Question 1

Decode Genetics purchased lab equipment for $600,000 that will generate net cash flows of $130,000 per year for 10 years.What is the IRR for this project?

Accepted Answer

A) 16.76% 
B) 17.26% 
C) 18.13% 
D) 17.76%

Question 2

The disadvantages of the payback approach include:

Accepted Answer

A) cash flows after the payback period are ignored in the calculation 
B) payback ignores the time value of money 
C) payback fails to provide an objective decision-making criterion 
D) all of these

Question 3

All of the following are reasons why a firm may face capital rationing except:

Accepted Answer

A) reluctant to issue additional debt 
B) the discount rate is too high 
C) lacks the managerial resources 
D) restrictive covenants that limit borrowing

Question 4

Which of the following statements about comparing capital budget techniques is/are correct?

Accepted Answer

A) I only 
B) II only 
C) Both I and II 
D) Neither I nor II

Question 5

If a net present value analysis for a normal project gives an NPV greater than zero, an internal rate of return calculation on the same project would yield an internal rate of return the required rate of return for the firm.

Accepted Answer

A) greater than 
B) less than 
C) equal to 
D) cannot be determined from the information given

Question 6

Sigma is thinking about purchasing a new clam digger for $14,000.The expected net cash flows resulting from the digger are $9,000 in year 1, $7,000 in the 2nd year, $5,000 in the 3rd year, and $3,000 in the 4th year.Should Sigma purchase this digger if its cost of capital is 12 percent?

Accepted Answer

A) Yes, NPV = $3,176 
B) Yes, NPV = $5,084 
C) Yes, NPV = $16,605 
D) Yes, NPV = $19,084

Question 7

A firm's capital expenditures may be limited due to externally imposed constraints. All of the following are external constraints EXCEPT:

Accepted Answer

A) The firm's loan agreements may contain restrictive restraints. 
B) The firm may decide to place an upper limit on the amount of funds allocated to capital investment. 
C) If the firm has a weak financial position, it may be too expensive to float a new bond issue. 
D) There may be market-imposed difficulties such as a tight money policy of the part of the Federal Reserve System.

Question 8

With the net present value approach, all net cash flows are discounted at the

Accepted Answer

A) required rate of return 
B) discount rate 
C) cost of capital 
D) all of these

Question 9

The measures the present value return for each dollar of initial investment.

Accepted Answer

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

Question 10

Based upon the following cash flows, should Ooey Gooey Candy Makers introduce a new product, Skinny Minnie Diet Cuisine? The initial investment is $780,000 and the cost of capital is 12.2%.
$$\begin{array} { | c | c | } 
\hline \text { Years } & \text { Cash Flare } \
\hline 1 & 190,000 \
\hline 2 & 105,000 \
\hline 3 & 105,000 \
\hline 4 & 195,000 \
\hline 5 & 195,000 \
\hline 0 & 195,000 \
\hline
\end{array}$$

Accepted Answer

A) Yes, the npv is $288,410.60 and the irr is 38.2%. 
B) Yes, the npv is $175,478.98 and the irr is 20.42%. 
C) No, the npv is -$211,589.40 and the irr is 3.24%. 
D) No, the npv is -$75,375.18 and the irr is 11.75%.

Question 11

The payback period of an investment is defined as:

Accepted Answer

A) the number of years required for cumulative profits from a project to equal the initial outlay. 
B) the number of years required for the cumulative cash flows from a project to equal the initial outlay. 
C) the number of years required for the cumulative cash flows from a project to equal the average investment in the project, when depreciation is considered. 
D) a period of time sufficient to earn a rate of return equal to the firm's cost of capital.

Question 12

In comparing the techniques of net present value and internal rate of return:

Accepted Answer

A) The npv and irr techniques will generate the same accept-reject decision provided the projects have conventional cash flows. 
B) The differences between the underlying assumptions of npv and irr can cause them to rank projects differently. 
C) Both a and b 
D) Neither a nor b

Question 13

In the case of mutually exclusive projects, NPV and PI are likely to yield conflicting decisions when:

Accepted Answer

A) the projects require the same net investment 
B) the projects are significantly different in size 
C) multiple rates of return are a possibility 
D) none of these

Question 14

What is the NPV of a project that required a net investment of $500,00 and produced net cash flows of $150,000 per year for 5 years and $110,000 for the next 5 years? Assume the cost of capital is 14%.

Accepted Answer

A) $211,080 
B) $392,580 
C) $588,710 
D) $160,920

Question 15

Real options in capital budgeting can be classified.The classification that means that the project is delayed and can be termed "waiting to invest" is:

Accepted Answer

A) Investment timing option 
B) Abandonment option 
C) Shutdown option 
D) Growth option

Question 16

Calculate the profitability index for a project that has a net present value equal to -$10,000.The project's net investment is $20,000, and the firm has a 40 percent marginal tax rate.

Accepted Answer

A) -0.5 
B) 0 
C) 0.8 
D) None of these

Question 17

In considering the payback method,

Accepted Answer

A) It is a method of determining the financial exposure of a firm for a project. 
B) It is a complicated but accurate capital budgeting method. 
C) Both a and b are correct. 
D) Neither a nor b is correct.

Question 18

In the absence of capital rationing, the method is normally superior to the method when choosing among mutually exclusive investments.

Accepted Answer

A) net present value, internal rate of return 
B) internal rate of return, profitability index 
C) net present value, profitability index 
D) a and c

Question 19

Kinetics is considering a project that has a NINV of $874,000 and generates net cash flows of $170,000 per year for 12 years.What is the NPV of this project if Kinetics cost of capital is 14%?

Accepted Answer

A) $252,760 
B) $110,840 
C) $88,200 
D) $47,570

Question 20

When dealing with cash flows, the is computed by trial and error.

Accepted Answer

A) uniform;internal rate of return 
B) perpetual;internal rate of return 
C) uneven;internal rate of return 
D) uneven;net present value

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