FNAN 522 EXAM STUDY GUIDE
COMPLETE QUESTIONS AND ANSWERS
GRADED A+
◉ 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.
COMPLETE QUESTIONS AND ANSWERS
GRADED A+
◉ 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.
