Chapter 13 MC Flashcards by Lisa Mitchell

1) Which of the following is a FALSE statement of capital expenditures?

a) They are a firm’s investments in long-lived assets
b) They may be tangible assets or intangible assets
c) They determine a company’s future direction
d) They usually involve large amounts of money and the decisions are frequently recoverable.

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2) Which of the following is NOT one of the distinct steps in the capital budgeting process?

a) Identifying investment alternatives
b) Obtaining the financing to pay for the investment
c) Implementing the chosen investment decisions
d) Monitoring and evaluating the implemented decisions

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3) A firm that does not invest effectively will:

a) find itself at a competitive advantage.
b) make itself more attractive in the short run.
c) increase its cost of capital.
d) increase its market prices of debt and equity securities.

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4) Which of the following is NOT one of Michael Porter’s five critical factors that determine the attractiveness of an industry?

a) Entry barriers.
b) The threat of substitutes.
c) The bargaining power of buyers/suppliers.
d) Coalition among existing competitors.

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5) Which one of the following statements is NOT true?

a) Capital expenditures in good projects will increase the value of the firm.
b) A pending drug patent can be used as collateral.
c) Capital budgeting is a dynamic process and depends on changing conditions.
d) A change in interest rates is not important enough to change a decision about a project

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6) Michael Porter argues that firms can create competitive advantages for themselves by adopting one of the following strategies:
I. Cost leadership: firms strive to use the latest technology to lower the costs of production.
II. Differentiation: firms can differentiate their products by providing customers with unique delivery alternatives.

a) I and II are correct.
b) I and II are incorrect.
c) I is correct, II is incorrect.
d) I is incorrect, II is correct.

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7) Use the following two statements to answer this question:
I. Bottom-up analysis: an investment strategy in which capital expenditure decisions are considered in connection with whether the firm should continue in this business or for general industry and economic trends.
II. Top-down analysis: an investment strategy that focuses on strategic decisions, such as which industries or products the firm should be involved in, looking at the overall economic picture.

a) I and II are correct.
b) I and II are incorrect.
c) I is correct, II is incorrect.
d) I is incorrect, II is correct.

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8) Use the following two statements to answer this question:
I. DCF methodologies are techniques for making capital expenditure decisions that are consistent with the overriding objective of maximizing shareholder wealth.
II. DCF valuation involves estimating future cash flows and comparing their present values with investment outlays required today.

a) I and II are correct.
b) I and II are incorrect.
c) I is correct, II is incorrect.
d) I is incorrect, II is correct.

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9) Which of the following is NOT a true statement about net present value (NPV) analysis?

a) The NPV of a project is the sum of the present value of all future after-tax incremental cash flows generated by an initial cash outlay, minus the present value of the investment outlays.
b) Projects that have a positive NPV should be accepted, and projects that have a negative NPV should be rejected.
c) The NPV is the present value of the expected cash flows net of the costs needed to generate them.
d) The firm’s after-tax marginal cost of capital is the appropriate discount rate for all projects.

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10) Which of the following statements is FALSE?

a) Positive NPVs arise only in situations in which a company has a competitive advantage.
b) Projects that produce an NPV of zero should be rejected.
c) The market value of any firm in an efficient market should equal the present value of its expected after-tax cash flows.
d) Because of the competitive nature of today’s business environment, we would not expect to see an abundance of positive NPV opportunities to persist for very long.

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11) Suppose a project requires an initial investment of $10,000 and it will yield $1,500 for 8 years. The discount rate is 10%. What is the NPV of the project and should we accept or reject it?

a) -$1,997.61; reject
b) $1,997.61; accept
c) -$2,000; reject
d) $2,000; accept

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12) Suppose a project requires an initial investment of $10,000 and it will yield $10,500 one year later. The NPV of the project is:

a) Equal to $500.
b) Less than 0 if the discount rate is less than 5 percent.
c) Zero if the discount rate is equal to 5 percent.
d) Positive if the discount rate is greater than 5 percent.

c **

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13) A project that requires a $ 100,000 investment yields $50,000 in 6 months and $50,000 in one year should be rejected for the following reasons:
I. The cost of time is not incorporated in the calculation
II. The sum of the cash inflows following the investment is equivalent to the initial investment

a) I only
b) II only
c) I and II
d) None of these reasons

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14) The IRR and NPV may yield the same conclusion about a project except:

a) When interest rates are too high
b) When the project is short term
c) When cash flows are irregular
d) When the management is using debt to finance the project

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15) The acceptance of an investment project implies that:
I. Its IRR is greater than a certain threshold.
II. Its NPV is greater than its IRR.
III. Its NPV is greater than or equal to 0.

a) I only
b) II only
c) I and II only
d) I and III only

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16) The risk-adjusted discount rate is

a) The overall company expected return for investors
b) The debt rate of the company
c) The cost of financing from the bank
d) The discount rate that reflects the project’s risk

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17) The internal rate of return (IRR) is:

a) the discount rate that makes the NPV greater than zero for a given set of cash flows.
b) the discount rate that sets the FV of future CFs equal to the initial cash outlay.
c) the opportunity cost of the capital invested in the project.
d) the economic rate of return of a given project

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18) Use the following two statements to answer this question:
I. A firm should accept a project whenever IRR > k.
II. When IRR

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19) Which of the following statements is FALSE?

a) The NPV profile shows the NPV of a project for various IRRs.
b) Mutually exclusive projects are projects for which the acceptance of one precludes the acceptance of one or more of the alternative projects.
c) The crossover rate is a special discount rate at which the NPV profiles of two projects cross.
d) There may be more than one IRR for cash flow streams where the cash flows change signs more than once.

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20) You are the CFO of a major, publicly traded corporation. You must choose between two mutually exclusive projects. You will accept a project based on which of the following?

a) The greatest increase in shareholder value.
b) The highest accounting profit.
c) The greatest tax benefit.
d) The highest internal rate of return.

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21) Which of the following are NOT mutually exclusive projects?

a) Building a factory in New Brunswick or Nova Scotia.
b) Building a gas station or a strip mall on a given piece of land.
c) Selling canoes or paddles at different times.
d) An electricity utility building a coal-fired power plant or a natural gas-fired plant.

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22) Suppose a company has an investment that requires an after-tax incremental cash outlay of $12,000 today. It estimates that the expected future after-tax cash flows associated with this investment are $5,000 in years 1 and 2, and $8,000 in year 3. Using a 12-percent discount rate, determine the project’s NPV.

a) $16,071.43
b) $ 14,144.50
c) $ 4,071.43
d) $ 2,144.50

5,000/((1+12%))+5,000/〖(1+12%)〗^2 +8,000/〖(1+12%)〗^3 -12,000=$2,144.50

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23) Suppose a company has an investment that requires an after-tax incremental cash outlay of $12,000 today. It estimates that the expected future after-tax cash flows associated with this investment are $5,000 in years 1 and 2, and $8,000 in year 3. What is the IRR?

a) 50%
b) 49.26%
c) 21.31%
d) Cannot be determined

21.31%

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24) What is the major assumption in the calculation of IRR?

a) IRR is more intuitive than NPV
b) Every dollar of cash flows is reinvested at the discount rate
c) Every dollar of cash flows is reinvested at the IRR
d) Every dollar of cash flows is measured in real dollars

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see question it has a grap

graph

26) Which one of the following is an example of mutual exclusive projects? I. A piece of land may be either used for the extension of the existing plant or the building of a more efficient headquarters for the company. II. Extending the plant or relocating the company’s headquarters to a new location a) I only b) II only c) Both I and II d) Neither I nor II

27) If projects Mars and Venus are mutually exclusive, the acceptance of project Mars means: a) project Venus is rejected. b) project Venus is accepted. c) project Mars has a higher IRR d) project Venus has a shorter payback period.

28) Suppose the projects Mars and Venus are mutually exclusive. Project Mars has an IRR of 10 percent and project Venus has an IRR of 20 percent. One can then conclude that: a) project Venus must always be preferred to Mars. b) project Mars must always be preferred to Venus. c) project Mars has a negative NPV while project Venus has a positive NPV d) it is impossible to rank the two projects without further information about the timing of the cash flows.

29) Suppose the Canadian Space Agency has two mutually exclusive projects: landing a woman on Mars and landing a man on Venus. Project Mars has an IRR of 12 percent and project Venus has an IRR of 15 percent. The crossover rate is 9 percent. The project’s appropriate discount rate is 18 percent. a) Accept project Mars. b) Accept project Venus. c) Accept both projects. d) Accept neither project.

30) Suppose the Canadian Space Agency has two mutually exclusive projects: landing a woman on Mars and landing a man on Venus. Project Mars has an IRR of 12 percent and project Venus has an IRR of 15 percent. The crossover rate is 9 percent. The project’s appropriate discount rate is 8 percent. a) Accept project Mars. b) Accept project Venus. c) Accept both projects. d) Accept neither project.

a | As the appropriate discount rate is lower than the cross-over rate, the lower IRR project dominates (see graph below)

31) Suppose the Canadian Space Agency has two mutually exclusive projects: landing a woman on Mars and landing a man on Venus. Project Mars has an IRR of 12 percent and project Venus has an IRR of 15 percent. The crossover rate is 9 percent. The project’s appropriate discount rate is 10 percent. a) Accept project Mars. b) Accept project Venus. c) Accept both projects. d) Accept neither project.

b | As the appropriate discount rate is higher than the cross-over rate, the higher IRR project dominates (see graph below)

32) Suppose the Canadian Space Agency has two independent Martian rover projects: Spirit and Endeavour. Project Spirit has an IRR of 13 percent and project Endeavour has an IRR of 15 percent. The crossover rate is 10 percent. The project’s appropriate discount rate is 12 percent. a) Accept project Spirit. b) Accept project Endeavour. c) Accept both projects. d) Accept neither project.

33) Suppose the Canadian Space Agency has two independent Martian rover projects: Spirit and Endeavour. Project Spirit has an IRR of 10 percent and project Endeavour has an IRR of 15 percent. The crossover rate is 9 percent. The project’s appropriate discount rate is 12 percent. a) Accept project Spirit. b) Accept project Endeavour. c) Accept both projects. d) Accept neither project.

34) Suppose the Canadian Space Agency has two independent Martian rover projects: Spirit and Endeavour. Project Spirit has an IRR of 10 percent and project Endeavour has an IRR of 15 percent. The crossover rate is 9 percent. The project’s appropriate discount rate is 18 percent. a) Accept project Spirit. b) Accept project Endeavour. c) Accept both projects. d) Accept neither project

35) Use the following two statements to answer this question: I. The NPV assumes that all cash flows are reinvested at the firm’s cost of capital. II. The IRR assumes that all cash flows are reinvested at the project’s economic rate of return. a) I and II are correct. b) I and II are incorrect. c) I is correct, II is incorrect. d) I is incorrect, II is correct.

36) The net present value method is preferred to the internal rate of return in all of the following situations, EXCEPT: I. mutually exclusive projects II. projects of different scales III. projects with multiple cash inflows and outflows a) I is correct, II and III are incorrect. b) I and II are correct and III are incorrect. c) I is incorrect, II and III are correct. d) I, II, and III are correct.

37) Which one of the following approaches will always yield the same results as the NPV? a) Internal rate of return b) Payback period c) Profitability index d) All of the above

``` 38) Which of the following is a DCF approach? I. Profitability index II. Internal rate of return III. Net present value IV. Payback period ``` a) I and III only. b) II and III only. c) I, II, and III only. d) I, III, and IV only.

``` 39) Which of the following ignores late cash flows? I. Profitability index II. Discounted payback period III. Net present value IV. Payback period ``` a) I and III only. b) II and IV only. c) I, II, and III only. d) I, III, and IV only.

40) The NPV rule is preferred to the payback period as a project evaluation criterion because the payback period rule ignores the impact of: I. the initial cost II. the timing of cash flows prior to the payback period III. any cash flows beyond the payback period a) III only b) I and II only c) I and III only d) II and III only

41) Which of the following is FALSE about the payback period? a) It is used as an informal measure of project risk. b) It is implemented by choosing an arbitrary cut-off date. c) It rejects projects whose payback period is shorter than the cut-off period. d) It disregards the time and risk value of money.

42) Which of the following is NOT a disadvantage of the payback period? a) It disregards the time and risk value of money. b) It provides an intuitive measure of how long it takes to recover an investment. c) It does not account for the cash flows received after the cut-off date. d) The choice of the cut-off date is somewhat arbitrary.

43) The NPV rule is preferred to the discounted payback period as a project evaluation criterion because the discounted payback period rule ignores: I. The initial cost II. The timing of cash flows prior to the discounted payback period III. Any cash flows beyond the discounted payback period a) III only b) I and II only c) I and III only d) II and III only

44) Which of the following is NOT true about the discounted payback period? a) It accounts for the time value of money. b) It ignores cash flows beyond the cut-off date. c) The choice of the cut-off date is somewhat arbitrary. d) Projects with discounted payback periods beyond the cut-off date will be accepted.

45) The discounted payback period is longer than the simple payback period because: a) the future cash flows are worth less. b) the cut-off dates are different. c) the cash outflows are worth more. d) the PV of cash inflows are worth more.

46) Use the following statements to answer the question: I. The payback period does not take into consideration time value of money II. In capital budgeting, the most important factor is to recoup the initial investment. a) I and II are correct b) I and II are incorrect c) I is correct and II is incorrect d) I is incorrect and II is correct

47) If the NPV of a project is greater than zero, then its profitability index is a) less than 1. b) equal to 1. c) greater than 1. d) equal to 0.

48) Which of the following is FALSE about the profitability index? a) It is an absolute measure of wealth. b) It is often used when firms are capital constrained. c) It produces the same accept/reject decisions as does the NPV. d) It works even when future cash flows change signs.

49) If the NPV of a project is less than zero, then its profitability index is: a) less than 1. b) equal to1. c) greater than 1. d) equal to 0.

50) Suppose your friend Sarah came to see you with an opportunity to invest in a project that generates $5,000 in the first and the third year, and where the cash flow in the second year is $3,000. The initial investment required for the project is $10,000. If the risk-adjusted rate is 15%, she insists that the project is worth the investment. Which method is Sarah using? a) Internal Rate of Return b) Payback period c) Net present value d) Profitability index

51) Suppose you have an opportunity to invest in a project, which requires a cash outlay of $15,000 today. The project is expected to generate $6,000 in year 1, $6,500 in year 2, and $7,000 in year 3. The appropriate risk-adjusted discount rate for the project is 12 percent. What is project’s NPV? Assume the tax rate is zero. a) -$1,120.29 b) $521.36 c) $732.48 d) $2,410.71

Answer: b,

52) Suppose you have an opportunity to invest in a project, which is expected to generate $6,800 in year 1, $7,200 in year 2, and $7,500 in year 3. The appropriate risk-adjusted discount rate for the project is 10.5 percent. What is project’s initial investment when the project's NPV is $2,609.25? Assume the tax rate is zero. a) $15,000.00 b) $17,609.25 c) $20,218.50 d) $21,500.00

a CFo = -2609.25 + (6,800/1.105) + (7,200 / 1.105)exp2 + (7500 / 1.105)exp3 = 15,000

53) Suppose you have an opportunity to invest in a project, which is expected to generate $6,800 in year 1, $7,200 in year 2, and $7,500 in year 3. The appropriate risk-adjusted discount rate for the project is 10.5 percent. The project’s initial investment is $15,000. What is the profitability index? a) 1.29 b) 1.17 c) 0.85 d) 0.17

b | (6,800/〖(1+10.5%)〗^1 +7,200/〖(1+10.5%)〗^2 +7,500/〖(1+10.5%)〗^3 )) ⁄ (15,000=1.17

54) Suppose you have an opportunity to invest in a project, which requires an after-tax incremental cash outlay of $25,000 today. The project is expected to generate after-tax cash flows of $7,500 per year for the next six years. What is the project’s NPV if the appropriate discount rate is 15 percent? a) $141.16 b) $3,383.62 c) $7,641.63 d) $10,883.62

55) Consider a project that would change the way your company is doing business. Investing $100,000 would save your company $10,000 a year forever. Calculate the NPV of this project if the risk-adjusted rate is 10%. a) $10,000 b) $100,000 c) 0 d) $ -90,000

c 10,000 /10% -100,000 = 0

56) Suppose you have an opportunity to invest in a project, which requires an after-tax incremental cash outlay of $25,000 today. The project is expected to generate its first cash flow of $8,000 two years from now, which will remain the same for the following ten years. What is the project’s NPV if the appropriate discount rate is 14 percent? a) $7,109.05 b) $9,236.48 c) $11,604.32 d) $16,728.93

57) Use the following statements to answer the question: I. The IRR of a project that has a profitability index equal to 1 is equal to the risk-adjusted rate. II. The IRR and NPV results can be contradictory a) I and II are correct b) I and II are incorrect c) I is correct and II is incorrect d) I is incorrect and II is correct

58) Consider a twelve-year project that costs $48,000 today and will produce after-tax cash flows of $6,000 each year for the first four years, $7,000 each year for the next four years, and $8,000 each year for the last four years. If the cost of capital is 8 percent, what is the project’s NPV? a) –$30,092.41 b) $907.11 c) $3,229.86 d) $21,554.66

59) Vancouver Salmon Farm Inc.’s current operations will generate cash flows of $100,000 in year one, $115,000 in year two, and $125,000 in year three. The company is considering a new investment, which requires an immediate cash outlay of $300,000. With the new investment, the company can instead expect to have cash flows of $250,000 per year for the next three years. The appropriate discount rate is 15 percent. What is the NPV of the new investment? a) $14,703.71 b) $65,439.36 c) $256,107.57 d) $270,806.28

60) What is the discounted payback period of a project whose profitability index is higher than 1? a) Lower than 1 b) Higher than 1 c) Lower than the project life time d) Higher than the project life time

61) What is the discounted payback period of a project whose NPV is positive? a) Lower than 1 b) Higher than 1 c) Lower than the project life time d) Higher than the project life time

62) What is the payback period of a project whose NPV is positive? a) Lower than 1 b) Higher than 1 c) Lower than the project life time d) Higher than the project life time

63) What is the project’s NPV if it requires an initial cash outlay of $50,000 and pays $8,000 per year indefinitely? Assume the appropriate discount rate is 15 percent and the tax rate is zero. a) –$3,623.19 b) $1,479.82 c) $3,333.33 d) $53,333.33

64) What is the IRR of a project which requires an initial cash outlay of $12,345 and is expected to generate cash flows of $3,600 a year for three years and then $4,200 a year for two more years? Assume the tax rate is zero. a) 14.00% b) 15.50% c) 16.20% d) 17.80%

see question

66) What is the IRR of a project that requires an investment of $9,900.39 today and will generate $1,500 per year for ten years and an additional $10,000 at the end of the tenth year? a) 8.37% b) 11.75% c) 14.43% d) 15.20%

``` D! [CF][2nd][CLR WORK] CF0=-9900.39, C01=1500, F01=9, C02=11500, F02=1. IRR. CPT. ```

67) A company is considering two separate, mutually exclusive projects Adept and Boffo. Project Adept requires an initial investment of $100,000 and is expected to generate after-tax cash flows of $45,000 per year for three years. Project Boffo requires an initial investment of $150,000 and is expected to generate after-tax cash flows of $50,000 per year for four years. The appropriate discount rate is 10 percent. What is the crossover rate for projects Adept and Boffo? a) 4.06% b) 7.77% c) 12.59% d) 16.65%

``` b [CF][2nd][CLR WORK] CF0=-50000, C01=5000, F01=3, C02=50000, F02=1. IRR. CPT. CR = 7.77% cross over rate is CR ```

68) Suppose project Acquisition and project Merger are mutually exclusive. Project Acquisition requires an initial cash outlay of $50,000 and is expected to provide after-tax cash flows of $15,000 in year 1, $25,000 in year 2, $20,000 in year 3, and $15,000 in year 4. Project Merger requires an initial cash outlay of $75,000 and is expected to provide after-tax cash flows of $20,000 in year 1, $28,000 in year 2, $35,000 in year 3, and $20,000 in year 4. The appropriate discount rate is 12 percent. What is the crossover rate? a) 4.30% b) 4.87% c) 13.72% d) 18.59%

[CF][2nd][CLR WORK] CF0=-25000, C01=5000, F01=1, C02=3000, F02=1, C03=15000, F03=1, C04=5000, F04=1, IRR CPT. CR = 4.30%

69) Consider a project that requires an investment of $28,000 today and generates after-tax cash flows of $10,000 per year for the next four years. The appropriate discount rate is 15 percent. What are the project’s NPV and IRR? a) NPV = –$264.37; IRR = 14.85% b) NPV = $335.92; IRR = 15.34% c) NPV = $549.78; IRR = 15.97% d) NPV = $738.26; IRR = 16.13%

c [CF][2nd][CLR WORK] CF0=-28000, C01=50000, F01=4, IRR CPT. IRR = 15.97%

70) Consider a five-year project that costs $20,000 today, which is expected to generate $6,000 at the end of the second year and then the cash flows will increase by $1,000 per year for each of the subsequent years. The cost of capital is 8 percent. What are the project’s NPV and IRR? a) NPV = $1,083.24; IRR = 8.96% b) NPV = $2,706.35; IRR = 11.93% c) NPV = $3,824.56; IRR = 14.87% d) NPV = $4,522.85: IRR = 17.09%

b NPV = 2706.35 [CF][2nd][CLR WORK] CF0=-20000, C01=0, F01=1, C02=6000, F02=1, C03=7000, F03=1, C04=8000, F04=1, C05=9000, F05=1, IRR, CPT. 11.93

71) Consider a ten-year project that costs $40,000 today, which is expected to generate $6,000 at the end of the second year and then the cash flows will increase by $1,000 for three years and then stagnate for the rest of the project life. The cost of capital is 8 percent. What is the project’s NPV? a) $14,897.61 b) $12,718.24 c) $7,162.69 d) $3,764.73

see question / answer in test bank

72) Consider a ten-year project that costs $40,000 today, which is expected to generate $6,000 at the end of the second year and then the cash flows will increase by $1,000 for three years and then stagnate for the rest of the project life. The cost of capital is 8 percent. What is the project’s IRR? a) 14.04% b) 13.85% c) 11.17% d) 9.74%

c | find out how to do this on financial calclautor

73) Consider a ten-year project that costs $40,000 today, which is expected to generate $6,000 at the end of the second year and then the cash flows will increase by $1,000 for three years then stagnate for the rest of the project life. The cost of capital is 8 percent. What is discounted payback period? a) 8.99 b) 8.34 c) 7.71 d) 7.17

b | see book

74) Use the following statements to answer this question: I. The payback period is always longer than the discounted payback period. II. Both the discounted payback and payback period ignore cash flows beyond the cut-off period. a) I and II are correct b) I and II are incorrect c) I is correct and II is incorrect d) I is incorrect and II is correct

75) What is the payback period of a project that requires an initial cash outlay of $16,000 and provides cash flows of $4,500 in year 1, $5,500 in year 2, $6,500 in year 3 and $7,500 in year 4? Assume the appropriate discount rate is 10 percent. a) 2.08 b) 2.36 c) 2.68 d) 2.92

d, | Payback period = 2+( (16,000 -10,000)/6,500) = 2.92

76) Consider a project that requires an investment of $22,500 today and pays $5,250 per year for ten years. What is the payback period of the project? Assume the cost of capital is 12 percent. a) 4.29 b) 4.52 c) 4.71 d) 4.93

A 4+( (22,500 - 21,000)/5,250) =4.29

77) What is the discounted payback period of a five-year project that costs $18,000 today and pays an annual cash flow of $7,500? Assume the cost of capital is 15%. a) 2.40 b) 3.12 c) 3.20 d) 3.80

c, PV(CF1-4): $6,521.74, $5,671.08, $4,931.37, and $4,288.15 | PV(Accumulated CF1-4): $6,521.74, $12,192.82, $17,124.19, and $21,412.34

78) Consider an investment opportunity that requires an initial cash outlay of $28,500 and provides cash flows of $8,500 in year 1, $10,000 in year 2, $11,500 in year 3, and $13,000 in year 4. The cost of capital is 12 percent. What is the discounted payback period of the project? a) 2.87 b) 3.37 c) 3.42 d) 3.58

79) Suppose a project requires an after-tax incremental cash outflow of $40,000 today. The project is expected to generate after-tax cash inflows of $9,000 per year for the next six years. What is the project’s PI if the appropriate discount rate is 10 percent? a) 0.92 b) 0.98 c) 1.03 d) 1.11

b | PV(CFs) = $9,000*PVAF(10%,6) = $39,197.35

80) Consider a project that requires an immediate cash outflow of $100,000 and provides a perpetual annual inflow of $15,000 starting two years from today. The cost of capital is 12 percent. What is the project’s PI? a) 1.04 b) 1.12 c) 1.25 d) 1.33

Answer: b,

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82) A company is considering four separate, mutually exclusive projects A, B, C, and D. Project A requires an initial investment of $100,000 and is expected to generate after-tax cash flows of $62,500 per year for two years. Project B requires an initial investment of $160,000 and is expected to generate after-tax cash flows of $72,000 per year for three years. Project C requires an initial investment of $125,000 and is expected to generate $45,000 per year for four years. Project D requires an initial investment of $200,000 and is expected to generate after-tax cash flows of $87,500 per year for three years. The appropriate discount rate is 10 percent. Rank the projects by their PIs in descending order a) A, B, C, D b) B, C, A, D c) C, B, D, A d) D, A, B, C

83) What is the PI of a project that requires an initial investment of $36,000 and pays $10,000 in year 1, $18,000 in year 2, $15,000 in year 3, and $12,000 in year 4? Assume the discount rate is 9 percent and the tax rate is zero. a) 1.05 b) 1.16 c) 1.23 d) 1.38

84) Which of the following are NOT contingent projects? a) Buying a truck and a trailer. b) Selling canoes and paddles. c) Manufacturing milk and butter. d) Manufacturing baby food and applesauce.

85) The investment rule for contingent projects is: a) Accept the projects only if all of the individual NPVs are positive. b) Accept the projects even if all of the individual NPVs are negative. c) Accept the projects only if the total NPV of all projects is positive. d) Accept the projects even if the total NPV of all projects is negative

86) Mutually exclusive projects with unequal lives can be compared by using: a) The NPV approach b) The IRR approach c) The PI approach d) The chain replication approach

87) Which of the following statements is TRUE? a) Contingent projects are projects for which the acceptance of one requires the acceptance of another, either beforehand or simultaneously. b) The chain replication approach is a way to compare projects with equal lives by finding a time horizon into which all the project lives under consideration divide equally, and then assuming each project repeats until it reaches this horizon. c) The equivalent annual NPV approach is a way to compare projects by finding the NPV of the individual projects, and then determining the amount of an annual annuity that is economically equivalent to the PV generated by each project over its respective time horizon. d) Mutually exclusive projects require the firm to choose one project over another unless both projects generate positive NPVs.

88) Use these statements to answer the following question: I. Contingent projects are evaluated independently and should be accepted independently. II. When considering contingent projects, all projects should have a positive NPV. a) I and II are correct b) I and II are incorrect c) I is correct and II is incorrect d) I is incorrect and II is correct

89) A company must choose between two mutually exclusive projects: Alpha and Bravo, to enhance its current operations. Project Alpha requires a $12,000 cash outlay today and is expected to generate after-tax cash flows of $6,000 in year 1, $6,500 in year 2, and $7,000 in year 3. Project Bravo requires a $20,000 cash outlay today and is expected to generate after-tax cash flows of $7,000 in year 1, $8,000 in year 2, $9,000 in year 3 and $8,000 in year 4. The appropriate discount rate is 10 percent. Which project should the firm choose? Assume both projects can be replicated. a) Total NPVAlpha=$11,194 > total NPVBravo=$11,180 over a 12-year time horizon, choose project Alpha b) Total NPVAlpha=$16,343 > total NPVBravo=$15,603 over a 12-year time horizon, choose project Alpha c) Total NPVBravo=$11,194 > total NPVAlpha=$11,180 over a 12-year time horizon, choose project Bravo d) Total NPVBravo=$16,343 > total NPVAlpha=$15,603 over a 12-year time horizon, choose project Bravo

90) A company must choose between two new computer operating systems: Linux and Windows, to replace the existing system to support its ongoing operations. System Linux costs $50,000 and requires annual maintenance costs of $6,000 during its four-year life. System Windows costs $75,000 and requires annual maintenance cost of $4,500 during its six-year life. The appropriate discount rate is 8 percent. Which system should the firm choose? Assume both systems can be replicated. a) EANPVL=$21,096 > EANPVW=$20,724, choose system Linux b) EANPVL=$21,096 > EANPVW=$20,724, choose system Windows c) EANPVL= –$9,096 > EANPVW= –$11,724, choose system Linux d) EANPVL= –$9,096 > EANPVW= –$11,724, choose system Windows

Answer: b, System Linux’s NPV = $50,000 + $6,000*PVAF(8%,4) = $69,872.76 System Linux’s EANPV System Windows’s NPV = $75,000 + $4,500*PVAF(8%,6) = $95,802.96 System Windows’s EANPV

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92) Use the following statements to answer this question: I. The EANPV is effective in choosing between projects that have different life spans. II. The IRR will lead to the same conclusion as EANPV if the two projects are not mutually exclusive and the cash flows are conventional. a) I and II are correct b) I and II are incorrect c) I is correct and II is incorrect d) I is incorrect and II is correct

93) What is the EANPV of a project that requires an initial investment of $42,000 and costs $10,000 per year for 8 years? Assume the discount rate is 10 percent and the tax rate is zero. a) $2,127 b) $11,919 c) $17,873 d) $95,349

Answer: c, NPV = $42,000 + $10,000*PVAF(10%,8) = $95,349.26 EANPV = $95,349.26 / PVAF(10%,8) = $17,873

94) Which of the following is NOT true when a firm faces capital budget constraints? a) Capital rationing prevails. b) Independent projects that generate positive NPVs may not be accepted. c) Investment capital must be rationed amongst available investment projects. d) All the projects listed on its investment opportunity schedule until the IRR equals its WACC will be accepted.

95) In the presence of capital rationing: a) the cost of capital is no longer the appropriate opportunity cost. b) firms can fully rely on either IRR or NPV as a criterion. c) PIs are often useful to conclude on the optimal solution. d) the investment decision should be based on which combination of projects generates the highest total NPV, regardless of the cost of the investment.

96) You must choose between the following projects. Project Alpha requires an initial investment of $10 million and provides an NPV of $4 million. Project Bravo requires an investment of $7 million and provides an NPV of $4 million. Project Charlie requires an investment of $8 million and provides an NPV of $4 million. Project Delta, contingent on project Alpha, requires an investment of $5 million and provides an NPV of $4.5 million. If you only have $15 million in available capital, which projects will you select? a) Projects Alpha and Delta b) Projects Bravo and Charlie c) Projects Bravo and Delta d) Projects Charlie and Delta

a Answer: a, Total NPV of projects Alpha and Delta combined = $4,000,000 + $4,500,000 = $8,500,000, is greater than the $8,000,000 total NPV of projects Bravo and Charlie combined. Given project Delta is contingent on project Alpha, it cannot be combined with project Bravo or Charlie alone.

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103) Which of the following about a firm’s weighted average cost of capital (WACC) is FALSE? a) It is the after-tax cost of the average dollar of long-term financing to the firm. b) It is the appropriate discount rate to evaluate long-term investment projects. c) It is the appropriate discount rate to evaluate typical investment projects. d) It is the appropriate discount to evaluate atypical investment projects

104) If a firm uses a constant WACC to select investments projects, it will: a) always make appropriate decisions. b) not accept negative NPV high-risk projects. c) not reject positive NPV low-risk projects. d) cause the market price of its debt and equity securities to decline.

105) Which of the following is NOT an approach to estimate risk-adjusted discount rates for an atypical investment? a) Estimating the weighted average cost of capital of firms in an industry associated with the project. b) Adjusting the firm’s cost of capital up or down based on the risk level and financing of the project. c) Estimating betas and the risk associated with the firm’s overall investments. d) Estimating beta for the project by regressing the ROA of the project against the ROA of the market index.

106) Use the following statements to answer these questions: I. Everything else held constant, increasing the proportion of debt in the project would increase the WACC. II. A typical project of the company should be discounted using a risk-adjusted rate different than the WACC. a) I and II are correct b) I and II are incorrect c) I is correct and II is incorrect d) I is incorrect and II is correct

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111) Use the following two statements to answer this question: I. Portfolio flows are investments in financial securities and in companies by firms. II. Foreign direct investments include investments in real assets. a) I and II are correct. b) I and II are incorrect. c) I is correct, II is incorrect. d) I is incorrect, II is correct.

112) Which of the following is the best answer for a reason(s) that firms make foreign investments? a) They want to enter new markets. b) They want to have access to new technology. c) They want to take advantage of cheaper resources. d) All of the above

113) Use the following statements to answer this question: I. The fact that Export Development Corporation of Canada (EDC) provides an insurance against political risk lowers the cost of capital for the firm. II. Foreign direct investments are priced the same way as domestic investments. a) I and II are correct b) I and II are incorrect c) I is correct and II is incorrect d) I is incorrect and II is correct

114) Alberta Tar Sand Inc., a Canadian company, has an opportunity to invest in Peru. The project requires an immediate cash outlay of $3 million and is expected to provide after-tax cash flows of $800,000 in year 1, $1,000,000 in year 2, $1,200,000 in year 3, and $1,600,000 in year 4. The appropriate discount rate for a similar project in Canada is 12 percent. The risks of implementing such a project in Peru will require a risk premium of 4 percent. What will be the impact on the shareholder value of Syntax if the firm undertakes this project in Peru? a) Increase by $85,273 b) Increase by $382,445 c) Increase by $3,085,273 d) Increase by $3,382,445

Answer: a, Project’s required return = 12% + 4% = 16% | Shareholder value of Syntax increases by the value of the positive NPV

116) What improvement does MIRR represent over traditional IRR? a) It relaxes the assumption that cash flows are reinvested at the cost of capital. b) It relaxes the assumption that cash flows are reinvested at IRR. c) It always gives the same accept/reject decision as IRR. d) It always gives the same accept/reject decision as NPV.

117) Project X has a project with cost of capital of 8 percent, initial cost of $1,000, and annual after-tax cash flow of $450 for 3 years. Cash flow is reinvested at 8 percent. What are the IRR and MIRR, respectively? a) 16.65% and 13.47% b) 13.47% and 16.65% c) 16.65% and 16.65% d) 16.65% and 10.52%

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