Exam Name___________________________________ MULTIPLE CHOICE.

Choose the one alternative that best completes the statement or answers the question. 1) Which of the following statements is false? 1) _______ A) If you are unsure of your cost of capital estimate, it is important to determine how sensitive your analysis is to errors in this estimate. B) About 75% of firms surveyed used the NPV rule for making investment decisions. C) To decide whether to invest using the NPV rule, we need to know the cost of capital. D) NPV is positive only for discount rates greater than the internal rate of return. Use the table for the question(s) below. Consider a project with the following cash flows: Year 0 1 2 3 4 Cash Flow -10,000 4,000 4,000 4,000 4,000 2) If the appropriate discount rate for this project is 15%, then the NPV is closest to: A) $1,420 B) -$867 C) $867 D) $6,000

2) _______

Use the table for the question(s) below. Consider the following two projects:

Year 0 Year 1 Year 2 Year 3 Year 4 Discount Project Cash Flow Cash Flow Cash Flow Cash Flow Cash Flow Rate A -100 40 50 60 N/A .15 B -73 30 30 30 30 .15 3) The NPV of project A is closest to: A) 15.0 B) 12.6 C) 12.0 D) 42.9 4) The NPV of project B is closest to: A) 12.0 B) 23.3

3) _______

4) _______ C) 15.0 D) 12.6 5) _______

5) Which of the following statements is false? A) Problems arise using the IRR method when the mutually exclusive investments have differences in scale. B) When using the incremental IRR rule, you must keep track of which project is the incremental project and ensure that the incremental cash flows are initially positive and then become negative. C) Picking one project over another simply because it has a larger IRR

can lead to

mistakes. D) When the risks of two projects are different, only the NPV rule will give a reliable answer.

Use the table for the question(s) below. Consider the following two projects:

Year 0 Year 1 Year 2 Year 3 Year 4 Discount Project Cash Flow Cash Flow Cash Flow Cash Flow Cash Flow Rate A -100 40 50 60 N/A .15 B -73 30 30 30 30 .15 6) The maximum number of incremental IRRs that could exist for project B over project A is? A) 3 B) 2 C) 0 D) 1 Use the table for the question(s) below. Consider the following two projects:

6) _______

Project Alpha Beta

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Discount C/F C/F C/F C/F C/F C/F C/F C/F Rate -79 20 25 30 35 40 N/A N/A 15% -80 25 25 25 25 25 25 25 16% 7) Assume that projects Alpha and Beta are mutually exclusive. The 7) _______ correct investment decision and the best rational for that decision is to? A) Invest in project Beta since NPVBeta > 0 B) Invest in project Beta since NPVBeta > NPVAlpha > 0 C) Invest in project Beta since IRRB > IRRA D) Invest in project Alpha since NPVBeta < NPVAlpha 8) Which of the following statements is false? A) The profitability index measures the bang for your buck. B) The profitability index can can be easily adapted for determining the correct investment decisions when multiple resource constraints exist. C) The profitability index is the ratio of value created to resources consumed. D) The profitability index measures the value created in terms of NPV per unit of resource consumed. 8) _______

Use the table for the question(s) below. Consider the following two projects:

Year 0 Year 1 Year 2 Year 3 Year 4 Discount Project Cash Flow Cash Flow Cash Flow Cash Flow Cash Flow Rate A -100 40 50 60 N/A .15 B -73 30 30 30 30 .15

9) The profitability index for project A is closest to: A) 12.04 B) 0.12 C) 0.17 Use the table for the question(s) below. Consider the following list of projects:

9) _______ D) 21.65

Project Investment NPV A 135,000 6,000 B 200,000 30,000 C 125,000 20,000 D 150,000 2,000 E 175,000 10,000 F 75,000 10,000 G 80,000 9,000 H 200,000 20,000 I 50,000 4,000 10) Assuming that your capital is constrained, which investment tool should you use to determine the correct investment decisions? A) NPV B) Profitability Index C) Incremental IRR D) IRR

10) ______

1) D 2) A 3) C 4) D 5) B 6) B 7) B 8) B 9) B 10) B

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