Question 1

The Net Present Value rule implies that we should compare a project's net present value (NPV) to zero.

Accepted Answer

A) True 
 B)False

Question 2

Jenkins Security has learned that a rival has offered to supply a parking garage with security for ten years for $45,000 up front and a further $15,000 per year. If Jenkins Security offers to provide security for eight years for an upfront cost of $60,000 and a separate yearly payment, by what maximum amount can this yearly payment be over $20,000, so that Jenkins' offer matches the equivalent annual annuity of their rival's offer? (Assume a cost of capital of 5%.)

Accepted Answer

A)  -$89 
B)  -$94 
C)  -$100 
D)  -$111 
A)  -$89 
B)  -$94 
C)  -$100 
D)  -$111

Question 3

What is the internal rate of return (IRR) of an investment that requires an initial investment of $11,000 today and pays $15,400 in one year's time?

Accepted Answer

A)  37% 
B)  44% 
C)  43% 
D)  40% 
A)  37% 
B)  44% 
C)  43% 
D)  40%

Question 4

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. If her discount rate is 6%, should she accept the project?

Accepted Answer

A)  Yes, because the NPV is positive at that rate. 
B)  No, because the NPV is negative at that rate. 
C)  No, because the NPV is positive at that rate. 
D)  Cannot be determined from the information given. 
A)  Yes, because the NPV is positive at that rate. 
B)  No, because the NPV is negative at that rate. 
C)  No, because the NPV is positive at that rate. 
D)  Cannot be determined from the information given.

Question 5

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

Accepted Answer

A) True 
 B)False

Question 6

Which of the following is NOT a valid method of modifying cash flows to produce a MIRR?

Accepted Answer

A)  Discount all of the negative cash flows to time 0 and leave the positive cash flows alone. 
B)  Leave the initial cash flow alone and compound all of the remaining cash flows to the final period of the project. 
C)  Discount all of the negative cash flows to the present and compound all of the positive cash flows to the end of the project. 
D)  Turn multiple negative cash flows into a single negative cash flow by summing all negative cash flows over the project's lifetime. 
A)  Discount all of the negative cash flows to time 0 and leave the positive cash flows alone. 
B)  Leave the initial cash flow alone and compound all of the remaining cash flows to the final period of the project. 
C)  Discount all of the negative cash flows to the present and compound all of the positive cash flows to the end of the project. 
D)  Turn multiple negative cash flows into a single negative cash flow by summing all negative cash flows over the project's lifetime.

Question 7

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. 
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.

Question 8

An investor is considering a project that will generate $900,000 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 $400,000. If the cost of capital is 4.4%, based on the MIRR, at what upfront costs does this project cease to be worthwhile?

Accepted Answer

A)  $2.62 million 
B)  $2.91 million 
C)  $3.21 million 
D)  $3.50 million 
A)  $2.62 million 
B)  $2.91 million 
C)  $3.21 million 
D)  $3.50 million

Question 9

Consider the following two projects:   The profitability index for project A is closest to ________.

Accepted Answer

A)  0.16 
B)  32.28 
C)  0.24 
D)  16.14 
A)  0.16 
B)  32.28 
C)  0.24 
D)  16.14

Question 10

The owners of a chain of fast-food restaurants spend $25 million installing donut makers in all their restaurants. This is expected to increase cash flows by $11 million per year for the next five years. If the discount rate is 5.3%, were the owners correct in making the decision to install donut makers?

Accepted Answer

A)  No, as it has a net present value (NPV) of -$4.45 million. 
B)  No, as it has a net present value (NPV) of -$2.22 million. 
C)  Yes, as it has a net present value (NPV) of $13.34 million. 
D)  Yes, as it has a net present value (NPV) of $22.23 million. 
A)  No, as it has a net present value (NPV) of -$4.45 million. 
B)  No, as it has a net present value (NPV) of -$2.22 million. 
C)  Yes, as it has a net present value (NPV) of $13.34 million. 
D)  Yes, as it has a net present value (NPV) of $22.23 million.

Question 11

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 12

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

Accepted Answer

The net present value (NPV) profile can

Question 13

A mining company plans to mine a beach for rutile. To do so will cost $14 million up front and then produce cash flows of $7 million per year for five years. At the end of the sixth year the company will incur shut-down and clean-up costs of $6 million. If the cost of capital is 13.0%, then what is the MIRR for this project?

Accepted Answer

A)  -60.97% 
B)  -78.39% 
C)  -87.10% 
D)  -95.81% 
A)  -60.97% 
B)  -78.39% 
C)  -87.10% 
D)  -95.81%

Question 14

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 15

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 16

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 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&_TB1316_00 @#IMG-DLM&_TB1316_00 Normally we would

Question 18

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?   Cost of Capital: 8.2%
  Cost of Capital: 7.0%
  Cost of Capital: 7.6%
  Cost of Capital: 5.0%

Accepted Answer

D
Explanation: Expla

Question 19

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

Accepted Answer

A)  $31.35 
B)  $25.08 
C)  $37.62 
D)  $21.32 
A)  $31.35 
B)  $25.08 
C)  $37.62 
D)  $21.32

Question 20

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 11.0% 
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 11.8% 
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 6.1% 
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 6.1% 
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 11.0% 
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 11.8% 
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 6.1% 
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 6.1%

The Net Present Value rule implies that we should compare a project's net present value (NPV) to zero.

What is the internal rate of return (IRR) of an investment that requires an initial investment of $11,000 today and pays $15,400 in one year's time?

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

Which of the following is NOT a valid method of modifying cash flows to produce a MIRR?

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

Consider the following two projects: The profitability index for project A is closest to ________.

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

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?

Which of the following statements is FALSE?

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

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?

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? Cost of Capital: 8.2% Cost of Capital: 7.0% Cost of Capital: 7.6% Cost of Capital: 5.0%

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

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

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

The Net Present Value rule implies that we should compare a project's net present value (NPV) to zero.

What is the internal rate of return (IRR) of an investment that requires an initial investment of $11,000 today and pays $15,400 in one year's time?

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

Which of the following is NOT a valid method of modifying cash flows to produce a MIRR?

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

Consider the following two projects: The profitability index for project A is closest to ________.

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

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?

Which of the following statements is FALSE?

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

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?

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? Cost of Capital: 8.2% Cost of Capital: 7.0% Cost of Capital: 7.6% Cost of Capital: 5.0%

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

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

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