D076- FINANCE- MASTER LIST Questions and
Answers Grade A+ 2023
A potential project to expand the size of an apartment complex will cost $100,000. Its calculated
net present value is $5,000. Given this information, which statement is correct? - -The project
should be accepted because it has a positive NPV.
-The YTM of a bond went from 8% to 7%. What can be predicted about the price of the bond? -
-It will increase.
-
The company Betsy's Wigs is considering three potential projects that are not mutually exclusive.
The IRR, NPV, and PI for each project are listed in the table below. Use this information to rank
the projects in the order in which Betsy's Wigs should accept them to bring the most value to the
firm. - -Project 3, Project 2, Project 1
Correct! The projects with the highest PIs should be accepted first.
-A company is trying to decide which of four projects to invest in.
Project 1 has an IRR of 14% and an NPV of $54,000.
Project 2 has an IRR of 11% and an NPV of $67,000.
Project 3 has an IRR of 9% and an NPV of $60,000.
Project 4 has an IRR of 13% and an NPV of $47,000.
If the company can do only one project, which project should it choose to add the greatest value
to the firm? - -Project 2
Correct! The project with the highest NPV will bring the most value to the company
-Why is it important to have an accurate, carefully calculated required rate of return as part of the
NPV? - -An inaccurate required rate estimate could cause a firm to reject good projects or accept
bad projects.
Correct! While the required rate of return is the most difficult part of the NPV calculation to
estimate, it is also the most important.
-Why is it important to consider all relevant cash flows in an ideal evaluation method for capital
investment? - -Without considering every cash flow of a potential project, you do not know how
the project will enhance the value of a firm.
Correct! You need to include all the cash flows coming from a potential project to understand
how much value they will add to the firm.
-Talia is comparing four mutually exclusive projects. In order to choose the best project to
optimize the goal of the firm, which capital budgeting method should Talia use? - -Net present
value (NPV)
, Correct! When you compare mutually exclusive projects, you should look at how much value is
added by each project, because you can do only one of them. Therefore, you should use the NPV
method to choose a project.
-Alphabet Co. has $50,000 to spend on capital investment projects for the next year. It will do as
many projects as it has cash for. Alphabet Co. calculates the potential incremental cash flows and
costs of the projects as well as the NPV, IRR, and PI for each project. How should the company
decide which projects to invest in if it wants to maximize the total amount of value created? - -It
should choose the projects with the highest PIs until all capital has been used.
Correct! By choosing the projects with the highest PI, Alphabet Co. will be able to use its limited
capital effectively to create the most overall value for the firm.
-What is opportunity cost as it relates to the time value of money? - -t is the opportunity you
forgo to invest in other options due to the time scope of an investment.
Correct! Opportunity cost is the cost that you have to give up for something as a result of
investing in something else.
-Why is the timing of cash flows an important characteristic of capital investment? - -Timing of
cash flows is related to the opportunity cost associated with those cash flows.
Correct! The cash flows of an investment need to be compared to the cash flows of other
projects.
-
You are considering four projects. The initial cost to start each project is $500,000, and the total
cash inflows generated by each project are $600,000. Each project also has the same level of
risk. The only difference between these four projects is the cash flow patterns.
Year 1 Year 2 Year 3
Project A $200,000 $200,000 $200,000
Project B $300,000 $200,000 $100,000
Project C $100,000 $200,000 $300,000
Project D $600,000 $300,000 -$300,000
Given the information above, which statement is correct about these four projects? - -Project D
should be chosen first given that the project will receive cash to sum to $600,000 the most
quickly.
Correct! Project D receives cash flows the most quickly of the four projects. Given the concept
of the time value of money, Project D should generate the highest NPV.
-Why is there always a cost for bringing funds into a business? - -A business must compensate
investors for the risk that they are taking to invest in the business.
-
What is the relationship between the risk and the rate of return? - -The higher the risk investors
have to take on, the higher return they require.
Answers Grade A+ 2023
A potential project to expand the size of an apartment complex will cost $100,000. Its calculated
net present value is $5,000. Given this information, which statement is correct? - -The project
should be accepted because it has a positive NPV.
-The YTM of a bond went from 8% to 7%. What can be predicted about the price of the bond? -
-It will increase.
-
The company Betsy's Wigs is considering three potential projects that are not mutually exclusive.
The IRR, NPV, and PI for each project are listed in the table below. Use this information to rank
the projects in the order in which Betsy's Wigs should accept them to bring the most value to the
firm. - -Project 3, Project 2, Project 1
Correct! The projects with the highest PIs should be accepted first.
-A company is trying to decide which of four projects to invest in.
Project 1 has an IRR of 14% and an NPV of $54,000.
Project 2 has an IRR of 11% and an NPV of $67,000.
Project 3 has an IRR of 9% and an NPV of $60,000.
Project 4 has an IRR of 13% and an NPV of $47,000.
If the company can do only one project, which project should it choose to add the greatest value
to the firm? - -Project 2
Correct! The project with the highest NPV will bring the most value to the company
-Why is it important to have an accurate, carefully calculated required rate of return as part of the
NPV? - -An inaccurate required rate estimate could cause a firm to reject good projects or accept
bad projects.
Correct! While the required rate of return is the most difficult part of the NPV calculation to
estimate, it is also the most important.
-Why is it important to consider all relevant cash flows in an ideal evaluation method for capital
investment? - -Without considering every cash flow of a potential project, you do not know how
the project will enhance the value of a firm.
Correct! You need to include all the cash flows coming from a potential project to understand
how much value they will add to the firm.
-Talia is comparing four mutually exclusive projects. In order to choose the best project to
optimize the goal of the firm, which capital budgeting method should Talia use? - -Net present
value (NPV)
, Correct! When you compare mutually exclusive projects, you should look at how much value is
added by each project, because you can do only one of them. Therefore, you should use the NPV
method to choose a project.
-Alphabet Co. has $50,000 to spend on capital investment projects for the next year. It will do as
many projects as it has cash for. Alphabet Co. calculates the potential incremental cash flows and
costs of the projects as well as the NPV, IRR, and PI for each project. How should the company
decide which projects to invest in if it wants to maximize the total amount of value created? - -It
should choose the projects with the highest PIs until all capital has been used.
Correct! By choosing the projects with the highest PI, Alphabet Co. will be able to use its limited
capital effectively to create the most overall value for the firm.
-What is opportunity cost as it relates to the time value of money? - -t is the opportunity you
forgo to invest in other options due to the time scope of an investment.
Correct! Opportunity cost is the cost that you have to give up for something as a result of
investing in something else.
-Why is the timing of cash flows an important characteristic of capital investment? - -Timing of
cash flows is related to the opportunity cost associated with those cash flows.
Correct! The cash flows of an investment need to be compared to the cash flows of other
projects.
-
You are considering four projects. The initial cost to start each project is $500,000, and the total
cash inflows generated by each project are $600,000. Each project also has the same level of
risk. The only difference between these four projects is the cash flow patterns.
Year 1 Year 2 Year 3
Project A $200,000 $200,000 $200,000
Project B $300,000 $200,000 $100,000
Project C $100,000 $200,000 $300,000
Project D $600,000 $300,000 -$300,000
Given the information above, which statement is correct about these four projects? - -Project D
should be chosen first given that the project will receive cash to sum to $600,000 the most
quickly.
Correct! Project D receives cash flows the most quickly of the four projects. Given the concept
of the time value of money, Project D should generate the highest NPV.
-Why is there always a cost for bringing funds into a business? - -A business must compensate
investors for the risk that they are taking to invest in the business.
-
What is the relationship between the risk and the rate of return? - -The higher the risk investors
have to take on, the higher return they require.
