1. DYI Construction Co. is considering a new inventory system that will cost $750,000.

The
system is expected to generate positive cash flows over the next four years in the amounts
of $350,000 in year one, $325,000 in year two, $150,000 in year three, and $180,000 in
year four. DYI's required rate of return is 8%. What is the payback period of this project?
A) 4.00 years
B) 3.09 years
C) 2.91 years
D) 2.50 years
2. DYI Construction Co. is considering a new inventory system that will cost $750,000. The
system is expected to generate positive cash flows over the next four years in the amounts
of $350,000 in year one, $325,000 in year two, $150,000 in year three, and $180,000 in
year four. DYI's requirevd rate of return is 8%. What is the net present value of this
project?
A) $104,089
B) $100,328
C) $96,320
D) $87,417
3. DYI Construction Co. is considering a new inventory system that will cost $750,000. The
system is expected to generate positive cash flows over the next four years in the amounts
of $350,000 in year one, $325,000 in year two, $150,000 in year three, and $180,000 in
year four. DYI's required rate of return is 8%. What is the modified internal rate of return
of this project?
A) 10.87%
B) 11.57%
C) 13.68%
D) 15.13%
4. Lithium, Inc. is considering two mutually exclusive projects, A and B. Project A costs
$95,000 and is expected to generate $65,000 in year one and $75,000 in year two. Project
B costs $120,000 and is expected to generate $64,000 in year one, $67,000 in year two,
$56,000 in year three, and $45,000 in year four. The firm's required rate of return for
these projects is 10%. The net present value for Project A is
A) $12,358.
B) $16,947.
C) $19,458.
D) $26,074.
5. A project requires an initial investment of $389,600. The project generates free cash flow
of $540,000 at the end of year 4. What is the internal rate of return for the project?
A) 138.6%
B) 38.6%
C) 8.5%
D) 6.9%
6. What is the payback period for a project with an initial investment of $180,000 that
providesan annual cash inflow of $40,000 for the first three years and $25,000 per year
for years four and five, and $50,000 per year for years six through eight?
A) 5.80 years
 B) 5.20 years
C) 5.40 years
D) 5.59 years
7. If the NPV (Net Present Value) of a project with one sign reversal is positive, then the
project's IRR (Internal Rate of Return) ________ the required rate of return.
A) must be less than
B) must be greater than
C) could be greater or less than
D) The project's IRR cannot be determined without actual cash flows.
8. An independent project should be accepted if it
A) produces a net present value that is greater than or equal to zero.
B) produces a net present value that is greater than the equivalent IRR.
C) has only one sign reversal.
D) produces a profitability index greater than or equal to zero.
9. The net present value method
A) is consistent with the goal of shareholder wealth maximization.
B) recognizes the time value of money.
C) uses all of a project's cash flows.
D) all of the above.
10. Lithium, Inc. is considering two mutually exclusive projects, A and B. Project A costs
$95,000 and is expected to generate $65,000 in year one and $75,000 in year two. Project
B costs $120,000 and is expected to generate $64,000 in year one, $67,000 in year two,
$56,000 in year three, and $45,000 in year four. Lithium, Inc.'s required rate of return for
these projects is 10%.The modified internal rate of return for Project A is
A) 19.19%.
B) 24.18%.
C) 26.89%.
D) 29.63%.
11. The modified internal rate of return for Project B in question 10 is
A) 17.84%.
B) 18.52%.
C) 19.75%.
D) 22.80%
12. Given the following annual net cash flows, determine the internal rate of return to the
nearest whole percent of a project with an initial outlay of $750,

A) 9%
B) 11%
 C) 13%
D) 15%
13. What is the payback period for a project with an initial investment of $180,000 that provides
an annual cash inflow of $40,000 for the first three years and $25,000 per year for years four and
five, and $50,000 per year for years six through eight?
A) 5.80 years
B) 5.20 years
C) 5.40 years
D) 5.59 years
14. The advantages of NPV are all of the following EXCEPT
A) it can be used as a rough screening device to eliminate those projects whose returns do
not
materialize until later years.
B) it provides the amount by which positive NPV projects will increase the value of the firm.
C) it allows the comparison of benefits and costs in a logical manner through the use of time
value of money principles.
D) it recognizes the timing of the benefits resulting from the project
15. Which of the following should NOT be considered when calculating a firm's WACC?
A) after-tax YTM on a firm's bonds
B) after-tax cost of accounts payable
C) cost of newly issued preferred stock
D) cost of newly issued common stock
16. A corporate bond has a face value of $1,000 and a coupon rate of 5%. The bond matures in
15 years and has a current market price of $925. If the corporation sells more bonds, it will incur
flotation costs of $25 per bond. If the corporate tax rate is 35%, what is the after-tax cost of debt
capital?
A) 3.74%
B) 4.45%
C) 5.29%
D) 6.78%
17. Haroldson Inc. common stock is selling for $22 per share. The last dividend was $1.20, and
dividends are expected to grow at a 6% annual rate. Flotation costs on new stock sales are 5% of
the selling price. What is the cost of Haroldson Inc.'s new common stock?
A) 5.73%
B) 11.45%
C) 11.78%
D) 12.09%
18. All else equal, an increase in beta results in
A) an increase in the cost of retained earnings.
B) an increase in the cost of newly issued common stock.
C) an increase in the after-tax cost of debt.
D) an increase in the cost of common equity, whether or not the funds come from retained
earnings or newly issued common stock.
19. Blammo, Inc. has a target capital structure of 30% debt and 70% equity. The firm is planning
to invest in a project that will necessitate raising new capital. New debt will be issued at a
before-tax yield of 14%, with a coupon rate of 10%. The equity will be provided by internally
generated funds so no new outside equity will be issued. If the required rate of return on the
firm's stock is 22% and its marginal tax rate is 35%, compute the firm's cost of capital.
A) 18.00%
B) 18.13%
C) 19.68%
D) 15.55%
20. All the following variables are used in computing the cost of debt EXCEPT
A) maturity value of the debt.
B) market price of the debt.
C) number of years to maturity.
D) risk-free rate.
21. Consider the following two projects:

a. Calculate the net present value of each of the above projects, assuming a 14 percent discount
rate.
b. What is the internal rate of return for each of the above projects?
c. Compare and explain the conflicting rankings of the NPVs and IRRs obtained in parts a and
b above.
d. If 14 percent is the required rate of return, and these projects are independent, what decision
should be made?
e. If 14 percent is the required rate of return, and the projects are mutually exclusive, what
decision should be made?
Answer:
a. NPV of A = $1,836,166 NPV of B = $2,512,883
b. IRR of A = 35.0% IRR of B = 28.78%
c. B has more distant cash flows, thus its IRR is less while its NPV is greater. This time disparity is
one of
IRR's ranking problems.
d. If these projects are independent we would accept them both because they each have a positive
NPV.
e. If these projects are mutually exclusive we would select B because it has the highest positive NPV