Question 1

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 2

Which of the following decision rules is best defined as the amount of time it takes to pay back the initial investment?

Accepted Answer

A)  internal rate of return (IRR) 
B)  profitability index 
C)  net present value (NPV) 
D)  payback period 
A)  internal rate of return (IRR) 
B)  profitability index 
C)  net present value (NPV) 
D)  payback period

Question 3

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.

Question 4

You are considering investing in a zero-coupon bond that will pay you its face value of $1000 in twelve years. If the bond is currently selling for $496.97, then the internal rate of return (IRR) for investing in this bond is closest to ________.

Accepted Answer

A)  5.0% 
B)  7.1% 
C)  6.0% 
D)  8.2% 
A)  5.0% 
B)  7.1% 
C)  6.0% 
D)  8.2%

Question 5

A security company offers to provide CCTV coverage for a parking garage for ten years for an initial payment of $50,000 and additional payments of $30,000 per year. What is the equivalent annual annuity of this deal, given a cost of capital of 5%?

Accepted Answer

A)  -$21,885 
B)  -$25,533 
C)  -$29,180 
D)  -$36,475 
A)  -$21,885 
B)  -$25,533 
C)  -$29,180 
D)  -$36,475

Question 6

Which of the following statements is FALSE?

Accepted Answer

A)  In general, the difference between the cost of capital and the internal rate of return (IRR) is the maximum amount of estimation error in the cost of capital estimate that can exist without altering the original decision. 
B)  The internal rate of return (IRR) can provide information on how sensitive your analysis is to errors in the estimate of your cost of capital. 
C)  If you are unsure of your cost of capital estimate, it is important to determine how sensitive your analysis is to errors in this estimate. 
D)  If the cost of capital estimate is more than the internal rate of return (IRR), the net present value (NPV) will be positive. 
A)  In general, the difference between the cost of capital and the internal rate of return (IRR) is the maximum amount of estimation error in the cost of capital estimate that can exist without altering the original decision. 
B)  The internal rate of return (IRR) can provide information on how sensitive your analysis is to errors in the estimate of your cost of capital. 
C)  If you are unsure of your cost of capital estimate, it is important to determine how sensitive your analysis is to errors in this estimate. 
D)  If the cost of capital estimate is more than the internal rate of return (IRR), the net present value (NPV) will be positive.

Question 7

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 8

A janitorial services firm is considering two brands of industrial vacuum cleaners to equip their staff. Option A will cost $1,500, require servicing of $200 per year, and it will last five years. Option B will cost $1,000, require servicing of $100 per year, and it will last three years. If the cost of capital is 8%, which is the better option, given that the firm has an ongoing requirement for vacuum cleaners?

Accepted Answer

A)  Option A, since it has a lower equivalent annual annuity. 
B)  Option B, since it has a lower equivalent annual annuity. 
C)  Option A, since it has a greater equivalent annual annuity. 
D)  Option B, since it has a greater equivalent annual annuity. 
A)  Option A, since it has a lower equivalent annual annuity. 
B)  Option B, since it has a lower equivalent annual annuity. 
C)  Option A, since it has a greater equivalent annual annuity. 
D)  Option B, since it has a greater equivalent annual annuity.

Question 9

How do you apply the Net Present Value rule when multiple projects are available and you have the added constraint of accepting only one project?

Accepted Answer

When making an investment deci

Question 10

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 11

A florist is buying a number of motorcycles to expand its delivery service. These will cost $78,000 but are expected to increase profits by $3000 per month over the next four years. What is the payback period in this case?

Accepted Answer

A)  10.40 months 
B)  15.60 months 
C)  19.50 months 
D)  26.00 months 
A)  10.40 months 
B)  15.60 months 
C)  19.50 months 
D)  26.00 months

Question 12

A manufacturer of video games develops a new game over two years. This costs $830,000 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 $1.20 million per year for three years after that. What is the net present value (NPV) of this decision if the cost of capital is 10%?

Accepted Answer

A)  $950,349 
B)  $1,045,384 
C)  $1,520,559 
D)  $1,805,663 
A)  $950,349 
B)  $1,045,384 
C)  $1,520,559 
D)  $1,805,663

Question 13

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 14

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 15

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& @#IMG-DLM& Normally we would want to take project

Question 16

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)   
B)   
C)   
D)   
A)   
B)   
C)   
D)

Question 17

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 18

Trial and error is the only way to compute the internal rate of return (IRR) when interest is calculated over five or more periods.

Accepted Answer

A) True 
 B)False

Question 19

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

Accepted Answer

The decision criteria using th

Question 20

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 dollar value should the NPV profile cross the vertical axis?

Accepted Answer

A)  $780,000 
B)  $1,000,000 
C)  Cannot be determined because inadequate information is given. 
D)  The vertical axis crossing point cannot be calculated since the cash inflows are in perpetuity. 
A)  $780,000 
B)  $1,000,000 
C)  Cannot be determined because inadequate information is given. 
D)  The vertical axis crossing point cannot be calculated since the cash inflows are in perpetuity.

Exam 8: Investment Decision Rules

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

Which of the following decision rules is best defined as the amount of time it takes to pay back the initial investment?

You are considering investing in a zero-coupon bond that will pay you its face value of $1000 in twelve years. If the bond is currently selling for $496.97, then the internal rate of return (IRR) for investing in this bond is closest to ________.

A security company offers to provide CCTV coverage for a parking garage for ten years for an initial payment of $50,000 and additional payments of $30,000 per year. What is the equivalent annual annuity of this deal, given a cost of capital of 5%?

Which of the following statements is FALSE?

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?

How do you apply the Net Present Value rule when multiple projects are available and you have the added constraint of accepting only one project?

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

A florist is buying a number of motorcycles to expand its delivery service. These will cost $78,000 but are expected to increase profits by $3000 per month over the next four years. What is the payback period in this case?

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

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?

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

Trial and error is the only way to compute the internal rate of return (IRR) when interest is calculated over five or more periods.

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

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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