Question 1

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) D

Question 2

A convenience store owner is contemplating putting a large neon sign over his store. It would cost $50,000, but is expected to bring an additional $24,000 of profit to the store every year for five years. Would this project be worthwhile if evaluated using a payback period of two years or less and if the cost of capital is 10%?

Accepted Answer

A)  Yes, since it will pay back its initial investment in two years. 
B)  Yes, since the value of the cash flows into the store, in present dollars, are greater than the initial investment. 
C)  Yes, since the cash flows after two years are greater than the initial investment. 
D)  No, since the value of the cash flows over the first two years are less than the initial investment. 
A)  Yes, since it will pay back its initial investment in two years. 
B)  Yes, since the value of the cash flows into the store, in present dollars, are greater than the initial investment. 
C)  Yes, since the cash flows after two years are greater than the initial investment. 
D)  No, since the value of the cash flows over the first two years are less than the initial investment. D

Question 3

The owner of a number of gas stations is considering installing coffee machines in his gas stations. It will cost $260,000 to install the coffee machines, and they are expected to boost cash flows by $111,428 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)  1.17% 
B)  2.34% 
C)  4.69% 
D)  5.86% 
A)  1.17% 
B)  2.34% 
C)  4.69% 
D)  5.86% C

Question 4

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

Question 5

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 6

What is the decision criterion while using the payback rule?

Accepted Answer

The payback rule does not have

Question 7

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 8

Given the cash flows in the table above, the point at which the NPV profile crosses the vertical axis is ________.

Accepted Answer

A)  $0 
B)  $12,000 
C)  23% 
D)  19% 
A)  $0 
B)  $12,000 
C)  23% 
D)  19%

Question 9

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 10

Consider the following two projects:   The payback period for project B is closest to ________.

Accepted Answer

A)  3.2 years 
B)  2.3 years 
C)  2.6 years 
D)  2.9 years 
A)  3.2 years 
B)  2.3 years 
C)  2.6 years 
D)  2.9 years

Question 11

Consider the following two projects:   The net present value (NPV) for project beta is closest to ________.

Accepted Answer

A)  $21.67 
B)  $14.45 
C)  $18.06 
D)  $12.64 
A)  $21.67 
B)  $14.45 
C)  $18.06 
D)  $12.64

Question 12

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 13

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 14

The profitability index can break down completely when dealing with multiple resource restraints.

Accepted Answer

A) True 
 B)False

Question 15

What is the general shape of the net present value (NPV) profile?

Accepted Answer

The net present value (NPV) pr

Question 16

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 17

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 18

Preference for cash today versus cash in the future in part determines net present value (NPV).

Accepted Answer

A) True 
 B)False

Question 19

A lawn maintenance company compares two ride-on mowers-the Excelsior, which has an expected working-life of six years, and the Grassassinator, which has a working life of four years. After examining the equivalent annual annuities of each mower, the company decides to purchase the Excelsior. Which of the following, if true, would be most likely to make them change that decision?

Accepted Answer

A)  Fuel prices are expected to rise and raise the annual running costs of all mowers. 
B)  The mower is only expected to be needed for three years. 
C)  The prices of equivalent mowers are expected to grow in the future as lawnmower manufacturers consolidate. 
D)  The number of customers requiring lawn-mowing services is expected to sharply increase in the near future. 
A)  Fuel prices are expected to rise and raise the annual running costs of all mowers. 
B)  The mower is only expected to be needed for three years. 
C)  The prices of equivalent mowers are expected to grow in the future as lawnmower manufacturers consolidate. 
D)  The number of customers requiring lawn-mowing services is expected to sharply increase in the near future.

Question 20

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

Exam 8: Investment Decision Rules

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

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.

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

What is the decision criterion while using the payback rule?

Given the cash flows in the table above, the point at which the NPV profile crosses the vertical axis is ________.

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

Consider the following two projects: The payback period for project B is closest to ________.

Consider the following two projects: The net present value (NPV) for project beta is closest to ________.

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?

The profitability index can break down completely when dealing with multiple resource restraints.

What is the general shape of the net present value (NPV) profile?

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

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

Preference for cash today versus cash in the future in part determines 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.

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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