10/24/21, 3:37 PM Multiple Choice

MCQ

Summary of responses

In capital budgeting analysis, the use of a cumulative net present value (NPV) is useful for
1)
________. 

a) Determining a probability distribution of NPVs

b) Determining the time required to achieve a positive NPV

c) Determining how the required rate of return changes over time

d) Determining how the cost of capital changes over time

Learner's answers:

 Determining the time required to achieve a positive NPV

Assume an MNC establishes a subsidiary where it has no other existing business. The present
2) value of parent cash flows from this subsidiary is more sensitive to exchange rate movements
when ________. 

a) The subsidiary finances the entire investment by local borrowing

b) The subsidiary finances most of the investment by local borrowing

c) The parent finances most of the investment

d) The parent finances the entire investment

Learner's answers:

 The parent finances the entire investment

3) Exchange rates for purposes of multinational capital budgeting ________.

a) Are very difficult to forecast

b) Can be easily hedged with currency swaps

c) Are unimportant, as they do not affect the cash flows of the multinational project

d) All of the above

Learner's answers:

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10/24/21, 3:37 PM Multiple Choice

Learner's answers:

 Are very difficult to forecast

Petrus Company has a unique opportunity to invest in a two-year project in Australia. The project
is expected to generate 1,000,000 Australian dollars (A$) in the first year and A$2,000,000 in the
second year. Petrus would have to invest $1,500,000 in the project. Petrus has determined that
4)
the cost of capital for similar projects is 14%. What is the net present value of this project if the
spot rate of the Australian dollar for the two years is forecasted to be $0.55 and $0.60,
respectively?

a) $2,905,817

b) $916,128

c) –$94,183

d) None of the above

Learner's answers:

 –$94,183

Feedback:

Year 0 Year 1 Year 2

Exchange rate 0.55/A$ $0.60/A$
Cash flow to parent A$1,000,000
A$2,000,000
-$1,500,000 $550,000 $1,200,000
PV of parent cash flow $482,456 $923,361
Cumulative NPV -$1,017,544 -$94,183

An international project's NPV is ________ related to the size of the initial investment and
5)
________ related to the project's required rate of return.

a) Positively; Positively

b) Positively; Negatively

c) Negatively; Positively

d) Negatively; Negatively

Learner's answers:

 Negatively; Negatively

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10/24/21, 3:37 PM Multiple Choice

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