Question 3

3. Consider the following cash flow pattern. In year zero: capital expense = $100,000; year 1 cash inflow = $25,000; year 2 cash inflow = $10,000; year 3 cash inflow = $50,000; year 4 cash inflow = $60,000. This cash flow pattern is best described as a(n):

a. annuity and a conventional cash flow

b. mixed stream and a non-conventional cash flow

c. annuity and a non-conventional cash flow

d. mixed stream and a conventional cash flow

e. Beats me! - like you expected me to actually read the book?

Question 7

7. All of the following are weaknesses of the payback method except:

a.

it is easy to calculate

b.

it ignores cash flow beyond the payback period

c.

present value of cash flows is not used

e. none of the above

Question 11

11. A firm with a cost of capital of 12.5% is evaluating 3 capital projects. The IRRs are as follows:

Project IRR

1 12%

2 15%

3 13.5%

The firm should:

a. accept 2; reject 1 & 3

b. accept 2 & 3; reject 1

c. accept 1; reject 2 & 3

d. accept 3; reject 1 & 2

e. accept all projects

f. reject all projects

Question 12

12. When NPV is negative, the IRR is ______________ the cost of capital.

a. greater than

b. greater than or equal to

c. less than

d. equal to

Question 12

12. When NPV is negative, the IRR is ______________ the cost of capital.

a. greater than

b. greater than or equal to

c. less than

d. equal to

Question 13

13. In comparing NPV to IRR:

a. IRR is theoretically superior, but financial managers prefer NPV

b. NPV is theoretically superior, but financial mangers prefer IRR

c. Financial managers prefer NPV because it is presented as a % of the investment

d. I get confused

Question 15

15. The initial investment for replacement decisions includes all of the following except:

a. the cost of the equipment

b. the installation costs of the new equipment

c. a subtraction of the sale of the old machine that is being replaced

d. all of the above would be included

Question 17

17. The higher the risk of a project, the higher its RADR and thus the lower the NPV for a given stream of inflows.

True

False

Question 23

23. The cost of common equity may be estimated by using the:

a. yield curve

b. NPV method: NPV = CF (PVIFA) - CF

c. the Gordon model; r = D/P + g

d. Dupont analysis

Question 24

24. The investment opportunity schedule (IOS) combined with thee WACC indicates:

		a. the inititial investment in the project
		b. those projects that will result in the highest positive cash flows
		c. which projects are acceptable
		d. that a hotel on Boardwalk costs $2,000 Question 25 25. As the cummulative amount of money invested in capital projects increases, its return on the projects increases. True False Question 27 27. BONUS Sunk costs are cash outlays that may have a substantial impact on the capital budgeting decision and should be included in the initlal investment calculation. True False