Fin 8 - notes PDF

Preview

Summary

notes...

Description

23.

A project's opportunity cost of capital is:

A. the forgone return from investing in the project. B. the return earned by investing in the project. C. equal to the average return on all company projects. D. designed to be less than the project's IRR. AACSB: Communication Abilities Blooms: Knowledge Brealey - Chapter 008 #23 Difficulty: Easy Learning Objective: 8-1

24.

Which of the following statements is correct for a project with a positive NPV?

A. IRR exceeds the cost of capital. B. Accepting the project has an indeterminate effect on shareholders. C. The discount rate exceeds the cost of capital. D. The profitability index equals one. AACSB: Reflective Thinking Skills Blooms: Understanding Brealey - Chapter 008 #24 Difficulty: Medium Learning Objective: 8-1

25.

If the net present value of a project which costs $20,000 is $5,000 when the discount rate is 10%, then the:

A. project's IRR equals 10%. B. project's rate of return is greater than 10%. C. net present value of the cash inflows is $4,500. D. project's cash inflows total $25,000. AACSB: Reflective Thinking Skills Blooms: Application Brealey - Chapter 008 #25 Difficulty: Medium Learning Objective: 8-1

26.

What is the NPV of a project that costs $100,000 and returns $50,000 annually for three years if the opportunity cost of capital is 14%?

A. $3,397.5 7 B. $4,473.4 4 C. $16,085. 00 D. $35,000. 00

AACSB: Reflective Thinking Skills Blooms: Application Brealey - Chapter 008 #26 Difficulty: Medium Learning Objective: 8-1

27.

The decision rule for net present value is to:

A. accept all projects with cash inflows exceeding initial cost. B. reject all projects with rates of return exceeding the opportunity cost of capital. C. accept all projects with positive net present values. D. reject all projects lasting longer than 10 years. AACSB: Communication Abilities Blooms: Knowledge Brealey - Chapter 008 #27 Difficulty: Easy Learning Objective: 8-1

28.

What should occur when a project's net present value is determined to be negative?

A. The discount rate should be decreased. B. The profitability index should be calculated. C. The present value of the project cost should be determined. D. The project should be rejected. AACSB: Communication Abilities Blooms: Knowledge Brealey - Chapter 008 #28 Difficulty: Easy Learning Objective: 8-1

29.

Which of the following changes will increase the NPV of a project?

A. A decrease in the discount rate B. A decrease in the size of the cash inflows C. An increase in the initial cost of the project D. A decrease in the number of cash inflows AACSB: Reflective Thinking Skills Blooms: Understanding Brealey - Chapter 008 #29 Difficulty: Easy Learning Objective: 8-1

30.

What is the maximum that should be invested in a project at time zero if the inflows are estimated at $50,000 annually for three years, and the cost of capital is 9%?

A. $101,251. 79 B. $109,200. 00 C. $126,565. 00 D. $130,800. 00

AACSB: Reflective Thinking Skills Blooms: Application Brealey - Chapter 008 #30 Difficulty: Medium Learning Objective: 8-1

31.

When a manager does not accept a positive-NPV project, shareholders face an opportunity cost in the amount of the:

A. project's initial cost. B. project's NPV. C. project's discounted cash flows. D. soft capital rationing budget. AACSB: Reflective Thinking Skills Blooms: Understanding Brealey - Chapter 008 #31 Difficulty: Medium Learning Objective: 8-1

32.

What is the approximate maximum amount that a firm should consider paying for a project that will return $15,000 annually for 5 years if the opportunity cost is 10%?

A. $33,52 0 B. $56,86 0 C. $62,54 0 D. $75,00 0

AACSB: Reflective Thinking Skills Blooms: Application Brealey - Chapter 008 #32 Difficulty: Medium Learning Objective: 8-1

33.

Which of the following projects would you feel safest in accepting? Assume the opportunity cost of capital to be 12% for each project.

A. "A" has a small, but negative, NPV. B. "B" has a positive NPV when discounted at 10%. C. "C's" cost of capital exceeds its rate of return. D. "D" has a zero NPV when discounted at 14%. AACSB: Reflective Thinking Skills Blooms: Application Brealey - Chapter 008 #33 Difficulty: Medium Learning Objective: 8-1

34.

As the discount rate is increased, the NPV of a specific project will:

A. increas e. B. decreas e. C. remain constant. D. decrease to zero, then remain constant. AACSB: Reflective Thinking Skills Blooms: Understanding Brealey - Chapter 008 #34 Difficulty: Easy Learning Objective: 8-1

35.

If the opportunity cost of capital for a project exceeds the project's IRR, then the project has a(n):

A. positive NPV. B. negative NPV. C. acceptable payback period. D. positive profitability index. AACSB: Reflective Thinking Skills Blooms: Understanding Brealey - Chapter 008 #35 Difficulty: Easy Learning Objective: 8-2

36.

When the NPV of an investment is positive, then the IRR will be:

A. equal to the opportunity cost of capital. B. greater than the opportunity cost of capital. C. less than the opportunity cost of capital. D. less than or equal to the opportunity cost of capital. AACSB: Reflective Thinking Skills Blooms: Understanding Brealey - Chapter 008 #36 Difficulty: Medium Learning Objective: 8-2

37.

Which of the following can be deduced about a three- year investment project that has a two-year payback period?

A. The NPV is positive. B. The IRR is greater than the cost of capital. C. Both 'a' and 'b' can be deduced. D. Neither 'a' nor 'b' can be deduced. AACSB: Reflective Thinking Skills Blooms: Understanding Brealey - Chapter 008 #37 Difficulty: Medium Learning Objective: 8-3

38.

When a project's internal rate of return equals its opportunity cost of capital, then:

A. the project should be rejected. B. the project has no cash inflows. C. the net present value will be positive. D. the net present value will be zero. AACSB: Reflective Thinking Skills Blooms: Understanding Brealey - Chapter 008 #38 Difficulty: Medium Learning Objective: 8-2

39.

Firms that make investment decisions based upon the payback rule may be biased toward rejecting projects:

A. with short lives. B. with long lives. C. with early cash inflows. D. that have negative NPVs. AACSB: Reflective Thinking Skills Blooms: Understanding Brealey - Chapter 008 #39 Difficulty: Medium Learning Objective: 8-3

40.

One method that can be used to increase the NPV of a project is to decrease the:

A. project's payback. B. project's cost of capital. C. time until receipt of cash inflows. D. number of project IRRs. AACSB: Reflective Thinking Skills Blooms: Understanding Brealey - Chapter 008 #40 Difficulty: Medium Learning Objective: 8-1

41.

What is the approximate IRR for a project that costs $100,000 and provides cash inflows of $30,000 for 6 years?

A. 19.9 % B. 30.0 % C. 32.3 % D. 80.0 %

AACSB: Reflective Thinking Skills Blooms: Application Brealey - Chapter 008 #41 Difficulty: Medium Learning Objective: 8-2

42.

What is the IRR of a project that costs $100,000 and provides cash inflows of $17,000 annually for six years?

A. 0.57 % B. 2.00 % C. 5.69 % D. 56.87 %

AACSB: Reflective Thinking Skills Blooms: Application Brealey - Chapter 008 #42 Difficulty: Medium Learning Objective: 8-2

43.

What is the minimum number of years that an investment costing $500,000 must return $65,000 per year at a discount rate of 13% in order to be an acceptable investment?

A. 8.69 years B. 14.00 years C. 27.51 years D. An infinite number of years. NPV = (65,000/.13) - $500,000 NPV = 500,000 - 500,000 NPV = 0 AACSB: Reflective Thinking Skills Blooms: Application Brealey - Chapter 008 #43 Difficulty: Medium Learning Objective: 8-3

44.

Which of the following statements is most likely correct for a project costing $50,000 and returning $14,000 per year for five years?

A. NPV = $3,071.01. B. NPV = $20,000. C. IRR = 2.8%. D. IRR is greater than 10%.

AACSB: Reflective Thinking Skills Blooms: Application Brealey - Chapter 008 #44 Difficulty: Medium Learning Objective: 8-2

45.

If the IRR for a project is 15%, then the project's NPV would be:

A. negative at a discount rate of 10%. B. positive at a discount rate of 20%. C. negative at a discount rate of 20%. D. positive at a discount rate of 15%. AACSB: Reflective Thinking Skills Blooms: Application Brealey - Chapter 008 #45 Difficulty: Medium Learning Objective: 8-1

46.

As long as the NPV of a project declines smoothly with increases in the discount rate, the project is acceptable if its:

A. internal rate of return is positive. B. net present value does not equal zero. C. rate of return exceeds the cost of capital. D. cash inflows exceed the initial cost. AACSB: Reflective Thinking Skills Blooms: Understanding Brealey - Chapter 008 #46 Difficulty: Medium Learning Objective: 8-1

47.

A project can have as many different internal rates of return as it has:

A. cash inflows. B. cash outflows. C. periods of cash flow. D. changes in the sign of the cash flows. AACSB: Reflective Thinking Skills Blooms: Understanding Brealey - Chapter 008 #47 Difficulty: Medium Learning Objective: 8-2

48.

What is the NPV for the following project cash flows at a discount rate of 15%? CF 0 = ($1,000), CF1 = $700, CF2 = $700. A. ($308.7 0) B. ($138.0 0) C. $138.0 0 D. $308.7 0

AACSB: Reflective Thinking Skills Blooms: Application Brealey - Chapter 008 #48 Difficulty: Medium Learning Objective: 8-1

49.

Evaluate the following project using an IRR criterion, based on an opportunity cost of 10%: CF0 = -6,000, CF1 = +3,300, CF2 = +3,300.

A. Accept, since IRR exceeds opportunity cost. B. Reject, since opportunity cost exceeds IRR. C. Accept, since opportunity cost exceeds IRR. D. Reject, since IRR exceeds opportunity cost. AACSB: Reflective Thinking Skills Blooms: Application Brealey - Chapter 008 #49 Difficulty: Medium Learning Objective: 8-2

50.

A project costing $20,000 generates cash inflows of $9,000 annually for the first three years, followed by cash outflows of $1,000 annually for two years. At most, this project has ______ different IRR(s).

A. on e B. tw o C. thre e D. fiv e AACSB: Reflective Thinking Skills Blooms: Application Brealey - Chapter 008 #50 Difficulty: Medium Learning Objective: 8-2

51.

How many IRRs are possible for the following set of cash flows? CF0 = -1,000, CF1 = +500, CF2 = -300, CF3 = +1,000, CF4 = +200.

A. 1 B. 2 C. 3 D. 4 AACSB: Reflective Thinking Skills Blooms: Application Brealey - Chapter 008 #51 Difficulty: Medium Learning Objective: 8-2

52.

Given a particular set of project cash flows, which of the following statements is correct?

A. There can be project. B. There can be project. C. There can be project. D. There can be project.

only one NPV for the only one IRR for the more than one NPV for the only one profitability index for the AACSB: Reflective Thinking Skills Blooms: Understanding Brealey - Chapter 008 #52 Difficulty: Hard Learning Objective: 8-1

53.

When projects are mutually exclusive, selection should be made according to the project with the:

A. longer life. B. larger initial size. C. highest IRR. D. highest NPV. AACSB: Reflective Thinking Skills Blooms: Understanding Brealey - Chapter 008 #53 Difficulty: Medium Learning Objective: 8-1

54.

When managers select correctly from among mutually exclusive projects, they:

A. may give up rate of return for NPV. B. may give up NPV for rate of return. C. have a tendency to select the largest project. D. focus on payback method to avoid conflicting signals. AACSB: Reflective Thinking Skills Blooms: Understanding Brealey - Chapter 008 #54 Difficulty: Medium Learning Objective: 8-1

55.

The reason why the IRR criterion can give conflicting signals with mutually exclusive projects is:

A. The NPVs of these projects cross over at some discount rate. B. Discounted cash flow is not considered with mutually exclusive projects. C. IRR performs better with accounting returns than with cash flows. D. Mutually exclusive projects have multiple IRRs. AACSB: Reflective Thinking Skills Blooms: Understanding Brealey - Chapter 008 #55 Difficulty: Medium Learning Objective: 8-2

56.

When graphing NPV at different discount rates for mutually exclusive projects, the project with the lower IRR should be selected whenever:

A. the rate corresponding to the crossover NPV exceeds the opportunity cost of capital. B. the rate corresponding to the crossover NPV is less than the opportunity cost of capital. C. that IRR exceeds the opportunity cost of capital. D. the NPV is negative when discounted at the IRR. AACSB: Reflective Thinking Skills Blooms: Understanding Brealey - Chapter 008 #56 Difficulty: Hard Learning Objective: 8-1

57.

When managers cannot determine whether to invest now or wait until costs decrease later, the rule should be to:

A. postpone until costs reach their lowest. B. invest now to maximize the NPV. C. postpone until the opportunity cost reaches its lowest. D. invest at the date that gives the highest NPV today. AACSB: Reflective Thinking Skills Blooms: Understanding Brealey - Chapter 008 #57 Difficulty: Medium Learning Objective: 8-4

58.

Which of the following is incorrect for a borrowing project?

A. Its NPV graph rises as discount rates increase. B. Its cash flow at time zero is typically an inflow. C. Its NPV is positive. D. It's acceptable if IRR exceeds cost of capital. AACSB: Reflective Thinking Skills Blooms: Understanding Brealey - Chapter 008 #58 Difficulty: Hard Learning Objective: 8-1

59.

When mutually exclusive projects have different lives, the project which should be selected will have the:

A. highest IRR. B. longest life. C. lowest equivalent annual cost. D. highest NPV, discounted at the opportunity cost of capital. AACSB: Reflective Thinking Skills Blooms: Understanding Brealey - Chapter 008 #59 Difficulty: Medium Learning Objective: 8-4

60.

Which mutually exclusive project would you select, if both are priced at $1,000 and your discount rate is 15%; Project A with three annual cash flows of $1,000, or Project B, with three years of zero cash flow followed by three years of $1,500 annually?

A. Project A. B. Project B. C. You are indifferent since the NPVs are equal. D. Neither project should be selected. AACSB: Reflective Thinking Skills Blooms: Application Brealey - Chapter 008 #60 Difficulty: Hard Learning Objective: 8-1

61.

Which of the following best illustrates the problem imposed by capital rationing?

A. Accepting projects with the highest NPVs first B. Accepting projects with the highest IRRs first C. Bypassing projects that have positive NPVs D. Bypassing projects that have positive IRRs AACSB: Reflective Thinking Skills Blooms: Understanding Brealey - Chapter 008 #61 Difficulty: Easy

Learning Objective: 8-5

62.

Soft capital rationing:

A. is costly to shareholders. B. is used to determine mutually exclusive projects. C. should be costless to the shareholders of the firm. D. solves the problem of investment timing. AACSB: Reflective Thinking Skills Blooms: Understanding Brealey - Chapter 008 #62 Difficulty: Medium Learning Objective: 8-5

63.

Soft capital rationing is imposed upon a firm from _____ sources, while hard capital rationing is imposed from _____ sources.

A. internal; external B. internal; internal C. external; internal D. external; external AACSB: Communication Abilities Blooms: Knowledge Brealey - Chapter 008 #63 Difficulty: Easy Learning Objective: 8-5

64.

If a project has a cost of $50,000 and a profitability index of 0.4, then:

A. its cash inflows are $70,000. B. the present value of its cash inflows is $30,000. C. its IRR is 20%. D. its NPV is $20,000. AACSB: Reflective Thinking Skills Blooms: Application Brealey - Chapter 008 #64 Difficulty: Medium Learning Objective: 8-5

65.

When hard capital rationing exists, projects may be accurately evaluated by use of:

A. payback period. B. mutually exclusive IRRs. C. a profitability index. D. borrowing, rather than lending, projects. AACSB: Reflective Thinking Skills Blooms: Understanding Brealey - Chapter 008 #65 Difficulty: Medium Learning Objective: 8-5

66.

Use of a profitability index to select projects in the absence of capital rationing:

A. will provide the same rankings as an NPV criterion. B. will maximize NPV, but not IRR. C. can result in misguided selections. D. is technically impossible. AACSB: Reflective Thinking Skills Blooms: Understanding Brealey - Chapter 008 #66 Difficulty: Medium Learning Objective: 8-5

67.

The use of a profitability index will always provide results consistent with selecting the project with the:

A. highest NPV. B. highest IRR. C. largest dollar invested per rate of return. D. largest return per dollar invested. AACSB: Reflective Thinking Skills Blooms: Understanding Brealey - Chapter 008 #67 Difficulty: Medium Learning Objective: 8-5

68.

Which of the following investment criteria takes the time value of money into consideration?

A. Payback period B. Profitability index C. Internal rate of return for borrowing projects D. All of these AACSB: Reflective Thinking Skills Blooms: Understanding Brealey - Chapter 008 #68 Difficulty: Easy Learning Objective: 8-1

69.

When calculating a project's payback period, cash flows are discounted at:

A. the opportunity cost of capital. B. the internal rate of return. C. the risk-free rate of return. D. a discount rate of zero. AACSB: Reflective Thinking Skills Blooms: Understanding Brealey - Chapter 008 #69 Difficulty: Medium Learning Objective: 8-3

70.

The profitability index for a project costing $40,000 and returning $15,000 annually for four years at an opportunity cost of capital of 12% is:

A. 0.13 9 B. 0.32 0 C. 0.50 0 D. 0.86 1

AACSB: Reflective Thinking Skills Blooms: Application Brealey - Chapter 008 #70 Difficulty: Medium Learning Objective: 8-5

71.

Which of the following statements is true for a project with $20,000 initial cost, cash inflows of $5,800 per year for six years, and a discount rate of 15%?

A. Its payback period is roughly 3 1/2 years. B. Its NPV is $2,194. C. Its IRR is 1.85%. D. Its profitability index is 0.109. AACSB: Reflective Thinking Skills Blooms: Application Brealey - Chapter 008 #71 Difficulty: Medium Learning Objective: 8-3

72.

The "gold standard" of investment criteria refers to:

A. net present value. B. internal rate of return. C. payback period. D. profitability index. AACSB: Communication Abilities Blooms: Knowledge Brealey - Chapter 008 #72 Difficulty: Medium Learning Objective: 8-1

73.

Which of the following ...