FNAN 522 FINAL QUESTIONS AND ANSWERS
A company is analyzing a variety of potential investments using different capital
budgeting methods. Which of the following represents the most profitable choice based
on the information provided?
a.The company picks a project with an NPV of $250,000 over one with an NPV of
$300,000.
b.The company picks a project with a 5 year payback period over one with a 3 year
payback period.
c.The company picks a project with profitability index of 1.25 over a project with a PI of -
.25.
d.The company picks a project with an accounting rate of return 5% over one with an
ARR of 3%. - Answer -The company picks a project with profitability index of 1.25 over
a project with a PI of -.25.
A firm is trying to choose the most profitable project to invest in. Which of the following
should be used as the company's discount rate?
a.The projects' average internal rate of return.
b.The company's reinvestment rate or weighted average cost of capital.
c.The company's profitability index.
d.The company's weighted average cost of capital. - Answer -The company's
reinvestment rate or weighted average cost of capital.
Calculate the discounted payback period for a project with a discount rate of 5% the
following cash flows:Year 0: -$2000Year 1: $1000Year 2: -$1000Year 3: $1000Year 4:
$3000Year 5: $2000
:a.3.44 years.
b.3.56 years.
c.4.44 years.
d.4 years. - Answer -3.44 years.
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.To compare two investments that have different durations.
c.To assess a project which cash flows fluctuate between positive and negative.
d.All of these answers. - Answer -To compare two projects that have an equal initial
investment and lifespan.
The tax rate that applies to the last dollar of the tax base and is often applied to the
change in one's tax obligation as income rises is called _____.
:a.the statutory tax rate
b.the marginal tax rate
c.the effective tax rate
, d.the average tax rate - Answer -the marginal tax rate
When evaluating the cash flows from a project, a financial manager needs to analyze
the:
:a.costs, benefits, and opportunity costs of the project.
b.The costs and benefits of the project only
c.The benefits of the project only
d.The costs of the project only - Answer -costs, benefits, and opportunity costs of the
project.
Which of the following describes an advantage the internal rate of return has over net
present value for capital budgeting purposes?
a.All of these answers.
b.The IRR method adjusts for the riskiness (or uncertainty) of the projected cash flows
c.Internal rate of return is an indicator of the efficiency, quality or yield of an investment.
d.The IRR method recognizes the firm's opportunity costs. - Answer -Internal rate of
return is an indicator of the efficiency, quality or yield of an investment.
Which of the following is a correct definition of a capital budgeting method?
:a.Real option analysis is the ratio of payoff to investment of a proposed project.
b.The profitability index is the time required for an investment to repay the original
investment.
c.Equivalent annuity method essentially value projects as if they were risky bonds.
d.The internal rate of return is the discount rate that gives a net present value of zero. -
Answer -The internal rate of return is the discount rate that gives a net present value of
zero.
Which of the following is a way cash flow factors can be used to improve a business?
a.It can be used to .determine a project's rate of return or value
b.It can be used to evaluate the ""quality"" of income generated by accrual accounting.
c.All of these answers.
d.It can be used to determine problems with a business's liquidity. - Answer -All of
these answers.
Which of the following is an element needed to calculate an asset's depreciation?
a.All of these answers
b.The cost of the asset minus the asset's salvage value.
c.The estimated useful life of the asset.
d.A method of apportioning the cost of the asset. - Answer -All of these answers.
You have an opportunity to invest $48,900 now in return for $61,200 in one year. If your
cost of capital is 8.6%,what is the NPV of thisinvestment?
a.$6,231.53
b.$7,453.59
c.$8,856.92
d.$12,300 - Answer -$7,453.59
A company is analyzing a variety of potential investments using different capital
budgeting methods. Which of the following represents the most profitable choice based
on the information provided?
a.The company picks a project with an NPV of $250,000 over one with an NPV of
$300,000.
b.The company picks a project with a 5 year payback period over one with a 3 year
payback period.
c.The company picks a project with profitability index of 1.25 over a project with a PI of -
.25.
d.The company picks a project with an accounting rate of return 5% over one with an
ARR of 3%. - Answer -The company picks a project with profitability index of 1.25 over
a project with a PI of -.25.
A firm is trying to choose the most profitable project to invest in. Which of the following
should be used as the company's discount rate?
a.The projects' average internal rate of return.
b.The company's reinvestment rate or weighted average cost of capital.
c.The company's profitability index.
d.The company's weighted average cost of capital. - Answer -The company's
reinvestment rate or weighted average cost of capital.
Calculate the discounted payback period for a project with a discount rate of 5% the
following cash flows:Year 0: -$2000Year 1: $1000Year 2: -$1000Year 3: $1000Year 4:
$3000Year 5: $2000
:a.3.44 years.
b.3.56 years.
c.4.44 years.
d.4 years. - Answer -3.44 years.
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.To compare two investments that have different durations.
c.To assess a project which cash flows fluctuate between positive and negative.
d.All of these answers. - Answer -To compare two projects that have an equal initial
investment and lifespan.
The tax rate that applies to the last dollar of the tax base and is often applied to the
change in one's tax obligation as income rises is called _____.
:a.the statutory tax rate
b.the marginal tax rate
c.the effective tax rate
, d.the average tax rate - Answer -the marginal tax rate
When evaluating the cash flows from a project, a financial manager needs to analyze
the:
:a.costs, benefits, and opportunity costs of the project.
b.The costs and benefits of the project only
c.The benefits of the project only
d.The costs of the project only - Answer -costs, benefits, and opportunity costs of the
project.
Which of the following describes an advantage the internal rate of return has over net
present value for capital budgeting purposes?
a.All of these answers.
b.The IRR method adjusts for the riskiness (or uncertainty) of the projected cash flows
c.Internal rate of return is an indicator of the efficiency, quality or yield of an investment.
d.The IRR method recognizes the firm's opportunity costs. - Answer -Internal rate of
return is an indicator of the efficiency, quality or yield of an investment.
Which of the following is a correct definition of a capital budgeting method?
:a.Real option analysis is the ratio of payoff to investment of a proposed project.
b.The profitability index is the time required for an investment to repay the original
investment.
c.Equivalent annuity method essentially value projects as if they were risky bonds.
d.The internal rate of return is the discount rate that gives a net present value of zero. -
Answer -The internal rate of return is the discount rate that gives a net present value of
zero.
Which of the following is a way cash flow factors can be used to improve a business?
a.It can be used to .determine a project's rate of return or value
b.It can be used to evaluate the ""quality"" of income generated by accrual accounting.
c.All of these answers.
d.It can be used to determine problems with a business's liquidity. - Answer -All of
these answers.
Which of the following is an element needed to calculate an asset's depreciation?
a.All of these answers
b.The cost of the asset minus the asset's salvage value.
c.The estimated useful life of the asset.
d.A method of apportioning the cost of the asset. - Answer -All of these answers.
You have an opportunity to invest $48,900 now in return for $61,200 in one year. If your
cost of capital is 8.6%,what is the NPV of thisinvestment?
a.$6,231.53
b.$7,453.59
c.$8,856.92
d.$12,300 - Answer -$7,453.59
