FNAN 522 FINAL EXAM QUESTIONS & ANSWERS
A company is considering a project that has a discount rate of 5%. It will require an
initial investment of $200,000. In the first year, it will have $100,000 in net cash inflows
(one year after the initial investment). In year 2, it will have cash inflows of $100,000
(two years after the initial investment), and in year 3 the project will generate $200,000
(three years after the initial investment). What is the project's NPV? Assume all cash
flows occur at the end of the year.
a. $190,476
b. $193,204
c. $358,708
d. $158,709 - Answer -d. $158,709
A project has an initial investment requirement of $100,000. In year 1, it should earn
$25,000; in year two, $30,000; and in year 3, $50,000. What is the project's internal rate
of return? Assume the cash flows in years one, two, and three happen at the end of the
year.
a. 5.0%
b. 6.21%
c. 7.56%
d. 2.21% - Answer -d. 2.21%
In which of the following situations would it be appropriate to use the IRR method to
make an investment decision?
a. To compare two projects that have an equal initial investment and lifespan.
b. All of these answers.
c. To assess a project which cash flows fluctuate between positive and negative.
d. To compare two investments that have different durations. - Answer -a. To compare
two projects that have an equal initial investment and lifespan.
Under the internal rate of return rule in capital budgeting, which of the following
statements CANNOT be true?
a. The initial investment can be the cost from purchasing new equipment.
b. The cash inflows can be estimates.
c. The internal rate of return can vary throughout the life of a project.
d. The internal rate of return can be equal to the cost of capital. - Answer -c. The
internal rate of return can vary throughout the life of a project.
You have just been offered a contract worth $5.6 million per year for 3 years. However,
to take the contract, you will need to purchase some new equipment. Your discount rate
, for this project is 15.3%. You are still negotiating the purchase price of the equipment.
What is the most you can pay for the equipment and still have a positive NPV?
a. $5.6 million
b. $16.8 million
c. $23.4 million
d. $12.6 million - Answer -d. $12.6 million
Which of the following could be a sunk cost?
a. A feasibility study that attempted to determine the economic viability of a project.
b. All of these answers.
c. Labor hours spent on planning project.
d. Equipment purchased to pursue a project. - Answer -b. All of these answers.
Which of the following is an example of an opportunity cost?
a. If invest in one of two projects, the cost is the lost revenue from the other project.
b. If you buy a candy bar instead of a soda, the cost is thirst.
c. All of these answers.
d. If you watch a game instead of going for a run, the cost is poorer personal health. -
Answer -c. All of these answers.
Which of the following is the best reason to use the payback method to evaluate
investments?
Select one:
a. The payback method covers all cash inflows and outflows for the duration of the
investment.
b. If you use the payback method, you do not need to perform additional analyses.
c. The payback method is easy to use and understand for most people, regardless of
training.
d. The payback method adjusts for the project's riskiness. - Answer -c. The payback
method is easy to use and understand for most people, regardless of training.
You are analyzing two different investments and will present your findings to company
executives. Both projects have cash flows that alternate between positive and negative.
Which budgeting method should you use to evaluate the projects?
a. Any of these choices are appropriate.
b. Modified Internal Rate of Return and Net Present Value.
c. Internal Rate of Return and Net Present Value.
d. Payback period method. - Answer -b. Modified Internal Rate of Return and Net
Present Value.
Under the present value concept, a lottery winner would rather receive:
Select one:
A company is considering a project that has a discount rate of 5%. It will require an
initial investment of $200,000. In the first year, it will have $100,000 in net cash inflows
(one year after the initial investment). In year 2, it will have cash inflows of $100,000
(two years after the initial investment), and in year 3 the project will generate $200,000
(three years after the initial investment). What is the project's NPV? Assume all cash
flows occur at the end of the year.
a. $190,476
b. $193,204
c. $358,708
d. $158,709 - Answer -d. $158,709
A project has an initial investment requirement of $100,000. In year 1, it should earn
$25,000; in year two, $30,000; and in year 3, $50,000. What is the project's internal rate
of return? Assume the cash flows in years one, two, and three happen at the end of the
year.
a. 5.0%
b. 6.21%
c. 7.56%
d. 2.21% - Answer -d. 2.21%
In which of the following situations would it be appropriate to use the IRR method to
make an investment decision?
a. To compare two projects that have an equal initial investment and lifespan.
b. All of these answers.
c. To assess a project which cash flows fluctuate between positive and negative.
d. To compare two investments that have different durations. - Answer -a. To compare
two projects that have an equal initial investment and lifespan.
Under the internal rate of return rule in capital budgeting, which of the following
statements CANNOT be true?
a. The initial investment can be the cost from purchasing new equipment.
b. The cash inflows can be estimates.
c. The internal rate of return can vary throughout the life of a project.
d. The internal rate of return can be equal to the cost of capital. - Answer -c. The
internal rate of return can vary throughout the life of a project.
You have just been offered a contract worth $5.6 million per year for 3 years. However,
to take the contract, you will need to purchase some new equipment. Your discount rate
, for this project is 15.3%. You are still negotiating the purchase price of the equipment.
What is the most you can pay for the equipment and still have a positive NPV?
a. $5.6 million
b. $16.8 million
c. $23.4 million
d. $12.6 million - Answer -d. $12.6 million
Which of the following could be a sunk cost?
a. A feasibility study that attempted to determine the economic viability of a project.
b. All of these answers.
c. Labor hours spent on planning project.
d. Equipment purchased to pursue a project. - Answer -b. All of these answers.
Which of the following is an example of an opportunity cost?
a. If invest in one of two projects, the cost is the lost revenue from the other project.
b. If you buy a candy bar instead of a soda, the cost is thirst.
c. All of these answers.
d. If you watch a game instead of going for a run, the cost is poorer personal health. -
Answer -c. All of these answers.
Which of the following is the best reason to use the payback method to evaluate
investments?
Select one:
a. The payback method covers all cash inflows and outflows for the duration of the
investment.
b. If you use the payback method, you do not need to perform additional analyses.
c. The payback method is easy to use and understand for most people, regardless of
training.
d. The payback method adjusts for the project's riskiness. - Answer -c. The payback
method is easy to use and understand for most people, regardless of training.
You are analyzing two different investments and will present your findings to company
executives. Both projects have cash flows that alternate between positive and negative.
Which budgeting method should you use to evaluate the projects?
a. Any of these choices are appropriate.
b. Modified Internal Rate of Return and Net Present Value.
c. Internal Rate of Return and Net Present Value.
d. Payback period method. - Answer -b. Modified Internal Rate of Return and Net
Present Value.
Under the present value concept, a lottery winner would rather receive:
Select one:
