FNAN 522 FINAL 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. - Answer -$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. - Answer -2.21%
In which of the following situations would it be appropriate to use the IRR method to
make an investment decision? - Answer -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? - Answer -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? -
Answer -$12.6 million
Which of the following could be a sunk cost? - Answer -all of these
Which of the following is an example of an opportunity cost? - Answer -all of these
Which of the following is the best reason to use the payback method to evaluate
investments? - Answer -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? - Answer -Modified
Internal Rate of Return and Net Present Value.
Under the present value concept, a lottery winner would rather receive: - Answer -It is
not clear which of these is preferable. The best answer depends on the interest rate that
the lottery winner faces.
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. - Answer -$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. - Answer -2.21%
In which of the following situations would it be appropriate to use the IRR method to
make an investment decision? - Answer -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? - Answer -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? -
Answer -$12.6 million
Which of the following could be a sunk cost? - Answer -all of these
Which of the following is an example of an opportunity cost? - Answer -all of these
Which of the following is the best reason to use the payback method to evaluate
investments? - Answer -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? - Answer -Modified
Internal Rate of Return and Net Present Value.
Under the present value concept, a lottery winner would rather receive: - Answer -It is
not clear which of these is preferable. The best answer depends on the interest rate that
the lottery winner faces.
