Question 1

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

Accepted Answer

A) 23.34 
B) 12.64 
C) 0.17 
D) 0.12 
E) 1.14 
A) 23.34 
B) 12.64 
C) 0.17 
D) 0.12 
E) 1.14

Question 2

The cash flows for five investments have been identified as follows:   Based on the above information,and with an interest rate of 6%,which is the best investment?

Accepted Answer

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

Question 3

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

Accepted Answer

A) 12.6 
B) 23.3 
C) 12.0 
D) 15.0 
E) 14.2 
A) 12.6 
B) 23.3 
C) 12.0 
D) 15.0 
E) 14.2

Question 4

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

Accepted Answer

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

Question 5

A mining company will spend $28 million in order to exploit a low-grade placer deposit of gold ore.They estimate the deposit will produce profits of $6 million per year for six years.They calculate the net present value (NPV)using an estimated cost of capital of 6%.What is the maximum that the cost of capital can deviate from this estimate that still makes the decision to mine worthwhile?

Accepted Answer

A) 1.60% 
B) 1.66% 
C) 1.69% 
D) 1.72% 
E) 1.76% 
A) 1.60% 
B) 1.66% 
C) 1.69% 
D) 1.72% 
E) 1.76%

Question 6

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. 
E) If the NPV is positive and the initial investment will be recovered within a certain time period,the investment should be taken. 
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. 
E) If the NPV is positive and the initial investment will be recovered within a certain time period,the investment should be taken.

Question 7

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

Accepted Answer

The decision criteria using th

Question 8

A communications company installs cable to service a new area.They estimate the cost of installing the cable is $17 million,but they will receive a cash flow of $1.4 million per year indefinitely.The net present value (NPV)of this investment at a cost of capital of 6.5% indicates that this is a worthwhile investment.By how much would the cost of capital have to increase for the NPV to be zero?

Accepted Answer

A) 0.83% 
B) 1.74% 
C) 3.25% 
D) 5.37% 
E) 8.24% 
A) 0.83% 
B) 1.74% 
C) 3.25% 
D) 5.37% 
E) 8.24%

Question 9

A delivery service is buying 600 tires for its fleet of vehicles.One supplier offers to supply the tires for $85 per tire,payable in one year.Another supplier will supply the tires for $20,000 down today,then $50 per tire,payable in one year.What is the difference in PV between the first and the second offer,assuming interest rates are 8.5%?

Accepted Answer

A) $1000 
B) $276 
C) $645 
D) -$1000 
E) -$645 
A) $1000 
B) $276 
C) $645 
D) -$1000 
E) -$645

Question 10

You are looking for a car and have narrowed your choice down to two options.You can buy a new car at a cost of $23,995,which has an estimated life of 12 years and annual maintenance costs of $750 per year.Your second option is a used car at a cost of $14,225,with an estimated remaining life of 7 years and annual maintenance costs of $1,800 per year.Which is the cheaper option,given your borrowing cost of 7%?

Accepted Answer

A) The new car,since its costs have a lower PV 
B) The used car,since its costs have a lower PV 
C) The new car,since it has a lower equivalent annual annuity. 
D) The used car,since it has a lower equivalent annual annuity. 
E) The used car,since it has a higher equivalent annual annuity. 
A) The new car,since its costs have a lower PV 
B) The used car,since its costs have a lower PV 
C) The new car,since it has a lower equivalent annual annuity. 
D) The used car,since it has a lower equivalent annual annuity. 
E) The used car,since it has a higher equivalent annual annuity.

Question 11

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 10% 
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 12% 
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% 
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% 
E) 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 2% 
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 10% 
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 12% 
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% 
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% 
E) 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 2%

Question 12

A company has four projects it wishes to undertake.Which of these investments should be the lowest priority,given a discount rate of 5%?

Accepted Answer

A) Project I 
B) Project II 
C) Project III 
D) Project IV 
E) Project V 
A) Project I 
B) Project II 
C) Project III 
D) Project IV 
E) Project V

Question 13

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

Question 14

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.What is the net present value (NPV)of this project if the film maker does not issue the new security? What is the net present value (NPV)if the film maker issues the new security?

Accepted Answer

A) $1.7 million; $1.7 million 
B) $1.7 million; $2.7 million 
C) $2.7 million; $1.7 million 
D) $2.7 million; $2.7 million 
E) $5.0 million; $5.0 million 
A) $1.7 million; $1.7 million 
B) $1.7 million; $2.7 million 
C) $2.7 million; $1.7 million 
D) $2.7 million; $2.7 million 
E) $5.0 million; $5.0 million

Question 15

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)    Cost of Capital: 8% 
B)    Cost of Capital: 7% 
C)    Cost of Capital: 7.5% 
D)    Cost of Capital: 5% 
E)    Cost of Capital: 12% 
A)    Cost of Capital: 8% 
B)    Cost of Capital: 7% 
C)    Cost of Capital: 7.5% 
D)    Cost of Capital: 5% 
E)    Cost of Capital: 12%

Question 16

A furniture store offers no money down and no payment for two years.You decide to purchase a table,which you will take home today,and pay the $1,500 purchase price two years from now.If interest rates are 7%,what is the NPV of this offer?

Accepted Answer

A) -$1500 
B) $189.84 
C) $98.13 
D) $0 
E) $217.35 
A) -$1500 
B) $189.84 
C) $98.13 
D) $0 
E) $217.35

Question 17

A manufacturer of video games develops a new game over two years.This costs $850,000 per year with one payment made immediately and the other at the end of two years.When the game is released,it is expected to make $1.2 million per year for three years after that.The net present value (NPV)of this investment at a cost of capital of 9% indicates that this is a worthwhile investment.By how much would the cost of capital have to increase for the NPV to be zero?

Accepted Answer

A) 7% 
B) 9% 
C) 12% 
D) 16% 
E) 19% 
A) 7% 
B) 9% 
C) 12% 
D) 16% 
E) 19%

Question 18

You have an investment opportunity in Germany that requires an investment of $250,000 today and will produce a cash flow of €208,650 in one year with no risk.Suppose the risk-free rate of interest in Germany is 7% and the current competitive exchange rate is €0.78 to $1.00.What is the net present value (NPV)of this project? Would you take the project?

Accepted Answer

A) NPV = 0; No 
B) NPV = $2358; No 
C) NPV = $2358; Yes 
D) NPV = $13,650; Yes 
E) NPV = $36,225; Yes 
A) NPV = 0; No 
B) NPV = $2358; No 
C) NPV = $2358; Yes 
D) NPV = $13,650; Yes 
E) NPV = $36,225; Yes

Question 19

A consultancy calculates that it can supply crude oil assaying services to a small oil producer for $120,000 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 $150,000,given that the cost of capital is 10%?

Accepted Answer

A) $30,000 
B) $113,724 
C) $128,698 
D) $150,000 
E) $94,784 
A) $30,000 
B) $113,724 
C) $128,698 
D) $150,000 
E) $94,784

Question 20

An investor is considering a project that will generate $800,000 per year for four years.In addition to upfront costs,at the completion of the project at the end of the fifth year there will be shut-down costs of $500,000.If the cost of capital is 5%,based on the NPV,at what upfront costs does this project cease to be worthwhile?

Accepted Answer

A) $2.32 million 
B) $2.44 million 
C) $2.58 million 
D) $2.84 million 
E) $2.96 million 
A) $2.32 million 
B) $2.44 million 
C) $2.58 million 
D) $2.84 million 
E) $2.96 million

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

The cash flows for five investments have been identified as follows: Based on the above information,and with an interest rate of 6%,which is the best investment?

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

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

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

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

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

A company has four projects it wishes to undertake.Which of these investments should be the lowest priority,given a discount rate of 5%?

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?

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?

A furniture store offers no money down and no payment for two years.You decide to purchase a table,which you will take home today,and pay the $1,500 purchase price two years from now.If interest rates are 7%,what is the NPV of this offer?

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

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

The cash flows for five investments have been identified as follows: Based on the above information,and with an interest rate of 6%,which is the best investment?

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

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

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

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

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

A company has four projects it wishes to undertake.Which of these investments should be the lowest priority,given a discount rate of 5%?

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?

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?

A furniture store offers no money down and no payment for two years.You decide to purchase a table,which you will take home today,and pay the $1,500 purchase price two years from now.If interest rates are 7%,what is the NPV of this offer?

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