Documente Academic
Documente Profesional
Documente Cultură
Sudhakar Raju
FN 6100
1. The net present value (NPV) rule can be best stated as:
a. An investment should be accepted if, and only if, the NPV is exactly equal to zero.
b. An investment should be rejected if the NPV is positive and accepted if it is negative.
c. An investment should be accepted if the NPV is positive and rejected if it is negative.
d. An investment with greater cash inflows than cash outflows, regardless of when the cash flows
occur, will always have a positive NPV and therefore should always be accepted.
2. The discount rate that makes the net present value of investment exactly equal to zero is the:
a. Payback period.
b. Internal rate of return.
c. Average accounting return.
d. Profitability index.
e. Discounted payback period.
a. NPV should never be used if the project under consideration has unconventional cash flows.
b. NPV is similar to a cost/benefit ratio.
c. If the financial manager relies on NPV in making capital budgeting decisions, she acts in the
shareholders’ best interests.
d. NPV can normally be directly observed in the marketplace.
e. IRR is generally preferred to NPV in making correct capital budgeting acceptance decisions.
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5. The decision rule is considered the “best” in principle:
7. You own some manufacturing equipment that must be replaced. Two different suppliers
present a purchase and installation plan for your consideration. This is an example of a
business decision involving projects.
a. mutually exclusive
b. independent
c. working capital
d. positive NPV
e. crossover
8. Consider a project with an initial investment and positive future cash flows. As the discount
rate is decreased the .
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9. A project costs $300 and has cash flows of $75 for the first three years and $50 in each of the
project’s last three years. If the discount rate is 15%, what is the discounted payback period?
10. You are evaluating two mutually exclusive projects, A and B. Project A costs $600 and has
cash flows of $400 in each of the next 2 years. Project B also costs $600, and generates cash
flows of $500 and $275 for the next 2 years, respectively. What is the crossover rate? What is
the NPV at the cross-over rate?
a. 10%, $200
b. 15%, -$200
c. 25%, -$24
d. 25%, $24
e. 25%, $25
11. You are considering an investment with the following cash flows. Your required return is 8%,
you generally require a payback of 3 years and a discounted payback of 4 years. If your
objective is to maximize your wealth, should you take this investment?
Year 0 1 2 3 4 5
Cash Flow –$50,000 $20,000 $20,000 $20,000 $20,000 –$50,000
12. You are going to choose between two investments. Both cost $50,000, but investment A pays
$25,000 a year for 3 years while investment B pays $20,000 a year for 4 years. If your required
return is 12%, which should you choose?
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13. You have a choice between 2 mutually exclusive investments. If you require a 15% return,
which investment should you choose?
A B
Year Cash Flow Cash Flow
0 –$100,000 –$125,000
1 20,000 75,000
2 40,000 45,000
3 80,000 40,000
You need to borrow $5,000 quickly, and the local pawn shop will give it to you if you promise to repay
them $500 every month over the next year.
14. From the pawn shop’s point of view, what is the IRR of this transaction?
a. 120%
b. 35.07%
c. 24.48%
d. 30.12%
e. 41.29%
16. Suppose that the pawn shop’s cost of funds is 18% p.a., compounded monthly. From their
point of view, what is the NPV of this deal?
a. $ 84.82
b. $211.06
c. $326.17
d. $453.75
e. $692.01
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Use the following information to answer questions 17 through 20.
Bill plans to open a service center. The equipment will cost $50,000. Bill expects the after-tax cash
inflows to be $15,000 annually for 8 years, after which he plans to scrap the equipment and retire.
a. 2.67 years
b. 3.33 years
c. 3.67 years
d. 4.33 years
e. 5.67 years
18. Assume the required return is 10%. What is the project’s discounted payback period?
a. 4.25 years
b. 5.25 years
c. 6 years
d. 7 years
e. The project does not payback on a discounted basis.
19. Assume the required return is 10%. What is the project’s NPV?
a. $887
b. $13,322
c. $22,759
d. $30,024
e. $45,001
20. Assume the required return is 20%. What is the project’s IRR? Should it be accepted?
a. 15%; yes
b. 15%; no
c. 25%; yes
d. 25%; no
e. 20%; indifferent
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ANSWER KEY
1. C
2. B
3. C
4. C
5. D
6. E
7. A
8. A
9. A
10.C
11.D
12.E
13.B
14.E
15.E
16.D
17.B
18.A
19.D
20.C