Exam
Name___________________________________
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1)
Which of the following statements is false?
1)
A)
When the risks of two projects are different, only the NPV rule will give a reliable answer.
B)
When using the incremental IRR rule, you must keep track of which project is the incremental
project and ensure that the incremental cash flows are initially positive and then become
negative.
C)
Picking one project over another simply because it has a larger IRR can lead to mistakes.
D)
Problems arise using the IRR method when the mutually exclusive investments have
differences in scale.
2)
Which of the following statements is false?
2)
A)
If the payback period is less than a pre–specified length of time you accept the project
B)
It is possible that there is no discount rate that will set the NPV equal to zero.
C)
It is possible that an IRR does not exist for an investment opportunity.
D)
The internal rate of return (IRR) investment rule is based upon the notion that if the return on
other alternatives is greater than the return on the investment opportunity you should
undertake the investment opportunity.
Use the information for the question(s) below.
Larry the Cucumber has been offered $14 million to star in the lead role of the next three Larry Boy adventure movies. If
Larry takes this offer, he will have to forgo acting in other Veggie movies that would pay him $5 million at the end of each of
the next three years. Assume Larry’s personal cost of capital is 10% per year.
3)
Larry should:
3)
A)
Accept the offer because the IRR > 0%
B)
Reject the offer because the NPV < 0
C)
Reject the offer because the IRR < 10%
D)
Accept the offer even though the IRR < 10%, because the NPV > 0
Use the table for the question(s) below.
Consider the following two projects:
Project
Year 0
Cash Flow
Year 1
Cash Flow
Year 2
Cash Flow
Year 3
Cash Flow
Year 4
Cash Flow
Discount
Rate
A–100 40 50 60 N/A .15
B–73 30 30 30 30 .15
4)
The payback period for project A is closest to:
4)
A)
2.5 years
B)
2.2 years
C)
2.0 years
D)
2.4 years
5)
Which of the following statements is false?
5)
A)
The simplest investment rule is the NPV investment rule.
B)
The IRR investment rule will identify the correct decision in many, but not all, situations.
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)
By setting the NPV equal to zero and solving for r, we find the IRR.
6)
Which of the following statements is false?
6)
A)
Problems can arise using the IRR method when the mutually exclusive investments have
different cash flow patterns.
B)
Multiple incremental IRRs might exist.
C)
The IRR is affected by the scale of the investment opportunity.
D)
The incremental IRR rule assumes that the riskiness of the two projects is the same.
C
7)
Which of the following statements is false?
7)
A)
There are situations in which multiple IRRs exist.
B)
The IRR investment rule states you should turn down any investment opportunity where the
IRR is less than the opportunity cost of capital.
C)
Since the IRR rule is based upon the rate at which the NPV equals zero, like the NPV decision
rule, the IRR decision rule will always identify the correct investment decisions.
D)
The IRR investment rule states that you should take any investment opportunity where the
IRR exceeds the opportunity cost of capital.
C
A
Use the information for the question(s) below.
Boulderado has come up with a new composite snowboard. Development will take Boulderado four years and cost $250,000
per year, with the first of the four equal investments payable today upon acceptance of the project. Once in production the
snowboard is expected to produce annual cash flows of $200,000 each year for 10 years. Boulderado’s discount rate is 10%.
8)
Calculate the IRR for the snow board project and use it to determine he maximum deviation
allowable in the cost of capital estimate that leaves the investment decision unchanged. The
maximum deviation allowable is closest to:
8)
A)
1.0%
B)
2.5%
C)
11.0%
D)
0.0%
Use the table for the question(s) below.
Consider the following two projects:
Project
Year 0
Cash Flow
Year 1
Cash Flow
Year 2
Cash Flow
Year 3
Cash Flow
Year 4
Cash Flow
Discount
Rate
A–100 40 50 60 N/A .15
B–73 30 30 30 30 .15
9)
The payback period for project B is closest to:
9)
A)
2.5 years
B)
2.4 years
C)
2.0 years
D)
2.2 years
Use the table for the question(s) below.
Consider a project with the following cash flows:
Year Cash Flow
0–10,000
14,000
24,000
34,000
44,000
10)
Assume the appropriate discount rate for this project is 15%. The IRR for this project is closest to:
10)
A)
15%
B)
22%
C)
21%
D)
60%
Use the table for the question(s) below.
Consider the following list of projects:
Project Investment NPV
A135,000 6,000
B200,000 30,000
C125,000 20,000
D150,000 2,000
E175,000 10,000
F75,000 10,000
G80,000 9,000
H200,000 20,000
I50,000 4,000
11)
Assuming that your capital is constrained, what is the fifth project that you should invest in?
11)
A)
Project I
B)
Project A
C)
Project B
D)
Project H
Use the table for the question(s) below.
Consider the following two projects:
Project
Year 0
C/F
Year 1
C/F
Year 2
C/F
Year 3
C/F
Year 4
C/F
Year 5
C/F
Year 6
C/F
Year 7
C/F
Discount
Rate
Alpha –79 20 25 30 35 40 N/A N/A 15%
Beta –80 25 25 25 25 25 25 25 16%
12)
Assume that projects Alpha and Beta are mutually exclusive. Which of the following statements is
true regarding the investment decision tools’ suitability for deciding between projects Alpha &
Beta.
12)
A)
The incremental IRR should not be used since the projects have different discount rates
B)
Both the NPV and incremental IRR approaches are appropriate to solve this problem.
C)
The incremental IRR should not be used since the projects have different lives.
D)
The incremental IRR should not be used since the projects have different cash flow patterns.
Use the table for the question(s) below.
Consider the following two projects:
Project
Year 0
Cash Flow
Year 1
Cash Flow
Year 2
Cash Flow
Year 3
Cash Flow
Year 4
Cash Flow
Discount
Rate
A–100 40 50 60 N/A .15
B–73 30 30 30 30 .15
13)
The maximum number of IRRs that could exist for project B is:
13)
A)
3
B)
0
C)
1
D)
2
Use the information for the question(s) below.
Boulderado has come up with a new composite snowboard. Development will take Boulderado four years and cost $250,000
per year, with the first of the four equal investments payable today upon acceptance of the project. Once in production the
snowboard is expected to produce annual cash flows of $200,000 each year for 10 years. Boulderado’s discount rate is 10%.
14)
The IRR for Boulderado’s snowboard project is closest to:
14)
A)
15.1%
B)
11.0%
C)
10.4%
D)
10.0%
15)
Which of the following statements is false?
15)
A)
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.
B)
If the cost of capital estimate is more than the IRR, the NPV will be positive.
C)
The IRR can provide information on how sensitive your analysis is to errors in the estimate of
your cost of capital.
D)
In general, the difference between the cost of capital and the IRR is the maximum amount of
estimation error in the cost of capital estimate that can exist without altering the original
decision.
16)
Which of the following statements is false?
16)
A)
The concept of economic profit has been popularized recently under the name Economic
Value Added (EVA).
B)
The EVA investment rule can be stated as accept any investment opportunity in which the
present value of all future EVAs is positive.
C)
EVA is a measure of value created over the life of a project.
D)
The distinction between simply making money and creating value is the essence of the NPV
calculation.
Use the table for the question(s) below.
Consider the following two projects:
Project
Year 0
Cash Flow
Year 1
Cash Flow
Year 2
Cash Flow
Year 3
Cash Flow
Year 4
Cash Flow
Discount
Rate
A–100 40 50 60 N/A .15
B–73 30 30 30 30 .15
17)
The NPV of project A is closest to:
17)
A)
15.0
B)
42.9
C)
12.6
D)
12.0
Use the table for the question(s) below.
Consider the following list of projects:
Project Investment NPV
A135,000 6,000
B200,000 30,000
C125,000 20,000
D150,000 2,000
E175,000 10,000
F75,000 10,000
G80,000 9,000
H200,000 20,000
I50,000 4,000
18)
Assuming that your capital is constrained, which project should you invest in last?
18)
A)
Project I
B)
Project A
C)
Project D
D)
Project C
19)
Which of the following statements is false?
19)
A)
The profitability index can can be easily adapted for determining the correct investment
decisions when multiple resource constraints exist.
B)
The profitability index measures the “bang for your buck.”
C)
The profitability index measures the value created in terms of NPV per unit of resource
consumed.
D)
The profitability index is the ratio of value created to resources consumed.
20)
You are trying to decide between three mutually exclusive investment opportunities. The most
appropriate tool for identifying the correct decision is:
20)
A)
Incremental IRR
B)
IRR
C)
NPV
D)
Profitability index
Use the table for the question(s) below.
Consider a project with the following cash flows:
Year Cash Flow
0–10,000
14,000
24,000
34,000
44,000
21)
Assume the appropriate discount rate for this project is 15%. The payback period for this project is
closest to:
21)
A)
2.5
B)
3
C)
2
D)
4
Use the table for the question(s) below.
Consider the following list of projects:
Project Investment NPV
A135,000 6,000
B200,000 30,000
C125,000 20,000
D150,000 2,000
E175,000 10,000
F75,000 10,000
G80,000 9,000
H200,000 20,000
I50,000 4,000
22)
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 NPV for all the projects you invest in will be closest to:
22)
A)
$69,000
B)
$111,000
C)
$80,000
D)
$58.000
23)
You are opening up a brand new retail strip mall. You presently have more potential retail outlets
wanting to locate in your mall than you have space available. What is the most appropriate tool to
use if you are trying to determine the optimal allocation of your retail space?
23)
A)
Payback period
B)
IRR
C)
NPV
D)
Profitability index
Use the information for the question(s) below.
Boulderado has come up with a new composite snowboard. Development will take Boulderado four years and cost $250,000
per year, with the first of the four equal investments payable today upon acceptance of the project. Once in production the
snowboard is expected to produce annual cash flows of $200,000 each year for 10 years. Boulderado’s discount rate is 10%.
24)
The NPV for Boulderado’s snowboard project is closest to:
24)
A)
$23,800
B)
$228,900
C)
$46,900
D)
$51,600
Use the table for the question(s) below.
Consider the following two projects:
Project
Year 0
C/F
Year 1
C/F
Year 2
C/F
Year 3
C/F
Year 4
C/F
Year 5
C/F
Year 6
C/F
Year 7
C/F
Discount
Rate
Alpha –79 20 25 30 35 40 N/A N/A 15%
Beta –80 25 25 25 25 25 25 25 16%
25)
The payback period for project Alpha is closest to:
25)
A)
2.9 years
B)
3.1 years
C)
2.6 years
D)
3.2 years
26)
Which of the following statements is false?
26)
A)
Fifty percent of firms surveyed reported using the payback rule for making decisions.
B)
The payback rule is useful in cases where the cost of making an incorrect decision might not
be large enough to justify the time required for calculating the NPV.
C)
For most investment opportunities expenses occur initially and cash is received later.
D)
The payback rule is reliable because it considers the time value of money and depends on the
cost of capital.
Use the table for the question(s) below.
Consider the following list of projects:
Project Investment NPV
A135,000 6,000
B200,000 30,000
C125,000 20,000
D150,000 2,000
E175,000 10,000
F75,000 10,000
G80,000 9,000
H200,000 20,000
I50,000 4,000
27)
Assuming that your capital is constrained, which investment tool should you use to determine the
correct investment decisions?
27)
A)
Incremental IRR
B)
IRR
C)
Profitability Index
D)
NPV
28)
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?
28)
A)
BCFG
B)
CBFH
C)
CBGF
D)
CBFG
Use the information for the question(s) below.
The Sisyphean Company is planning on investing in a new project. This will involve the purchase of some
new machinery costing $450,000. The Sisyphean Company expects cash inflows from this project as
detailed below:
Year One Year Two Year Three Year Four
$200,000 $225,000 $275,000 $200,000
The appropriate discount rate for this project is 16%.
29)
The IRR for this project is closest to:
29)
A)
18.9%
B)
22.7%
C)
39.1%
D)
34.1%
30)
The payback period for this project is closest to:
30)
A)
3.0 years
B)
2.2 years
C)
2 years
D)
2.1 years
Use the table for the question(s) below.
Consider a project with the following cash flows:
Year Cash Flow
0–10,000
14,000
24,000
34,000
44,000
31)
If the appropriate discount rate for this project is 15%, then the NPV is closest to:
31)
A)
–$867
B)
$867
C)
$6,000
D)
$1,420
Use the table for the question(s) below.
Consider the following two projects:
Project
Year 0
Cash Flow
Year 1
Cash Flow
Year 2
Cash Flow
Year 3
Cash Flow
Year 4
Cash Flow
Discount
Rate
A–100 40 50 60 N/A .15
B–73 30 30 30 30 .15
32)
The internal rate of return (IRR) for project A is closest to:
32)
A)
21.6%
B)
7.7%
C)
42.9%
D)
23.3%
33)
The incremental IRR of Project B over Project A is closest to:
33)
A)
12.6%
B)
17.3%
C)
1.7%
D)
23.3%
34)
Consider two mutually exclusive projects A & B. If you subtract the cash flows of opportunity B
from the cash flows of opportunity A, then you should
34)
A)
take opportunity A if the regular IRR exceeds the cost of capital.
B)
take opportunity B if the regular IRR exceeds the cost of capital.
C)
take opportunity B if the incremental IRR exceeds the cost of capital.
D)
take opportunity A if the incremental IRR exceeds the cost of capital.
Use the table for the question(s) below.
Consider the following two projects:
Project
Year 0
Cash Flow
Year 1
Cash Flow
Year 2
Cash Flow
Year 3
Cash Flow
Year 4
Cash Flow
Discount
Rate
A–100 40 50 60 N/A .15
B–73 30 30 30 30 .15
35)
The internal rate of return (IRR) for project B is closest to:
35)
A)
42.9%
B)
21.6%
C)
7.7%
D)
23.3%
Use the table for the question(s) below.
Consider the following list of projects:
Project Investment NPV
A135,000 6,000
B200,000 30,000
C125,000 20,000
D150,000 2,000
E175,000 10,000
F75,000 10,000
G80,000 9,000
H200,000 20,000
I50,000 4,000
36)
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 NPV for all the projects you invest in will be closest to:
36)
A)
$65,000
B)
$111,000
C)
$80,000
D)
$69,000
37)
Which of the following statements is false?
37)
A)
When projects are mutually exclusive, it is not enough to determine which projects have
positive NPVs.
B)
Although the incremental IRR rule can provide a reliable method for choosing among
projects, it can be difficult to apply correctly.
C)
If a change in the timing of the cash flows does not affect the NPV, then the change in timing
will not impact the IRR.
D)
The incremental IRR need not exist.
Use the table for the question(s) below.
Consider the following two projects:
Project
Year 0
C/F
Year 1
C/F
Year 2
C/F
Year 3
C/F
Year 4
C/F
Year 5
C/F
Year 6
C/F
Year 7
C/F
Discount
Rate
Alpha –79 20 25 30 35 40 N/A N/A 15%
Beta –80 25 25 25 25 25 25 25 16%
38)
The payback period for project beta is closest to:
38)
A)
2.6 years
B)
3.2 years
C)
2.9 years
D)
3.1 years