Question 1

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% D

Question 2

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. D

Question 3

An investor is considering the two investments shown above. Which of the following statements about these investments is true?

Accepted Answer

A)  The investor should take investment A since it has a greater net present value (NPV). 
B)  The investor should take investment A since it has a greater internal rate of return (IRR). 
C)  The investor should take investment B since it has a greater net present value (NPV). 
D)  Neither investment should be taken since they both have a negative net present value (NPV). 
A)  The investor should take investment A since it has a greater net present value (NPV). 
B)  The investor should take investment A since it has a greater internal rate of return (IRR). 
C)  The investor should take investment B since it has a greater net present value (NPV). 
D)  Neither investment should be taken since they both have a negative net present value (NPV). D

Question 4

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 5

The Sisyphean Company is planning on investing in a new project. This will involve the purchase of some new machinery costing $420,000. The Sisyphean Company expects cash inflows from this project as detailed below:
 
The appropriate discount rate for this project is 16%.
The net present value (NPV) for this project is closest to ________.

Accepted Answer

A)  $206,265 
B)  $144,385 
C)  $515,661 
D)  $216,578 
A)  $206,265 
B)  $144,385 
C)  $515,661 
D)  $216,578

Question 6

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 7

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 8

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

Question 9

Consider the following two projects:
 
Assume that projects Alpha and Beta are mutually exclusive. The correct investment decision and the best rationale for that decision is to ________.

Accepted Answer

A)  invest in project Beta, since NPVBeta > 0 
B)  invest in project Alpha, since NPVBeta  IRRA 
D)  invest in project Beta, since NPVBeta > NPVAlpha > 0 
A)  invest in project Beta, since NPVBeta > 0 
B)  invest in project Alpha, since NPVBeta  IRRA 
D)  invest in project Beta, since NPVBeta > NPVAlpha > 0

Question 10

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 11

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 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 consultancy calculates that it can supply crude oil assaying services to a small oil producer for $115,000 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 $160,000, given that the cost of capital is 9%?

Accepted Answer

A)  $45,000 
B)  $175,034 
C)  $201,289 
D)  $160,000 
A)  $45,000 
B)  $175,034 
C)  $201,289 
D)  $160,000

Question 14

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 15

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 16

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 first?

Accepted Answer

A)  Project C 
B)  Project G 
C)  Project B 
D)  Project F 
A)  Project C 
B)  Project G 
C)  Project B 
D)  Project F

Question 17

If WiseGuy Inc. is choosing one of the above mutually exclusive projects (Project A or Project B), given a discount rate of 7%, which should the company choose?

Accepted Answer

A)  Project A 
B)  Project B 
C)  Neither project — both have negative NPV. 
D)  Both projects — both have positive NPV. 
A)  Project A 
B)  Project B 
C)  Neither project — both have negative NPV. 
D)  Both projects — both have positive NPV.

Question 18

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  IRRA 
C)  invest in project B, since NPVB > NPVA 
D)  invest in project A, since NPVA > 0 
A)  invest in project A, since NPVB  IRRA 
C)  invest in project B, since NPVB > NPVA 
D)  invest in project A, since NPVA > 0

Question 19

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

Accepted Answer

The net present value (NPV) pr

Question 20

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

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?

An investor is considering the two investments shown above. Which of the following statements about these investments is true?

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

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)?

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.

Consider the following two projects: Assume that projects Alpha and Beta are mutually exclusive. The correct investment decision and the best rationale for that decision is to ________.

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

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

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 first?

If WiseGuy Inc. is choosing one of the above mutually exclusive projects (Project A or Project B), given a discount rate of 7%, which should the company choose?

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 ________.

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

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.

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

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?

An investor is considering the two investments shown above. Which of the following statements about these investments is true?

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

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)?

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.

Consider the following two projects: Assume that projects Alpha and Beta are mutually exclusive. The correct investment decision and the best rationale for that decision is to ________.

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

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

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 first?

If WiseGuy Inc. is choosing one of the above mutually exclusive projects (Project A or Project B), given a discount rate of 7%, which should the company choose?

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 ________.

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

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.

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