Question 1

The is interpreted as the for each dollar of initial investment.

Accepted Answer

A) net present value;present value return 
B) profitability index;cash flow return 
C) profitability index;present value return 
D) none of these 
A) net present value;present value return 
B) profitability index;cash flow return 
C) profitability index;present value return 
D) none of these C

Question 2

What is the internal rate of return for a project that has a net investment of $14,600 and a single net cash flow of $25,750 in 5 years?

Accepted Answer

A) 10% 
B) 12% 
C) 15.3% 
D) 13.1% 
A) 10% 
B) 12% 
C) 15.3% 
D) 13.1% B

Question 3

Turntec is considering replacing an automatic shuttle machine that has a book value of $2,000 and a $0 market value with a more efficient machine that will cost $24,000.The annual net cash flows from the new equipment are expected to be $6,000 for the next 6 years.What is the net present value of this project? Assume the firm's cost of capital is 12 percent and its marginal tax rate is 40 percent.

Accepted Answer

A) $666 
B) $1,466 
C) $1,866 
D) -$134 
A) $666 
B) $1,466 
C) $1,866 
D) -$134 B

Question 4

Ecogen is considering the purchase of some new equipment that will cost $340,000 installed.The equipment will produce a product that must be FDA approved and this will require at least a year.Net cash flow in Year 1 will be a negative $110,000 but is expected to be a positive $50,000 in Year 2.Net cash flows will be $150,000, $240,000, and $330,000 in the next 3 years.At the end of 5 years the equipment and the product will be obsolete.If the firm's marginal tax rate is 40% and their costs of capital is 15%, should they invest in the new equipment?

Accepted Answer

A) Yes, NPV = $2,090 
B) Yes, NPV = $12,390 
C) No, NPV = -$63,210 
D) No, NPV = -$12,210 
A) Yes, NPV = $2,090 
B) Yes, NPV = $12,390 
C) No, NPV = -$63,210 
D) No, NPV = -$12,210

Question 5

Multiple internal rates of return can occur when there is (are):

Accepted Answer

A) large abandonment costs at the end of a project's life 
B) a major shutdown and rebuilding of a facility sometime during its life 
C) more than one sign change in the pattern of cash flows over a project's life. 
D) all of these are correct 
A) large abandonment costs at the end of a project's life 
B) a major shutdown and rebuilding of a facility sometime during its life 
C) more than one sign change in the pattern of cash flows over a project's life. 
D) all of these are correct

Question 6

Entrepreneurial firms with a net worth of less than $1 million tend to prefer the method for evaluating capital expenditures.

Accepted Answer

A) NPV 
B) IRR 
C) Payback 
D) Profitability index 
A) NPV 
B) IRR 
C) Payback 
D) Profitability index

Question 7

In considering the payback period:

Accepted Answer

A) The maximum period allowed by a firm is a specific time period based on objective criteria. 
B) It considers the time value of money in determining the maximum allowable time period. 
C) It gives some indication of a project's desirability from a liquidity viewpoint. 
D) It is based on cash flows both during and after the payback period. 
A) The maximum period allowed by a firm is a specific time period based on objective criteria. 
B) It considers the time value of money in determining the maximum allowable time period. 
C) It gives some indication of a project's desirability from a liquidity viewpoint. 
D) It is based on cash flows both during and after the payback period.

Question 8

In order to compensate for inflation in capital budgeting procedures, it is necessary to:

Accepted Answer

A) use constant dollar estimates of costs and revenues 
B) use a low discount rate to avoid double counting for inflationary effects 
C) rely heavily on the payback procedures 
D) none of these 
A) use constant dollar estimates of costs and revenues 
B) use a low discount rate to avoid double counting for inflationary effects 
C) rely heavily on the payback procedures 
D) none of these

Question 9

A project requires a net investment of $450,000.It has a profitability index of 1.25 based on the firm's 12 percent cost of capital.Determine the net present value of the project.

Accepted Answer

A) $112,500 
B) $562,500 
C) $1,012,500 
D) $140,625 
A) $112,500 
B) $562,500 
C) $1,012,500 
D) $140,625

Question 10

A digital assembly system that costs $160,000 is expected to operate for 8 years.The estimated salvage value at the end of 8 years is $12,000.The system is expected to save the company $38,000 in labor costs before taxes and depreciation.The company will depreciate this system on a 5-year MACRS schedule.If the firm's cost of capital is 12% and its marginal tax rate is 35%, compute the NPV for the project.(Note: Requires MACRS tables)

Accepted Answer

A) $4,045 
B) $7,196 
C) $20,873 
D) $167,196 
A) $4,045 
B) $7,196 
C) $20,873 
D) $167,196

Question 11

An investment project requires a net investment of $100,000.The project is expected to generate annual net cash inflows of $28,000 for the next 5 years.The firm's cost of capital is 12 percent.Determine the net present value for the project.

Accepted Answer

A) $940 
B) $100,940 
C) $77,884 
D) $40,000 
A) $940 
B) $100,940 
C) $77,884 
D) $40,000

Question 12

A capital expenditure project has an expected 20 percent internal rate of return and a $10,000 net present value.It has one cash flow sign change.

Accepted Answer

A) The discount rate used to calculate NPV is greater than 20 percent 
B) The project has another internal rate of return in addition to the 20 percent rate mentioned above 
C) In the internal rate of return calculation, the project's cash inflows are assumed to be reinvested at the firm's required rate of return 
D) None of these 
A) The discount rate used to calculate NPV is greater than 20 percent 
B) The project has another internal rate of return in addition to the 20 percent rate mentioned above 
C) In the internal rate of return calculation, the project's cash inflows are assumed to be reinvested at the firm's required rate of return 
D) None of these

Question 13

The relationship between NPV and IRR is such that:

Accepted Answer

A) both approaches always provide the same ranking of alternative investment projects. 
B) the IRR of a project is equal to the firm's cost of capital if the NPV of a project is $0. 
C) if the NPV of a project is negative, the IRR must be greater than the cost of capital. 
D) none of these 
A) both approaches always provide the same ranking of alternative investment projects. 
B) the IRR of a project is equal to the firm's cost of capital if the NPV of a project is $0. 
C) if the NPV of a project is negative, the IRR must be greater than the cost of capital. 
D) none of these

Question 14

An investment project requires a net investment of $100,000.The project is expected to generate annual net cash inflows of $28,000 for the next 5 years.The firm's cost of capital is 12 percent.Determine the internal rate of return for the project (to the nearest tenth of one percent).

Accepted Answer

A) 12.0% 
B) 12.6% 
C) 3.6% 
D) 12.4% 
A) 12.0% 
B) 12.6% 
C) 3.6% 
D) 12.4%

Question 15

Rollerblade, a manufacturer of skating gear, plans to expand its operation in Brighton, England.The expansion will cost $18.5 million and is expected to generate annual net cash flows of 2.2 million pounds for a period of 15 years and nothing thereafter.The cost of capital for the project is 16%.Using the spot exchange rate of $1.60 per British pound, compute the net present value of the expansion project.

Accepted Answer

A) -$6.235 million 
B) $2.458 million 
C) $1.124 million 
D) -$10.83 million 
A) -$6.235 million 
B) $2.458 million 
C) $1.124 million 
D) -$10.83 million

Question 16

Capital expenditures levels tend (in real terms) during periods of relatively high inflation than during low inflation times.

Accepted Answer

A) to be higher 
B) to be lower 
C) to be the same 
D) to depend on business risk 
A) to be higher 
B) to be lower 
C) to be the same 
D) to depend on business risk

Question 17

One weakness of the internal rate of return approach is that:

Accepted Answer

A) it does not directly consider the timing of the cash flows from a project 
B) it fails to provide a straightforward decision-making criterion 
C) it implicitly assumes that the firm is able to reinvest the interim cash flows from a project at the firm's cost of capital. 
D) none of these 
A) it does not directly consider the timing of the cash flows from a project 
B) it fails to provide a straightforward decision-making criterion 
C) it implicitly assumes that the firm is able to reinvest the interim cash flows from a project at the firm's cost of capital. 
D) none of these

Question 18

An investment project requires a net investment of $100,000 and is expected to generate annual net cash inflows of $25,000 for 6 years.The firm's cost of capital is 12 percent.Determine the profitability index for this project.

Accepted Answer

A) 1.50 
B) 1.028 
C) .028 
D) .972 
A) 1.50 
B) 1.028 
C) .028 
D) .972

Question 19

How does the profitability index differ from the net present value and when would each method be preferred?

Accepted Answer

The profitability index is the benefit-c

Question 20

When a project has multiple internal rates of return:

Accepted Answer

A) the analyst should choose the highest rate to compare with the firm's cost of capital. 
B) the analyst should choose the lowest rate to compare with the firm's cost of capital. 
C) the analyst should choose the rate that seems most "reasonable", given the project's cash flows, to compare with the firm's cost of capital. 
D) the analyst should compute the project's net present value and accept the project if its NPV is greater than $0 
A) the analyst should choose the highest rate to compare with the firm's cost of capital. 
B) the analyst should choose the lowest rate to compare with the firm's cost of capital. 
C) the analyst should choose the rate that seems most "reasonable", given the project's cash flows, to compare with the firm's cost of capital. 
D) the analyst should compute the project's net present value and accept the project if its NPV is greater than $0

Exam 10: Capital Budgeting: Decision Criteria and Real Option Considerations

The is interpreted as the for each dollar of initial investment.

What is the internal rate of return for a project that has a net investment of $14,600 and a single net cash flow of $25,750 in 5 years?

Multiple internal rates of return can occur when there is (are):

Entrepreneurial firms with a net worth of less than $1 million tend to prefer the method for evaluating capital expenditures.

In considering the payback period:

In order to compensate for inflation in capital budgeting procedures, it is necessary to:

A project requires a net investment of $450,000.It has a profitability index of 1.25 based on the firm's 12 percent cost of capital.Determine the net present value of the project.

An investment project requires a net investment of $100,000.The project is expected to generate annual net cash inflows of $28,000 for the next 5 years.The firm's cost of capital is 12 percent.Determine the net present value for the project.

A capital expenditure project has an expected 20 percent internal rate of return and a $10,000 net present value.It has one cash flow sign change.

The relationship between NPV and IRR is such that:

An investment project requires a net investment of $100,000.The project is expected to generate annual net cash inflows of $28,000 for the next 5 years.The firm's cost of capital is 12 percent.Determine the internal rate of return for the project (to the nearest tenth of one percent).

Capital expenditures levels tend (in real terms) during periods of relatively high inflation than during low inflation times.

One weakness of the internal rate of return approach is that:

An investment project requires a net investment of $100,000 and is expected to generate annual net cash inflows of $25,000 for 6 years.The firm's cost of capital is 12 percent.Determine the profitability index for this project.

How does the profitability index differ from the net present value and when would each method be preferred?

When a project has multiple internal rates of return:

The Role and Objective of Financial Management

The Domestic and International Financial Marketplace

Evaluation of Financial Performance

Financial Planning and Forecasting

The Time Value of Money

A: The Time Value of Money

Fixed-Income Securities: Characteristics and Valuation

Common Stock: Characteristics, Valuation, and Issuance

Analysis of Risk and Return

Capital Budgeting and Cash Flow Analysis

A: Capital Budgeting: Decision Criteria and Real Option Considerations

Capital Budgeting and Risk

The Cost of Capital, Capital Structure, and Dividend Policy

Capital Structure Concepts

Capital Structure Management in Practice

A: Capital Structure Management in Practice

Dividend Policy

Working Capital Management

The Management of Cash and Marketable Securities

The Management of Accounts Receivable and Inventories

Lease and Intermediate-Term Financing

Financing with Derivatives

A: Financing with Derivatives

Risk Management

International Financial Management

Corporate Restructuring

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