Question 1

What can you comment about the shape of the net present value (NPV)profile of a multiple IRR project?

Accepted Answer

A multiple IRR project will have a net p

Question 2

Which of the following is a disadvantage of the Net Present Value rule?

Accepted Answer

A) Can be misleading if inflows come before outflows 
B) Not necessarily consistent with maximizing shareholder wealth 
C) Ignores cash flows after the cutoff point 
D) Relies on accurate estimate of the discount rate 
E) Often an incorrect decision will result 
A) Can be misleading if inflows come before outflows 
B) Not necessarily consistent with maximizing shareholder wealth 
C) Ignores cash flows after the cutoff point 
D) Relies on accurate estimate of the discount rate 
E) Often an incorrect decision will result

Question 3

Use the table for the question(s)below.
Consider a project with the following cash flows:
  
-Given the cash flows in the table above,the point at which the NPV profile crosses the vertical axis is:

Accepted Answer

A) $6000 
B) -$867 
C) 22.0% 
D) 15.0% 
E) $0 
A) $6000 
B) -$867 
C) 22.0% 
D) 15.0% 
E) $0

Question 4

Use the table for the question(s)below.
Consider the following two projects:
  
-The payback period for project B is closest to:

Accepted Answer

A) 2.5 years 
B) 2.0 years 
C) 2.2 years 
D) 2.4 years 
E) 3.0 years 
A) 2.5 years 
B) 2.0 years 
C) 2.2 years 
D) 2.4 years 
E) 3.0 years

Question 5

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

Accepted Answer

A) Project A 
B) Project B 
C) Project C 
D) Project D 
E) Project E 
A) Project A 
B) Project B 
C) Project C 
D) Project D 
E) Project E

Question 6

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 
E) CBGH 
A) CBFH 
B) CBGF 
C) BCFG 
D) CBFG 
E) CBGH

Question 7

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 
E) Project E 
A) Project A 
B) Project I 
C) Project D 
D) Project C 
E) Project E

Question 8

Use the information for the question(s)below.
An independent film maker is considering producing a new movie.The initial cost for making this movie will be $20 million today.Once the movie is completed,in one year,the movie will be sold to a major studio for $25 million.Rather than paying for the $20 million investment entirely using its own cash,the film maker is considering raising additional funds by issuing a security that will pay investors $11 million in one year.Suppose the risk-free rate of interest is 10%.
-Refer to the information above.Assuming that the film maker issues the new security,the net present value (NPV)for this project is closest to what amount? Should the film maker make the investment?

Accepted Answer

A) $1.7 million; Yes 
B) $1.7 million; No 
C) $2.7 million; Yes 
D) $2.7 million; No 
E) $5.0 million; Yes 
A) $1.7 million; Yes 
B) $1.7 million; No 
C) $2.7 million; Yes 
D) $2.7 million; No 
E) $5.0 million; Yes

Question 9

A farmer sows a certain crop.It costs $250,000 to buy the seed,prepare the ground,and sow the crop.In one year's time it will cost $110,000 to harvest the crop.If the crop will be worth $380,000,and the interest rate is 8%,what is the net present value (NPV)of this investment?

Accepted Answer

A) -$21,000 
B) -$220 
C) $0 
D) $23,100 
E) $20,000 
A) -$21,000 
B) -$220 
C) $0 
D) $23,100 
E) $20,000

Question 10

The timeline of an investment is shown above.If the cost of capital is 5%,what is the profitability index of this investment?

Accepted Answer

A) 0.098 
B) 0.105 
C) 0.256 
D) 0.368 
E) 0.412 
A) 0.098 
B) 0.105 
C) 0.256 
D) 0.368 
E) 0.412

Question 11

A car dealership offers a car for $14,000,with up to one year to pay for the car.If the interest rate is 7%,what is the net present value (NPV)of this offer to buyers who elect not to pay for the car for one year?

Accepted Answer

A) $916 
B) $1896 
C) $13,084 
D) $14,000 
E) $980 
A) $916 
B) $1896 
C) $13,084 
D) $14,000 
E) $980

Question 12

Use the table for the question(s)below.
Consider the following two projects:
  
-The net present value (NPV)for project beta is closest to:

Accepted Answer

A) $24.01 
B) $16.92 
C) $20.96 
D) $14.41 
E) $12.06 
A) $24.01 
B) $16.92 
C) $20.96 
D) $14.41 
E) $12.06

Question 13

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. 
E) It ignores cash flows after the cutoff 
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. 
E) It ignores cash flows after the cutoff

Question 14

A firm decides to purchase a 3D printer at a cost of $25,000,with an estimated useful life of 10 years.The printer will require servicing at a cost of $1,500 per year.What is the equivalent annual annuity of this deal,given a cost of capital of 8%?

Accepted Answer

A) $5,226 
B) $4,000 
C) $3,704 
D) $1,500 
E) $35,065 
A) $5,226 
B) $4,000 
C) $3,704 
D) $1,500 
E) $35,065

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

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

Question 17

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 18

Use the table for the question(s)below.
Consider the following two projects:
  
-The profitability index for project A is closest to:

Accepted Answer

A) 0.12 
B) 21.65 
C) 0.17 
D) 12.04 
E) 1.14 
A) 0.12 
B) 21.65 
C) 0.17 
D) 12.04 
E) 1.14

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

How do you apply the Net Present Value rule when multiple projects are available and you have the added constraint of accepting only one project?

Accepted Answer

When making an investment deci

Exam 8: Investment Decision Rules

What can you comment about the shape of the net present value (NPV)profile of a multiple IRR project?

Which of the following is a disadvantage of the Net Present Value rule?

Use the table for the question(s)below. Consider a project with the following cash flows: -Given the cash flows in the table above,the point at which the NPV profile crosses the vertical axis is:

Use the table for the question(s)below. Consider the following two projects: -The payback period for project B is closest to:

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

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?

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?

A farmer sows a certain crop.It costs $250,000 to buy the seed,prepare the ground,and sow the crop.In one year's time it will cost $110,000 to harvest the crop.If the crop will be worth $380,000,and the interest rate is 8%,what is the net present value (NPV)of this investment?

The timeline of an investment is shown above.If the cost of capital is 5%,what is the profitability index of this investment?

A car dealership offers a car for $14,000,with up to one year to pay for the car.If the interest rate is 7%,what is the net present value (NPV)of this offer to buyers who elect not to pay for the car for one year?

Use the table for the question(s)below. Consider the following two projects: -The net present value (NPV)for project beta is closest to:

Which of the following is TRUE regarding the profitability index?

A firm decides to purchase a 3D printer at a cost of $25,000,with an estimated useful life of 10 years.The printer will require servicing at a cost of $1,500 per year.What is the equivalent annual annuity of this deal,given a cost of capital of 8%?

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

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.

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?

Use the table for the question(s)below. Consider the following two projects: -The profitability index for project A is closest to:

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

How do you apply the Net Present Value rule when multiple projects are available and you have the added constraint of accepting only one project?

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