Question 1

Given the following cash flows for Project M: C0 = -1,000, C1 = +200, C2 = +700, C3 =
+698, calculate the IRR for the project.

Accepted Answer

A)  23% 
B)  21% 
C)  19% 
D)  None of the above 
A)  23% 
B)  21% 
C)  19% 
D)  None of the above A

Question 2

Dry-Sand Company is considering investing in a new project. The project will need an initial investment of $1,200,000 and will generate $600,000 (after-tax) cash flows for three years. Calculate the MIRR (modified internal rate of return) for the project if the cost of capital is 15%.

Accepted Answer

A)  14.5% 
B)  18.6% 
C)  20.2% 
D)  23.4% 
A)  14.5% 
B)  18.6% 
C)  20.2% 
D)  23.4% C

Question 3

You are given a job to make a decision on project X, which is composed of three independent projects A, B, and C which have NPVs of + $70, -$40 and + $100, respectively. How would you go about making the decision about whether to accept or reject the project?

Accepted Answer

A)  Accept the firm's joint project as it has a positive NPV 
B)  Reject the joint project 
C)  Break up the project into its components: accept A and C and reject B 
D)  None of the above 
A)  Accept the firm's joint project as it has a positive NPV 
B)  Reject the joint project 
C)  Break up the project into its components: accept A and C and reject B 
D)  None of the above C

Question 4

The payback rule ignores all cash flows after the cutoff date.

Accepted Answer

A) True 
 B)False

Question 5

The discounted payback rule calculates the payback period and then discounts it at the opportunity cost of capital.

Accepted Answer

A) True 
 B)False

Question 6

The quickest way to calculate the internal rate of return (IRR) of a project is by:

Accepted Answer

A)  Trial and error method 
B)  Using the graphical method 
C)  Using a financial calculator 
D)  Guessing the IRR 
A)  Trial and error method 
B)  Using the graphical method 
C)  Using a financial calculator 
D)  Guessing the IRR

Question 7

The main advantage of the payback rule is:

Accepted Answer

A)  Adjustment for uncertainty of early cash flows 
B)  It is simple to use 
C)  Does not discount cash flows 
D)  Both A and C 
A)  Adjustment for uncertainty of early cash flows 
B)  It is simple to use 
C)  Does not discount cash flows 
D)  Both A and C

Question 8

Briefly explain the value adding-up property.

Accepted Answer

For example, the net present value (NPV)

Question 9

In case of a loan project, one should accept the project if the IRR is more than the cost of capital.

Accepted Answer

A) True 
 B)False

Question 10

Mass Company is investing in a giant crane. It is expected to cost 6.6 million in initial investment and it is expected to generate an end of year cash flow of 3.0 million each year for three years. Calculate the MIRR for the project if the cost of capital is 12% APR.

Accepted Answer

A)  17.3% 
B)  15.3% 
C)  23.8% 
D)  22.1% 
A)  17.3% 
B)  15.3% 
C)  23.8% 
D)  22.1%

Question 11

A positive NPV will always generate a profitability index above 0.

Accepted Answer

A) True 
 B)False

Question 12

The profitability index can be used for ranking projects under:

Accepted Answer

A)  Soft capital rationing 
B)  Hard capital rationing 
C)  Capital rationing at t = 0 
D)  Both A and B 
A)  Soft capital rationing 
B)  Hard capital rationing 
C)  Capital rationing at t = 0 
D)  Both A and B

Question 13

What are some of the advantages of using the IRR method?

Accepted Answer

The main advantage o

Question 14

The survey of CFOs indicates that IRR method is used for evaluating investment projects by:

Accepted Answer

A)  12% of firms 
B)  20% of firms 
C)  76% of firms 
D)  57% of firms 
A)  12% of firms 
B)  20% of firms 
C)  76% of firms 
D)  57% of firms

Question 15

The benefit-cost ratio is equal to profitability index plus one.

Accepted Answer

A) True 
 B)False

Question 16

The profitability index will always be below 1.

Accepted Answer

A) True 
 B)False

Question 17

Story Company is investing in a giant crane. It is expected to cost 6.0 million in initial investment and it is expected to generate an end of year cash flow of 3.0 million each year for three years. Calculate the NPV at 12% (approximately).

Accepted Answer

A)  2.4 million 
B)  1.2. million 
C)  0.80 million 
D)  0.20 million 
A)  2.4 million 
B)  1.2. million 
C)  0.80 million 
D)  0.20 million

Question 18

Briefly explain the term "soft rationing".

Accepted Answer

Management uses soft rationing

Question 19

Muscle Company is investing in a giant crane. It is expected to cost 6.5 million in initial investment and it is expected to generate an end of year cash flow of 3.0 million each year for three years. Calculate the IRR approximately.

Accepted Answer

A)  14.6 % 
B)  16.4 % 
C)  18.2 % 
D)  22.1% 
A)  14.6 % 
B)  16.4 % 
C)  18.2 % 
D)  22.1%

Question 20

If the sign of the cash flows for a project changes two times then the project has:

Accepted Answer

A)  one IRR 
B)  two IRRs 
C)  three IRRs 
D)  None of the above 
A)  one IRR 
B)  two IRRs 
C)  three IRRs 
D)  None of the above

Exam 5: Net Present Value and Other Investment Criteria

Given the following cash flows for Project M: C0 = -1,000, C1 = +200, C2 = +700, C3 = +698, calculate the IRR for the project.

Dry-Sand Company is considering investing in a new project. The project will need an initial investment of $1,200,000 and will generate $600,000 (after-tax) cash flows for three years. Calculate the MIRR (modified internal rate of return) for the project if the cost of capital is 15%.

You are given a job to make a decision on project X, which is composed of three independent projects A, B, and C which have NPVs of + $70, -$40 and + $100, respectively. How would you go about making the decision about whether to accept or reject the project?

The payback rule ignores all cash flows after the cutoff date.

The discounted payback rule calculates the payback period and then discounts it at the opportunity cost of capital.

The quickest way to calculate the internal rate of return (IRR) of a project is by:

The main advantage of the payback rule is:

Briefly explain the value adding-up property.

In case of a loan project, one should accept the project if the IRR is more than the cost of capital.

Mass Company is investing in a giant crane. It is expected to cost 6.6 million in initial investment and it is expected to generate an end of year cash flow of 3.0 million each year for three years. Calculate the MIRR for the project if the cost of capital is 12% APR.

A positive NPV will always generate a profitability index above 0.

The profitability index can be used for ranking projects under:

What are some of the advantages of using the IRR method?

The survey of CFOs indicates that IRR method is used for evaluating investment projects by:

The benefit-cost ratio is equal to profitability index plus one.

The profitability index will always be below 1.

Story Company is investing in a giant crane. It is expected to cost 6.0 million in initial investment and it is expected to generate an end of year cash flow of 3.0 million each year for three years. Calculate the NPV at 12% (approximately).

Briefly explain the term "soft rationing".

Muscle Company is investing in a giant crane. It is expected to cost 6.5 million in initial investment and it is expected to generate an end of year cash flow of 3.0 million each year for three years. Calculate the IRR approximately.

If the sign of the cash flows for a project changes two times then the project has:

Goals and Governance of the Firm

How to Calculate Present Values

Valuing Bonds

The Value of Common Stocks

Making Investment Decisions With the Net Present Value Rule

Introduction to Risk and Return

Portfolio Theory and the Capital Asset Pricing Model

Risk and the Cost of Capital

Project Analysis

Investment, Strategy, and Economic Rents

Agency Problems, Compensation, and Performance Measurement

Efficient Markets and Behavioral Finance

An Overview of Corporate Financing

How Corporations Issue Securities

Payout Policy

Does Debt Policy Matter

How Much Should a Corporation Borrow

Financing and Valuation

Understanding Options

Valuing Options

Real Options

Credit Risk and the Value of Corporate Debt

The Many Different Kinds of Debt

Leasing

Managing Risk

Managing International Risks

Financial Analysis

Financial Planning

Working Capital Management

Mergers

Corporate Restructuring

Governance and Corporate Control Around the World

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