MULTIPLE CHOICE - Answer all questions correctly.

Although it is extremely difficult to make accurate forecasts of the revenues that a project will generate, projects' initial outlays and subsequent costs can be forecasted with great accuracy. This is especially true for large product development projects.

a. True OR b. False

This corporation pays a 5% dividend. If the current stock price is $50 per share, what is the annual dividend?

a.$5.00 b. $.05 c. $2.50 d. $25.00

Real options affect the size, but not the risk, of a project's expected cash flows.

a. True OR b. False

Which of the following is NOT a real option?

a. The option to buy shares of stock if its price goes up. b. The option to abandon a project. c. The option to switch the type of fuel used in an industrial furnace. d. The option to expand into a new geographic region. e. The option to expand production if the product is successful.

Conflicts between two mutually exclusive projects occasionally occur, where the NPV method ranks one project higher but the IRR method ranks the other one first. In theory, such conflicts should be resolved in favor of the project with the higher positive NPV.

a.True OR b. False

Projects C and D both have normal cash flows and are mutually exclusive. Project C has a higher NPV if the cost of capital is less than 12%, whereas Project D has a higher NPV if the cost of capital exceeds 12%. Which of the following statements is CORRECT?

a. Project D is probably larger in scale than Project C. b. Project C probably has a faster payback. c. The crossover rate between the two projects is below 12%. d. Project C probably has a higher IRR. e. Project D probably has a higher IRR.

Which of the following statements is CORRECT? Assume that the project being considered has normal cash flows, with one outflow followed by a series of inflows. a. The lower the cost of capital used to calculate a project's NPV, the lower the calculated NPV will be. b. A project's NPV is found by compounding the cash inflows at the IRR to find the terminal value (TV), then discounting the TV at the cost of capital. c. If a project's NPV is greater than zero, then its IRR must be less than zero. d. If a project's NPV is less than zero, then its IRR must be less than the cost of capital. e. The NPV of a relatively low-risk project should be found using a relatively high cost of capital.

A project's IRR is independent of the firm's cost of capital. In other words, a project's IRR doesn't change with a change in the firm's cost of capital.

A. True OR b. False

Assume a project has normal cash flows. All else equal, which of the following statements is CORRECT?

a. A project's regular payback increases as the cost of capital declines. b. A project's MIRR is unaffected by changes in the cost of capital. c. A project's IRR increases as the cost of capital declines. d. A project's NPV increases as the cost of capital declines. e. A project's discounted payback increases as the cost of capital declines.

Which of the following bonds generate tax-free interest at the federal level for investors?

a. foreign bonds b. treasury bonds c. corporate bonds d. municipal bonds