Questions:
1. The Payback period is best defined as:
A) the time it takes to receive cash flows sufficient to cover your initial investment
B) the time period required for total revenue received to equal the initial investment
C) the time Investment period required for the present value of all cash flows to equal the initial
D) the time period required for the NPV to equal zero
2.Calculate the payback period for the following investment: A machine costs $100,000 with installation costs of $15,000. Cash inflows are expected to be 26,000 per yearfor the next seven years.
A) greater than 6 years
B )3.85 years
C) 5 years
D) 4.42 years
3. A problem associated with the payback method is:
A) it usually requires less time to compute than that required by the net present value method
B) it doesn't consider cash flows after the payback period
C) it assumes that all cash flows are invested at the cost of capital
D) it uses the time value of money concept
4. The value of a business depends on future cash flows.
This value is affected by:
A) the size of the cash flows
B) the timing of the cash flows
C) the riskiness of the cash flows
D) all of the above
5. NPV represents:
A) the percentage return of the project
B) the percentage change represented by the project
C)the dollar change in firm value resulting from undertaking a project
D)the dollar profits added to the firm discounting at the cost of capital
6. An acceptable net present value has a value:
A )= or > 0
B )<0
C )= or <0
D) equal to the IRR
7. Given the following information, calculate the net present value:
a. NPV=Initial Cash Outlay +PV of Cash Flow 1+ PV of Cash Flow 2+...PV of Cash Flow N.
b. Initial outlay is $50,000; required rate of return is 10%; cash inflows at the end of the next 4 years are $60,000, $30,000,$40,000, And $50,000.
A)$87,734
B)$93,542
C)equal to 0
D) Less than 0
8. The internal rate of return (IRR) is best described as the discount rate that:
A) makes the Net Present Value (NPV) equal to the Internal Rate of Return(IRR)
B) makes the NPV of a projector acquisition, i.e., its incremental cash flows minus its Costs or acquisition price, equal to zero
C) equals the required rate of return
D) equates all cashflows to the current market rate
9. The Hurdle rate is:
A) the number of years required to get the Initial investment In the payback period
B) the IRR
C) the NPV
D) the rate of return the firm decides it must earn from new projects or investments
10. A project is accepted If its IRR is:
A) Less than or equal to the hurdle rate
B) Greater than the NPV
C) Equal to the NPV
D) equal to or greater than the hurdle rate
11. The Project selection method most consistent with the goal of firm value maximization is:
A) Payback method
B) IRR
C) NPV
D) Both IRR And NPV
12. When Two (or more) projects are mutually exclusive (if you done, it rules out the possibility of doing the other), management should choose:
A) the project with highest IRR (internal rate of return)
B) the one with highest NPV (Net Present Value)
C) the one with highest cost of capital
D) with mutually exclusive projects, NPV = IRR so the highest of either is appropriate
13. When evaluating a project with higher Than average risk, a financial analyst should:
A) always rejects the project
B) uses a risk---free rate of interest as the required rate of return
C) adjusts the discount rate upward in the NPV calculation
D) Adjusts the discount rate upward in the IRR calculation
14. Given the following information, calculate the NPV: Purchase price is $150,000, setup is $15,000; cash flows are $15,000, $20,000, ($10,000), $30,000, $50,000; required rate of return is 9%.
A) $10,000
B) ($72,934)
C) ($76,442)
D) ($88,377)
15. A cost that Has been incurred, or will occur, whether a project is accepted or rejected is a
A) salvage value
B) Incremental cash flow
C) Sunk cost
D) externality
16. Which of the following is (are) an example(s) of a sunk cost?
A) An Environment impact study to determine if plant emissions will affect the environment.
B) A Marketing demand study to see if demand exists for the proposed product.
C) A soil sample to determine if the land will support the proposed production facility.
D) All of the above are examples of sunk costs.
17. Which Of the following items would not represent an incremental cash flow?
A) shut---down cash flow
B) Existing overhead expense
C) change In operating cash flow
D) Initial investment cash flow
18. What Is the relevant cash flow in Year 3 For deciding whether to purchase a replacement machine, based on these projected cash flows generated by the new one and the old one?
Year
New
Old
0
0
0
1
100,000
$75,000
2
123,672
70,000
3
125,000
65,000
A)$25,000
B)$60,000
C)$125,000
D) $55,000
19. W hen you start with expected incremental Net Income to estimate incremental after--tax net cash flows from a new project, additional depreciation arising fromthe project will:
A) cause incremental operating cash flows to decrease
B) have no effect on incremental cash flows
C) cause incremental cash flows to increase
D) only affect the fixed asset account as depreciation is a sunk cost
20 W hich of the following is correct?
A) NPV and IRR are both subject to cash flow estimation error.
B) Payback uses all relevant cash flows in its analysis.
C) IRR is preferred over NPV when the two methods conflict.
D) All of the above are correct.
21. Calculate the incremental operating cash flow for year two for a new proposed project given the following information:
Machine cost: $90,000
Installation & Delivery: $10,000
Depreciation Expense, Year 2: $44,500
Tax Rate: 40%
New Revenues: $145,000/yr; Old Revenues:$ 90,000/yr
A) $104,800
B) $ 60,300
C) $ 50,800
D)$ 6,300