QUESTION 1

Working capital is a frequent source of errors in estimating project cash flows. These errors include

A.		forgetting about working capital entirely, forgetting that working capital may change during the life of the project, and forgetting that working capital is recovered at the end of the project.
B.		forgetting about working capital entirely and forgetting that working capital may change during the life of the project.
C.		forgetting that working capital may change during the life of the project, forgetting that working capital is recovered at the end of the project, and forgetting to depreciate working capital.
D.		forgetting about working capital entirely, forgetting that working capital may change during the life of the project, and forgetting to depreciate working capital.

QUESTION 2

If the cash flows for project A are C0 = -375; C1 = +150; C2 = +100; C3 = +125; and C4 = +250, calculate the payback period (in years).

ANSWER ________

QUESTION 3

If the cash flows for project Z are C0 = -2,700; C1 = 880; C2 = 1,089; C3 = 1,331 and C4 = 1,611, calculate the discounted payback period (in years) for the project at a discount rate of 10 percent.

ANSWER ________

QUESTION 4

Your boss asked you to evaluate a project with an infinite life. Sales and costs project to $2,500 and $1,000 per year, respectively. (Assume sales and costs occur at the end of the year [i.e., profit of $1,500 at the end of year one]). There is no depreciation and the tax rate is 32 percent. The required rate of return is 12 percent. If the project costs $6,000 what is the NPV?

ANSWER ________

QUESTION 5

The main advantage of the payback rule is that it

A.		adjusts for uncertainty of early cash flows.
B.		better accounts for salvage costs at the end of a project.
C.		is simple to use.
D.		does not discount cash flows.

QUESTION 6

If an investment project (normal project) has an IRR equal to the cost of capital, the NPV for that project is

A.		unable to be determined.
B.		zero.
C.		positive.
D.		negative.

QUESTION 7

If the cash flows for Project M are C0 = -2,000; C1 = +400; C2 = +1,400; and C3 = +1,300, calculate the IRR for the project. Please input the percentage format for your answer. And there is no need to put the percentage sign (%).

ANSWER ________

QUESTION 8

The following table gives the available projects (in $millions) for a firm. If the firm has a limit of $210 million to invest, what is the maximum NPV the company can obtain?

ANSWER ________

QUESTION 9

If the cash flows for Project A are C0 = -1,000; C1 = +750; C2 = +600; and C3 = +510, calculate the NPV of the project using a 10 percent discount rate.

ANSWER _______

QUESTION 10

Driscoll Company is considering investing in a new project. The project will need an initial investment of $1,600,000 and will generate $750,000 (after-tax) cash flows for three years. Calculate the IRR for the project. Please input the percentage format for your answer. And there is no need to put the percentage sign (%).

ANSWER _________

QUESTION 11

A project will have only one internal rate of return if

A.		the net present value is negative.
B.		the cash flows decline over the life of the project.
C.		the net present value is positive.
D.		there is a one-sign change in the cash flows.

QUESTION 12

The following are measures used by firms when making capital budgeting decisions except

A.		P/E ratio.
B.		net present value.
C.		payback period.
D.		internal rate of return.

QUESTION 13

The IRR is defined as

A.		the difference between the cost of capital and the present value of the cash flows.
B.		the discount rate used in the discounted payback period method.
C.		the discount rate that makes a project's NPV equal to zero.
D.		the discount rate used in the NPV method.