FIN 300 REVIEW TIPS QUESTIONS AND ANSWERS
SURE A+
✔✔_______ is the return on the best alternative use of an asset, or the highest return
that will not be earned if funds are invested in a particular project. - ✔✔Opportunity cost
✔✔________ are effects of a project on cash flows in other parts of the firm. -
✔✔Externalities
✔✔A company is considering a new project. The company's CFO plans to calculate the
project's NPV by discounting the relevant cash flows (which include the initial up-front
costs, the operating cash flows, and the terminal cash flows) at the company's cost of
capital (WACC). Which of the following factors should the CFO include when estimating
the relevant cash flows?
A ) Any sunk costs associated with the project.
B ) Any interest expenses associated with the project.
C ) Any opportunity costs associated with the project.
D ) All of the statements above are correct - ✔✔Any opportunity costs associated with
the project.
✔✔When evaluating a new project, the firm should consider all of the following factors
except:
A ) Changes in net operating working capital attributable to the project.
B ) Previous expenditures associated with a market test to determine the feasibility of
the project
if the expenditures have been expensed for tax purposes.
C ) Current rental income of a building owned by the firm if it is not used for this project.
D ) The decline in sales of an existing product directly attributable to this project. -
✔✔Previous expenditures associated with a market test to determine the feasibility of
the project
, if the expenditures have been expensed for tax purposes
✔✔Which of the following statements is most correct? The modified IRR (MIRR)
method:
Overcomes the problem of multiple internal rates of return.
Compounds cash flows at the cost of capital.
Overcomes the problems of cash flow timing and project size that lead to criticism of the
regular IRR method.
a and b are correct. - ✔✔a and b are correct.
✔✔______ projects are a set of projects where only one can be accepted. - ✔✔Mutually
exclusive
✔✔Determine the internal rate of return for a project that costs -$104,000 and would
yield after-tax cash flows of $16,000 the first year, $18,000 the second year, $21,000
the third year, $23,000 the fourth year, $27,000 the fifth year, and $33,000 the sixth
year. - ✔✔7.72%
✔✔Determine the internal rate of return for a project that costs $177,000 and would
yield after-tax cash flows of $21,000 per year for the first 5 years, $29,000 per year for
the next 5 years, and $42,000 per year for the following 5 years. - ✔✔12.60%
✔✔The Kyler Murray Company is investing in a new piece of equipment at a cost of $6
million. The project is expected to generate annual cash flows of $1,850,000 over the
next six years. The firm's cost of capital is 21 percent. What is the project's NPV? (Do
not round intermediate computations. Round final answer to nearest dollar.) - ✔✔$2538
✔✔The Corbin Carroll Company bought new machinery for $5 million. This is expected
to result in additional cash flows of $1.2 million over the next seven years. What is the
payback period for this project? If its acceptance period is five years, will this project be
accepted? (Round your answer to two decimal places.) - ✔✔4.17 years
✔✔The Clayton Kershaw Company is in the process of constructing a new plant at a
cost of $30 million. It expects the project to generate cash flows of $13,000,000,
$23,000,000, and $29,000,000 over the next three years. The cost of capital is 20
percent. What is the net present value of this project? (Do not round intermediate
computations but round your final answer to the nearest dollar) - ✔✔$13,587,963
✔✔The Tiger Woods Golf Resort is redoing its golf course at a cost of $2,744,320. It
expects to generate cash flows of $1,223,445, $2,007,812, and $3,147,890 over the
SURE A+
✔✔_______ is the return on the best alternative use of an asset, or the highest return
that will not be earned if funds are invested in a particular project. - ✔✔Opportunity cost
✔✔________ are effects of a project on cash flows in other parts of the firm. -
✔✔Externalities
✔✔A company is considering a new project. The company's CFO plans to calculate the
project's NPV by discounting the relevant cash flows (which include the initial up-front
costs, the operating cash flows, and the terminal cash flows) at the company's cost of
capital (WACC). Which of the following factors should the CFO include when estimating
the relevant cash flows?
A ) Any sunk costs associated with the project.
B ) Any interest expenses associated with the project.
C ) Any opportunity costs associated with the project.
D ) All of the statements above are correct - ✔✔Any opportunity costs associated with
the project.
✔✔When evaluating a new project, the firm should consider all of the following factors
except:
A ) Changes in net operating working capital attributable to the project.
B ) Previous expenditures associated with a market test to determine the feasibility of
the project
if the expenditures have been expensed for tax purposes.
C ) Current rental income of a building owned by the firm if it is not used for this project.
D ) The decline in sales of an existing product directly attributable to this project. -
✔✔Previous expenditures associated with a market test to determine the feasibility of
the project
, if the expenditures have been expensed for tax purposes
✔✔Which of the following statements is most correct? The modified IRR (MIRR)
method:
Overcomes the problem of multiple internal rates of return.
Compounds cash flows at the cost of capital.
Overcomes the problems of cash flow timing and project size that lead to criticism of the
regular IRR method.
a and b are correct. - ✔✔a and b are correct.
✔✔______ projects are a set of projects where only one can be accepted. - ✔✔Mutually
exclusive
✔✔Determine the internal rate of return for a project that costs -$104,000 and would
yield after-tax cash flows of $16,000 the first year, $18,000 the second year, $21,000
the third year, $23,000 the fourth year, $27,000 the fifth year, and $33,000 the sixth
year. - ✔✔7.72%
✔✔Determine the internal rate of return for a project that costs $177,000 and would
yield after-tax cash flows of $21,000 per year for the first 5 years, $29,000 per year for
the next 5 years, and $42,000 per year for the following 5 years. - ✔✔12.60%
✔✔The Kyler Murray Company is investing in a new piece of equipment at a cost of $6
million. The project is expected to generate annual cash flows of $1,850,000 over the
next six years. The firm's cost of capital is 21 percent. What is the project's NPV? (Do
not round intermediate computations. Round final answer to nearest dollar.) - ✔✔$2538
✔✔The Corbin Carroll Company bought new machinery for $5 million. This is expected
to result in additional cash flows of $1.2 million over the next seven years. What is the
payback period for this project? If its acceptance period is five years, will this project be
accepted? (Round your answer to two decimal places.) - ✔✔4.17 years
✔✔The Clayton Kershaw Company is in the process of constructing a new plant at a
cost of $30 million. It expects the project to generate cash flows of $13,000,000,
$23,000,000, and $29,000,000 over the next three years. The cost of capital is 20
percent. What is the net present value of this project? (Do not round intermediate
computations but round your final answer to the nearest dollar) - ✔✔$13,587,963
✔✔The Tiger Woods Golf Resort is redoing its golf course at a cost of $2,744,320. It
expects to generate cash flows of $1,223,445, $2,007,812, and $3,147,890 over the
