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

Question 2

When using equivalent annual annuities to compare the costs of projects with different lives, you should not consider any changes in the expected replacement cost of equipment.

Accepted Answer

A) True 
 B)False

Question 3

What is a safe method to use when confronted with mutually exclusive projects?

Accepted Answer

Generally the net present valu

Question 4

What is the Net Present Value rule?

Accepted Answer

The Net Present Value rule sta

Question 5

A garage is comparing the cost of buying two different car hoists. Hoist A will cost $20,000, will require servicing of $1000 every two years, and last ten years. Hoist B will cost $15,000, require servicing of $800 per year, and last eight years. If the cost of capital is 7%, which is the better option, given that the firm has an ongoing requirement for a hoist?

Accepted Answer

A)  Hoist A, since it has a greater present value (PV). 
B)  Hoist B, since it has a greater present value (PV). 
C)  Hoist A, since it has a greater equivalent annual annuity. 
D)  Hoist B, since it has a greater equivalent annual annuity. 
A)  Hoist A, since it has a greater present value (PV). 
B)  Hoist B, since it has a greater present value (PV). 
C)  Hoist A, since it has a greater equivalent annual annuity. 
D)  Hoist B, since it has a greater equivalent annual annuity.

Question 6

What are some potential problems in using internal rate of return (IRR) for mutually exclusive projects?

Accepted Answer

One has to be careful when eva

Question 7

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

Accepted Answer

A)  9.3 
B)  10.2 
C)  11.6 
D)  23.2 
A)  9.3 
B)  10.2 
C)  11.6 
D)  23.2

Question 8

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) 
A)  profitability Index 
B)  incremental IRR 
C)  net present value (NPV) 
D)  internal rate of return (IRR)

Question 9

The present value (PV) of an investment is ________.

Accepted Answer

A)  the amount that an investment would yield if the benefit were realized today 
B)  the difference between the cost of the investment and the benefit of the investment in dollars today 
C)  the amount you need to invest at the current interest rate to re-create the cash flow from the investment 
D)  the amount by which the cash flow of an investment exceeds or falls short of the cash flow generated by the same amount of money invested at market rate 
A)  the amount that an investment would yield if the benefit were realized today 
B)  the difference between the cost of the investment and the benefit of the investment in dollars today 
C)  the amount you need to invest at the current interest rate to re-create the cash flow from the investment 
D)  the amount by which the cash flow of an investment exceeds or falls short of the cash flow generated by the same amount of money invested at market rate

Question 10

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 11

An orcharder spends $110,000 to plant pomegranate bushes. It will take four years for the bushes to provide a usable crop. He estimates that every year for 20 years after that he will receive a crop worth $10,500 per year. If the discount rate is 9%, what is the net present value (NPV) of this investment?

Accepted Answer

A)  -$42,098 
B)  -$21,049 
C)  $8420 
D)  $12,629 
A)  -$42,098 
B)  -$21,049 
C)  $8420 
D)  $12,629

Question 12

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 timeframe 
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 
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 timeframe 
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

Question 13

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

Accepted Answer

A)  20.5 
B)  22.5 
C)  25.6 
D)  51.2 
A)  20.5 
B)  22.5 
C)  25.6 
D)  51.2

Question 14

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

Question 15

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 
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

Question 16

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 
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

Question 17

An investor has the opportunity to invest in four new retail stores. The amount that can be invested in each store, along with the expected cash flow at the end of the first year, the growth rate of the concern, and the cost of capital is shown for each case. It is assumed each investment will operate in perpetuity after the initial investment. Which investment should the investor choose?

Accepted Answer

A)  Initial investment: $100,000; Cash flow in year 1: $12,000; Growth Rate: 1.25%; Cost of Capital: 9.1% 
B)  Initial investment: $90,000; Cash flow in year 1: $10,000; Growth Rate: 1.50%; Cost of Capital: 9.3% 
C)  Initial investment: $80,000; Cash flow in year 1: $8,000; Growth Rate: 1.75%; Cost of Capital: 8.0% 
D)  Initial investment: $60,000; Cash flow in year 1: $6,000; Growth Rate: 2.50%; Cost of Capital: 7.2% 
A)  Initial investment: $100,000; Cash flow in year 1: $12,000; Growth Rate: 1.25%; Cost of Capital: 9.1% 
B)  Initial investment: $90,000; Cash flow in year 1: $10,000; Growth Rate: 1.50%; Cost of Capital: 9.3% 
C)  Initial investment: $80,000; Cash flow in year 1: $8,000; Growth Rate: 1.75%; Cost of Capital: 8.0% 
D)  Initial investment: $60,000; Cash flow in year 1: $6,000; Growth Rate: 2.50%; Cost of Capital: 7.2%

Question 18

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 $600,000 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)  $65,000 
B)  $80,000 
C)  $69,000 
D)  $111,000 
A)  $65,000 
B)  $80,000 
C)  $69,000 
D)  $111,000

Question 19

Tanner is choosing between two investment options. He can invest $500 now and get (guaranteed) $550 in one year, or invest $500 now and get (guaranteed) $531.40 back later today. The risk-free rate is 3.5%. Which investment should Tanner prefer?

Accepted Answer

A)  $531.40 later today, since $1 today is worth more than $1 in one year. 
B)  $550 in one year, since it is $50 more than he invested rather than $31.40 more than he invested. 
C)  Neither - both investments have a negative NPV. 
D)  Tanner should be indifferent between the two investments, since both are equivalent to the same amount of cash today. 
A)  $531.40 later today, since $1 today is worth more than $1 in one year. 
B)  $550 in one year, since it is $50 more than he invested rather than $31.40 more than he invested. 
C)  Neither - both investments have a negative NPV. 
D)  Tanner should be indifferent between the two investments, since both are equivalent to the same amount of cash today.

Question 20

Investment A:   Investment B:
  Investment C:
  The cash flows for three projects are shown above. The cost of capital is 9.5%. If an investor decided to take projects with a payback period two years or less, which of these projects would he take?

Accepted Answer

A)  Investment A 
B)  Investment B 
C)  Investment C 
D)  none of these investments 
A)  Investment A 
B)  Investment B 
C)  Investment C 
D)  none of these investments

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.

When using equivalent annual annuities to compare the costs of projects with different lives, you should not consider any changes in the expected replacement cost of equipment.

What is a safe method to use when confronted with mutually exclusive projects?

What is the Net Present Value rule?

What are some potential problems in using internal rate of return (IRR) for mutually exclusive projects?

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 list of projects: -Assuming that your capital is constrained, which investment tool should you use to determine the correct investment decisions?

The present value (PV) of an investment is ________.

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

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)?

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

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?

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

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 ________.

Tanner is choosing between two investment options. He can invest $500 now and get (guaranteed) $550 in one year, or invest $500 now and get (guaranteed) $531.40 back later today. The risk-free rate is 3.5%. Which investment should Tanner prefer?

Investment A: Investment B: Investment C: The cash flows for three projects are shown above. The cost of capital is 9.5%. If an investor decided to take projects with a payback period two years or less, which of these projects would he take?

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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