1. What will probably happen if a firm does not invest effectively?

a. The firm could still maintain its competitive advantage.

b. The cost of capital of the firm will be unchanged.

c. The long-term survival of the firm will be affected.

d. The short-term performance will be unaffected.

2. Which of the following is not a critical factor that Porter identified in determining industry attractiveness?

a. Bargaining power of suppliers

b. Entry barriers

c. Rivalry among competitors

d. Bargaining power of government

3. What is the NPV for a project with an after-tax initial investment of $17,000 and five equal cash flows of $8,000 at the start of each year, beginning with the third year? The appropriate discount rate is 20 percent. Should it be accepted?

a. $2,937.41; accept

b. $6,924.90; accept

c. –$385.49; reject

d. $1,998.35; accept

4. When will NPV and IRR have different rankings when we evaluate two mutually exclusive projects? IRRA < IRRB.

a. Discount rate (k) < crossover rate

b. Discount rate (k) < IRRA

c. Discount rate (k) > crossover rate

d. Discount rate (k) > IRRB

5. Which project(s) should a firm choose when the projects are independent? When they are mutually exclusive? Suppose both are within the capital budget and k is 15 percent for both projects.

Project A: CF0 = $2,000; CF1 = $1,000; CF2 = $2,000; CF3 = $1,500

Project B: CF0 = $2,000; CF1 = $1,000; CF2 = $1,000; CF3 = $4,500

a. Both projects; project A

b. Both projects; project B

c. Project B; project B

d. Neither project; neither project

6. What is the IRR of the following project? After-tax initial investment = $6,000; CF1 = $2,500; CF2 = $4,000; CF3 = $5,000. If k = 20%, should you accept the project?

a. 15%; no

b. 35.87%; yes

c. 25.65%; yes

d. 35.87%; no

7. We should reject a project if:

a. NPV > 0.

b. IRR > required rate of return.

c. Discounted payback period < required period.

d. PI < 1.