chapter 13 shortened

Question 1

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

Answer 1

c

Question 2

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.

Answer 2

d

Question 3

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

Answer 3

d

Question 4

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

Answer 4

d

Question 5

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.

Answer 5

c

Question 6

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

Answer 6

c

Question 7

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

Answer 7

c

Question 8

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.

Answer 8

a

Question 9

see 25 in the sheet

Answer 9

see 25

Question 10

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.

Answer 10

d

Question 11

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.

Answer 11

a

Question 12

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.

Answer 12

b

Question 13

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.

Answer 13

c

Question 14

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.

Answer 14

b

Question 15

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.

Answer 15

d

Question 16

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.

Answer 16

d

Question 17

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

Answer 17

c

Question 18

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.

Answer 18

c

Question 19

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.

Answer 19

b

Question 20

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.

Answer 20

c

Question 21

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.

Answer 21

b

Question 22

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.

Answer 22

c

Question 23

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.

Answer 23

a

Question 24

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

Answer 24

b

Question 25

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

Answer 25

a

Question 26

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

Answer 26

c

Question 27

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

Answer 27

c

Question 28

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

Answer 28

c