D076- FINANCE- MASTER LIST

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. 0 / 1 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.