1. Which of the following is an ideal criteria for the methods used to evaluate a capital investment project?

1.

Which of the following is an ideal criteria for the methods used to evaluate a capital investment project?

All cash flows should be included, which might consist of opportunity costs, sunk costs, and cannibalization costs.

The method must account for the success of previous projects

The method should set required risk to be constant for all projects that will be considered

The method should consider the timing of the project’s cash flows

None of the above

2.

Some company is considering a project with an initial cost of $46,000. The project will produce cash inflows of $18,000 a year for the first 2 years and $19,000 a year for the following 2 years. What is the net present value if the discount rate is 14%?

$7,713.87

$53,713.87

$99,713.87

$28,000.00

3.

The Net Present Value is a measure of:

How much value is added to the firm as a result of undertaking the project.

Which projects should be accepted and rejected.

The value of a project to the firm.

All of the above.

4.

What is the profitability index of the following stream of cash flows if the discount rate is 11%?

Year 0

Year 1

Year 2

Year 3

Year 4

-$21.4 Million

$7.8 Million

$8.1 million

$7.1 million

$6.4 million

1.05

1.01

0.99

1.03

1.08

5.

The net present value of a project is smaller when:

The required rate is lower

Cash inflows are pushed farther into the future

The initial outlay is decreased

None of the above

6.

Use the following information on Project Michelle to answer the question.

Initial Outlay

Year 1

Year 2

Year 3

Year 4

Year 5

$50 million

$10 million

$20 million

$20 million

$10 million

$5 million

The required rate of return is 15%.What is the internal rate of return of the Project Michelle?

5.50%

30.00%

11.25%

10.50%

7.

The decision rule for using the NPV states that when the NPV is greater than ______________ the project should be accepted.

The initial outlay

Zero

The IRR

One

None of the above

8.

Which of the statements correctly identifies the disadvantages of the payback period method?

The payback period does not identify the varying levels of risk in a project

The payback period does not account for the timing of the project’s cash flows

The payback period does not account for the varying levels of risk in a project

All of the above

None of the above

9.

What is the payback period for the following stream of cash flows if the discount rate is 16%?

Year 0

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

-$102.4M

$37.4M

$33.1M

$28.4M

$24.9M

$17.1M

$15.9M

2.84 years

3.05 years

2.96 years

3.55 years

3.14 years

10.

Internal rate of return is calculated by:

Finding the discount rate that forces the NPV of the project to zero.

Adjusting the initial outlay of the project so that it is equal to the discounted cash flows.

Adjusting the inflows until the NPV is zero.

None of the above.