FNAN 522 EXAM 2 QUESTIONS AND 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 projects'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?
-all of these
-To compare two projects that have an equal investment and lifespan.
-To compare two investments that have different durations
-to assess a project which cash flows fluctuate between positive and negative - 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?
-The cash inflows can be estimates
-The internal rate of return can be equal to the cost of capital.
-The initial investment can be the cost from purchasing new equipment.
-The internal rate of return can vary throughout the life of a project - 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 sunk cost?
-Labor hours spent on planning project
-All of these answers
-Equipment purchased to pursue a project
, -A feasibility study that attempted to determine the economic viability of a project -
Answer -all of these answers
Which of the following is an example of an opportunity cost?
-All of these answers
-If invest in one of two projects, the cost is the lost revenue from the other project
-if you buy a candy bar instead of a soda, the cost is thirst
-If you watch a game instead of going for a run, the cost is poorer. personal health -
Answer -all of these answers
Which of the following is the best reason to use the payback method to evaluate
investments?
-If you use the payback method, you do not need to perform additional analyses
-The payback method is easy to use and understand for most people, regardless of
training.
-The payback method adjusts for the project's riskiness
-The payback method covers all cash inflows and outflows for the duration of the
investment - 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.
The marginal tax rate is : - Answer -The average tax rate the firm pays on taxable
income.
A company sells 150,000 units at $60 a unit with a variable cost of $30 a unity. It has $1
million in fixed costs and $600,000 in interest costs. What is the company's operating
leverage? - Answer -1.29
An individual files for bankruptcy. Through this proceeding, the debtor reorganizes his
debt, is allowed to keep some of his property, but must sue some of his future earnings
to pay off his debts. what type of bankruptcy is this? - Answer -Chapter 11
If potential creditors and investors sense that a company has a higher risk of going
bankrupt, which of the following will occur?
-All of these 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 projects'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?
-all of these
-To compare two projects that have an equal investment and lifespan.
-To compare two investments that have different durations
-to assess a project which cash flows fluctuate between positive and negative - 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?
-The cash inflows can be estimates
-The internal rate of return can be equal to the cost of capital.
-The initial investment can be the cost from purchasing new equipment.
-The internal rate of return can vary throughout the life of a project - 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 sunk cost?
-Labor hours spent on planning project
-All of these answers
-Equipment purchased to pursue a project
, -A feasibility study that attempted to determine the economic viability of a project -
Answer -all of these answers
Which of the following is an example of an opportunity cost?
-All of these answers
-If invest in one of two projects, the cost is the lost revenue from the other project
-if you buy a candy bar instead of a soda, the cost is thirst
-If you watch a game instead of going for a run, the cost is poorer. personal health -
Answer -all of these answers
Which of the following is the best reason to use the payback method to evaluate
investments?
-If you use the payback method, you do not need to perform additional analyses
-The payback method is easy to use and understand for most people, regardless of
training.
-The payback method adjusts for the project's riskiness
-The payback method covers all cash inflows and outflows for the duration of the
investment - 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.
The marginal tax rate is : - Answer -The average tax rate the firm pays on taxable
income.
A company sells 150,000 units at $60 a unit with a variable cost of $30 a unity. It has $1
million in fixed costs and $600,000 in interest costs. What is the company's operating
leverage? - Answer -1.29
An individual files for bankruptcy. Through this proceeding, the debtor reorganizes his
debt, is allowed to keep some of his property, but must sue some of his future earnings
to pay off his debts. what type of bankruptcy is this? - Answer -Chapter 11
If potential creditors and investors sense that a company has a higher risk of going
bankrupt, which of the following will occur?
-All of these answers
