB > IRRA. 
C) invest in project B,since NPVB > NPVA. 
D) invest in project A,since NPVA > 0. 
E) invest in project A,since IRRA > IRRB.

Question 15

A restaurant is contemplating replacing its service staff with an electronic ordering process.Installing computers at each table will cost $150,000,but is expected to generate a cost savings of $40,000 per year for the next 10 years,when the computers will need to be replaced.If the restaurant has a cost of capital of 10%,what is the NPV of this investment?

Accepted Answer

A) -$90,000 
B) $250,000 
C) $95,783 
D) -$150,000 
E) $213,636 
A) -$90,000 
B) $250,000 
C) $95,783 
D) -$150,000 
E) $213,636

Question 16

Two mutually exclusive investment opportunities require an initial investment of $5 million.Investment A then generates $1.5 million per year in perpetuity,while investment B pays $1 million in the first year,with cash flows increasing by 3% per year after that.At what cost of capital would an investor regard both opportunities as being equivalent?

Accepted Answer

A) 3% 
B) 6% 
C) 9% 
D) 10% 
E) 12% 
A) 3% 
B) 6% 
C) 9% 
D) 10% 
E) 12%

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 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 18

According to Graham and Harvey's 2001 survey (Figure 7.2 in the text),the most popular decision rules for capital budgeting used by CFOs are:

Accepted Answer

A) NPV,Profitability index,payback period. 
B) Profitability index,IRR,Payback period. 
C) IRR,NPV,Payback period. 
D) Profitability index,NPV,IRR. 
E) NPV,IRR,discounted payback period. 
A) NPV,Profitability index,payback period. 
B) Profitability index,IRR,Payback period. 
C) IRR,NPV,Payback period. 
D) Profitability index,NPV,IRR. 
E) NPV,IRR,discounted payback period.

Question 19

Martin is offered an investment where for $5000 today,he will receive $5250 in one year.He decides to borrow $5000 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) 3.2% 
B) 4.8% 
C) 5.0% 
D) 5.6% 
E) 2.5% 
A) 3.2% 
B) 4.8% 
C) 5.0% 
D) 5.6% 
E) 2.5%

Question 20

A brewery is considering adding a new line of craft beers to its product mix.The new beer will require additional brewing and bottling capacity at a cost of $15 million,but is expected to generate new sales of $5 million per year for the next 5 years.If the brewery has a cost of capital of 6%,what is the NPV of this investment?

Accepted Answer

A) $6.1 million 
B) $10 million 
C) -$15 million 
D) $8.6 million 
E) $3.7 million 
A) $6.1 million 
B) $10 million 
C) -$15 million 
D) $8.6 million 
E) $3.7 million

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

You have an investment opportunity that will cost $50,000 today and will return $54,000 in one year.If interest rates are 4%,what is the 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.

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

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

Net present value (NPV)is the difference between the present value (PV)of the benefits and the present value (PV)of the costs of a project or investment.

What is the Net Present Value rule?

Use the table for the question(s)below. Consider a project with the following cash flows: -What is the IRR for this project?

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)?

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.

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?

Use the table for the question(s)below. Consider the following two projects: -Assume that projects A and B are mutually exclusive.The correct investment decision and the best rationale for that decision is to:

According to Graham and Harvey's 2001 survey (Figure 7.2 in the text),the most popular decision rules for capital budgeting used by CFOs are:

Martin is offered an investment where for $5000 today,he will receive $5250 in one year.He decides to borrow $5000 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?

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

The Valuation Principle: the Foundation of Financial Decision Making

The Time Value of Money

Interest Rates

Bonds

Valuing Stocks

Fundamentals of Capital Budgeting

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

Determining the Cost of Capital

Risk and the Pricing of Options

Raising Equity Capital

Debt Financing

Capital Structure

Payout Policy

Financial Modelling and Pro Forma Analysis

Working Capital Management

Short-Term Financial Planning

Risk Management

International Corporate Finance

Leasing

Mergers and Acquisitions

Corporate Governance

Filters

Exam 8: Investment Decision Rules

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

You have an investment opportunity that will cost $50,000 today and will return $54,000 in one year.If interest rates are 4%,what is the 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.

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

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

Net present value (NPV)is the difference between the present value (PV)of the benefits and the present value (PV)of the costs of a project or investment.

What is the Net Present Value rule?

Use the table for the question(s)below. Consider a project with the following cash flows: -What is the IRR for this project?

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)?

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.

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?

Use the table for the question(s)below. Consider the following two projects: -Assume that projects A and B are mutually exclusive.The correct investment decision and the best rationale for that decision is to:

According to Graham and Harvey's 2001 survey (Figure 7.2 in the text),the most popular decision rules for capital budgeting used by CFOs are:

Martin is offered an investment where for $5000 today,he will receive $5250 in one year.He decides to borrow $5000 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?

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

The Valuation Principle: the Foundation of Financial Decision Making

The Time Value of Money

Interest Rates

Bonds

Valuing Stocks

Fundamentals of Capital Budgeting

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

Determining the Cost of Capital

Risk and the Pricing of Options

Raising Equity Capital

Debt Financing

Capital Structure

Payout Policy

Financial Modelling and Pro Forma Analysis

Working Capital Management

Short-Term Financial Planning

Risk Management

International Corporate Finance

Leasing

Mergers and Acquisitions

Corporate Governance

Filters