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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
39)
Assume that projects A and B are mutually exclusive. The correct investment decision and the best
rational for that decision is to?
39)
A)
Invest in project A since NPVB< NPVA
B)
Invest in project B since NPVB> NPVA
C)
Invest in project B since IRRB> IRRA
D)
Invest in project A since NPVA> 0
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%
40)
The internal rate of return (IRR) for project Beta is closest to:
40)
A)
22.7%
B)
22.2%
C)
25.0%
D)
24.5%
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
41)
The profitability index for project B is closest to:
41)
A)
0.17
B)
0.12
C)
12.64
D)
23.34
42)
The NPV of project B is closest to:
42)
A)
12.6
B)
12.0
C)
15.0
D)
23.3
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%
43)
The NPV for project alpha is closest to:
43)
A)
$16.92
B)
$14.41
C)
$24.01
D)
$20.96
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
44)
The maximum number of incremental IRRs that could exist for project B over project A is?
44)
A)
1
B)
3
C)
0
D)
2
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%
45)
Which of the following statements is correct?
45)
A)
You should invest in project Beta since IRRBeta > 0
B)
You should invest in project Alpha since IRRAlpha > IRRBeta
C)
Your should invest i project Alpha since NPVAlpha < 0
D)
You should invest in project Beta since NPVBeta > 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
46)
Which of the following statements is correct?
46)
A)
You should accept project B since its IRR < 15%
B)
You should accept project A since its IRR > 15%
C)
Your should accept project A since its NPV < 0
D)
You should reject project B since its NPV > 0
47)
Which of the following statements is false?
47)
A)
The profitability index is calculated as the NPV divided by the resources consumed by the
project.
B)
If there is a fixed supply of resources available, so that you cannot undertake all possible
opportunities, then simply picking the highest NPV opportunity might not lead to the best
decision.
C)
Practitioners often use the profitability index to identify the optimal combination of projects
when there is a fixed supply of resources.
D)
If there is a fixed supply of resource available, you should rank projects by the profitability
index, selecting the project with the lowest profitability index first and working your way
down the list until the resource is consumed.
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 $5 million at the end of each of
the next three years. Assume Larry's personal cost of capital is 10% per year.
48)
The NPV of Larry's three movie Larry Boy offer is closest to:
48)
A)
1.6 million
B)
-1.0 million
C)
3.5 million
D)
-1.6 million
Use the table for the question(s) below.
Consider the following two projects:
Project
Year 0
C/F
Year 1
C/F
Year 2
C/F
Year 3
C/F
Year 4
C/F
Year 5
C/F
Year 6
C/F
Year 7
C/F
Discount
Rate
Alpha -79 20 25 30 35 40 N/A N/A 15%
Beta -80 25 25 25 25 25 25 25 16%
49)
Assume that projects Alpha and Beta are mutually exclusive. The correct investment decision and
the best rational for that decision is to?
49)
A)
Invest in project Beta since IRRB> IRRA
B)
Invest in project Alpha since NPVBeta < NPVAlpha
C)
Invest in project Beta since NPVBeta > NPVAlpha > 0
D)
Invest in project Beta since NPVBeta > 0
Use the table for the question(s) below.
Consider two mutually exclusive projects with the following cash flows:
Project C/F0C/F1C/F2C/F3C/F4C/F5C/F6
A$(41,215) $12,500 $14,000 $16,500 $18,000 20,000 N/A
B$(46,775) $15,000 $15,000 $15,000 $15,000 $15,000 $15,000
50)
You are considering using the incremental IRR approach to decide between the two mutually
exclusive projects A & B. How many potential incremental IRRs could there be?
50)
A)
0
B)
2
C)
3
D)
1
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%
51)
The internal rate of return (IRR) for project Alpha is closest to:
51)
A)
22.7%
B)
25.0%
C)
24.5%
D)
22.2%
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
52)
The profitability index for project A is closest to:
52)
A)
21.65
B)
0.17
C)
12.04
D)
0.12
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%.
53)
The profitability index for this project is closest to:
53)
A)
0.39
B)
.34
C)
.44
D)
.26
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%
54)
The NPV for project beta is closest to:
54)
A)
$14.41
B)
$20.96
C)
$24.01
D)
$16.92
55)
Which of the following statements is false?
55)
A)
In general, the IRR rule works for a stand-alone project if all of the project's positive cash
flows precede its negative cash flows.
B)
The payback rule is primarily used because of its simplicity.
C)
No investment rule that ignores the set of alternative investment alternatives can be optimal.
D)
There is no easy fix for the IRR rule when there are multiple IRRs.
56)
Which of the following statements is false?
56)
A)
A NPV will always exist for an investment opportunity.
B)
In general, there can be as many IRRs as the number of times the project's cash flows change
sign over time.
C)
The payback investment rule is based on the notion that an opportunity that pays back its
initial investments quickly is a good idea.
D)
An IRR will always exist for an investment opportunity.
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%.
57)
The NPV for this project is closest to:
57)
A)
$179,590
B)
$123,420
C)
$176,270
D)
$450,000
58)
Which of the following statements is false?
58)
A)
NPV is positive only for discount rates greater than the internal rate of return.
B)
To decide whether to invest using the NPV rule, we need to know the 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)
About 75% of firms surveyed used the NPV rule for making investment decisions.
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
59)
Assuming that your capital is constrained, which project should you invest in first?
59)
A)
Project B
B)
Project G
C)
Project F
D)
Project C
60)
Which of the following statements is false?
60)
A)
The likelihood of multiple IRRs is greater with the regular IRR rule than with the incremental
IRR rule.
B)
The incremental IRR investment rule applies the IRR rule to the difference between the cash
flows of the two mutually exclusive alternatives.
C)
When a manager must choose among mutually exclusive investments, the NPV rule provides
a straightforward answer.
D)
Problems can arise using the IRR method when the mutually exclusive investments have
differences in scale.
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.
61)
The IRR for Larry's three movie deal offer is closest to:
61)
A)
-3.5%
B)
3.5%
C)
1.6%
D)
-1.6%
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
62)
Assume the appropriate discount rate for this project is 15%. The profitability index for this project
is closest to:
62)
A)
.14
B)
.22
C)
.15
D)
.60
