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标题: Corporate Finance【Reading 36】Sample [打印本页]

作者: Gypsy    时间: 2012-3-29 10:31     标题: [2012 L1] Corporate Finance【Session 11 - Reading 36】Sample

Which of the following steps is least likely to be an administrative step in the capital budgeting process?
A)
Arranging financing for capital projects.
B)
Conducting a post-audit to identify errors in the forecasting process.
C)
Forecasting cash flows and analyzing project profitability.


Arranging financing is not one of the administrative steps in the capital budgeting process. The four administrative steps in the capital budgeting process are:
作者: Gypsy    时间: 2012-3-29 10:32

Which of the following types of capital budgeting projects are most likely to generate little to no revenue?
A)
Replacement projects to maintain the business.
B)
Regulatory projects.
C)
New product or market development.



Mandatory regulatory or environmental projects may be required by a governmental agency or insurance company and typically involve safety-related or environmental concerns. The projects typically generate little to no revenue, but they accompany other new revenue producing projects and are accepted by the company in order to continue operating.
作者: Gypsy    时间: 2012-3-29 10:32

Financing costs for a capital project are:
A)
subtracted from the net present value of a project.
B)
captured in the project’s required rate of return.
C)
subtracted from estimates of a project’s future cash flows.



Financing costs are reflected in a project’s required rate of return. Project specific financing costs should not be included as project cash flows. The firm's overall weighted average cost of capital, adjusted for project risk, should be used to discount expected project cash flows.
作者: Gypsy    时间: 2012-3-29 10:33

Ashlyn Lutz makes the following statements to her supervisor, Paul Ulring, regarding the basic principles of capital budgeting:
Statement 1: The timing of expected cash flows is crucial for determining the profitability of a capital budgeting project.
Statement 2: Capital budgeting decisions should be based on the after-tax net income produced by the capital project.
Which of the following regarding Lutz’s statements is most accurate?
Statement 1Statement 2
A)
CorrectCorrect
B)
CorrectIncorrect
C)
IncorrectCorrect



Lutz’s first statement is correct. The timing of cash flows is important for making correct capital budgeting decisions. Capital budgeting decisions account for the time value of money. Lutz’s second statement is incorrect. Capital budgeting decisions should be based on incremental after-tax cash flows, not net (accounting) income.
作者: Gypsy    时间: 2012-3-29 10:49

One of the basic principles of capital budgeting is that:
A)
decisions are based on cash flows, not accounting income.
B)
cash flows should be analyzed on a pre-tax basis.
C)
opportunity costs should be excluded from the analysis of a project.


The five key principles of the capital budgeting process are:
作者: Gypsy    时间: 2012-3-29 10:50

Mason Webb makes the following statements to his boss, Laine DeWalt about the principles of capital budgeting.
Statement 1: Opportunity costs are not true cash outflows and should not be considered in a capital budgeting analysis.
Statement 2: Cash flows should be analyzed on an after-tax basis.
Should DeWalt agree or disagree with Webb’s statements?
Statement 1Statement 2
A)
DisagreeAgree
B)
AgreeAgree
C)
DisagreeDisagree



DeWalt should disagree with Webb’s first statement. Cash flows are based on opportunity costs. Any cash flows that the firm gives up because a project is undertaken should be charged to the project. DeWalt should agree with Webb’s second statement. The impact of taxes must be considered when analyzing capital budgeting projects.
作者: Gypsy    时间: 2012-3-29 10:50

The CFO of Axis Manufacturing is evaluating the introduction of a new product. The costs of a recently completed marketing study for the new product and the possible increase in the sales of a related product made by Axis are best described (respectively) as:
A)
opportunity cost; externality.
B)
sunk cost; externality.
C)
externality; cannibalization.



The study is a sunk cost, and the possible increase in sales of a related product is an example of a positive externality.
作者: Gypsy    时间: 2012-3-29 10:51

If two projects are mutually exclusive, a company:
A)
must accept both projects or reject both projects.
B)
can accept one of the projects, both projects, or neither project.
C)
can accept either project, but not both projects.



Mutually exclusive means that out of the set of possible projects, only one project can be selected. Given two mutually exclusive projects, the company can accept one of the projects or reject both projects, but cannot accept both projects.
作者: Gypsy    时间: 2012-3-29 10:53

Rosalie Woischke is an executive with ColaCo, a nationally known beverage company. Woischke is trying to determine the firm’s optimal capital budget. First, Woischke is analyzing projects Sparkle and Fizz. She has determined that both Sparkle and Fizz are profitable and is planning on having ColaCo accept both projects. Woischke is particularly excited about Sparkle because if Sparkle is profitable over the next year, ColaCo will have the opportunity to decide whether or not to invest in a third project, Bubble. Which of the following terms best describes the type of projects represented by Sparkle and Fizz as well as the opportunity to invest in Bubble?
Sparkle and FizzOpportunity to invest in Bubble
A)
Independent projectsAdd-on project
B)
Independent projectsProject sequencing
C)
Mutually exclusive projectsProject sequencing



Independent projects are projects for which the cash flows are independent from one another and can be evaluated based on each project’s individual profitability. Since Woischke is accepting both projects, the projects must be independent. If the projects were mutually exclusive, only one of the two projects could be accepted. The opportunity to invest in Bubble is a result of project sequencing, which means that investing in a project today creates the opportunity to decide to invest in a related project in the future.
作者: Gypsy    时间: 2012-3-29 10:53

The Chief Financial Officer of Large Closeouts Inc. (LCI) determines that the firm must engage in capital rationing for its capital budgeting projects. Which of the following describes the most likely reason for LCI to use capital rationing? LCI:
A)
has a limited amount of funds to invest.
B)
must choose between projects that compete with one another.
C)
would like to arrange projects so that investing in a project today provides the option to accept or reject certain future projects.



Capital rationing exists when a company has a fixed (maximum) amount of funds to invest. If profitable project opportunities exceed the amount of funds available, the firm must ration, or prioritize its funds to achieve the maximum value for shareholders given its capital limitations.
作者: hinsafdar    时间: 2012-3-29 10:55

Project sequencing is best described as:
A)
an investment in a project today that creates the opportunity to invest in other projects in the future.
B)
arranging projects in an order such that cash flows from the first project fund subsequent projects.
C)
prioritizing funds to achieve the maximum value for shareholders, given capital limitations.



Projects are often sequenced through time so that investing in a project today may create the opportunity to invest in other projects in the future. Note that funding from the first project is not a requirement for project sequencing.
作者: hinsafdar    时间: 2012-3-29 10:56

The Seattle Corporation has been presented with an investment opportunity which will yield cash flows of $30,000 per year in years 1 through 4, $35,000 per year in years 5 through 9, and $40,000 in year 10. This investment will cost the firm $150,000 today, and the firm's cost of capital is 10%. The payback period for this investment is closest to:
A)
4.86 years.
B)
5.23 years.
C)
6.12 years.



Years

0

1

2

3

4

5


Cash Flows

-$150,000

$30,000

$30,000

$30,000

$30,000

$35,000


$150,000

120,000


(4 years)(30,000/year)

$30,000


With $30,000 unrecovered cost in year 5, and $35,000 cash flow in year 5; $30,000 / $35,000 = 0.86 years
4 + 0.86 = 4.86 years
作者: hinsafdar    时间: 2012-3-29 10:57

The process of evaluating and selecting profitable long-term investments consistent with the firm’s goal of shareholder wealth maximization is known as:
A)
financial restructuring.
B)
capital budgeting.
C)
monitoring.




In the process of capital budgeting, a manager is making decisions about a firm’s earning assets, which provide the basis for the firm’s profit and value. Capital budgeting refers to investments expected to produce benefits for a period of time greater than one year. Financial restructuring is done as a result of bankruptcy and monitoring is a critical assessment aspect of capital budgeting.
作者: hinsafdar    时间: 2012-3-29 10:57

Lincoln Coal is planning a new coal mine, which will cost $430,000 to build, with the expenditure occurring next year. The mine will bring cash inflows of $200,000 annually over the subsequent seven years. It will then cost $170,000 to close down the mine over the following year. Assume all cash flows occur at the end of the year. Alternatively, Lincoln Coal may choose to sell the site today. What minimum price should Lincoln set on the property, given a 16% required rate of return?
A)
$325,859.
B)
$376,872.
C)
$280,913.



The key to this problem is identifying this as a NPV problem even though the first cash flow will not occur until the following year. Next, the year of each cash flow must be property identified; specifically: CF0 = $0; CF1 = -430,000; CF2-8 = +$200,000; CF9 = -$170,000. One simply has to discount all of the cash flows to today at a 16% rate. NPV = $280,913.
作者: hinsafdar    时间: 2012-3-29 10:57

Which of the following statements about the discounted payback period is least accurate? The discounted payback:
A)
frequently ignores terminal values.
B)
method can give conflicting results with the NPV.
C)
period is generally shorter than the regular payback.



The discounted payback period calculates the present value of the future cash flows. Because these present values will be less than the actual cash flows it will take a longer time period to recover the original investment amount.
作者: hinsafdar    时间: 2012-3-29 10:58

An analyst has gathered the following data about a company with a 12% cost of capital:
Project AProject B
Cost$15,000$25,000
Life5 years5 years
Cash inflows$5,000/year$7,500/year
Projects A and B are mutually exclusive. What should the company do?
A)
Reject A, Accept B.
B)
Reject A, Reject B.
C)
Accept A, Reject B.



For mutually exclusive projects accept the project with the highest NPV. In this example the NPV for Project A (3,024) is higher than the NPV of Project B (2,036). Therefore accept Project A and reject Project B.

If the projects are independent, what should the company do?
A)
Accept A, Accept B.
B)
Reject A, Reject B.
C)
Accept A, Reject B.



Project A: N = 5; PMT = 5,000; FV = 0; I/Y = 12; CPT → PV = 18,024; NPV for Project A = 18,024 − 15,000 = 3,024.
Project B: N = 5; PMT = 7,500; FV = 0; I/Y = 12; CPT → PV = 27,036; NPV for Project B = 27,036 − 25,000 = 2,036.
For independent projects the NPV decision rule is to accept all projects with a positive NPV. Therefore, accept both projects.
作者: hinsafdar    时间: 2012-3-29 10:58

Landen, Inc. uses several methods to evaluate capital projects. An appropriate decision rule for Landen would be to invest in a project if it has a positive:
A)
profitability index (PI).
B)
internal rate of return (IRR).
C)
net present value (NPV).



The decision rules for net present value, profitability index, and internal rate of return are to invest in a project if NPV > 0, IRR > required rate of return, or PI > 1.
作者: hinsafdar    时间: 2012-3-29 10:59

A company is considering the purchase of a copier that costs $5,000. Assume a cost of capital of 10 percent and the following cash flow schedule:Determine the project's NPV and IRR.
NPVIRR
A)
$24320%
B)
$88320%
C)
$88315%



To determine the NPV, enter the following:
PV of $3,000 in year 1 = $2,727, PV of $2,000 in year 2 = $1,653, PV of $2,000 in year 3 = $1,503. NPV = ($2,727 + $1,653 + $1,503) − $5,000 = 883.

You know the NPV is positive, so the IRR must be greater than 10%. You only have two choices, 15% and 20%. Pick one and solve the NPV. If it is not close to zero, then you guessed wrong; select the other one. [3000 ÷ (1 + 0.2)1 + 2000 ÷ (1 + 0.2)2 + 2000 ÷ (1 + 0.2)3] − 5000 = 46 This result is closer to zero (approximation) than the $436 result at 15%. Therefore, the approximate IRR is 20%.
作者: hinsafdar    时间: 2012-3-29 10:59

A firm is considering a $200,000 project that will last 3 years and has the following financial data:
Determine the project's payback period and net present value (NPV).
Payback PeriodNPV
A)
2.22 years$18,716
B)
2.43 years$18,716
C)
2.22 years$21,872



Payback Period
$200,000 / $90,000 = 2.22 years
NPV MethodFirst, calculate the weights for debt and equity
wd + we = 1
we = 1 − wd
wd / we = 0.40
wd = 0.40 × (1 − wd)
wd = 0.40 − 0.40wd
1.40wd = 0.40
wd = 0.286, we = 0.714
Second, calculate WACC
WACC = (wd × kd) × (1 − t) + (we × ke) = (0.286 × 0.07 × 0.66) + (0.714 × 0.14) = 0.0132 + 0.100 = 0.1132
Third, calculate the PV of the project cash flows
90 / (1 + 0.1132)1 + 90 / (1 + 0.1132)2 + 90 / (1 + 0.1132)3 = $218,716
And finally, calculate the project NPV by subtracting out the initial cash flow
NPV = $218,716 − $200,000 = $18,716

作者: hinsafdar    时间: 2012-3-29 11:00

A company is considering a $10,000 project that will last 5 years.
What is the project's net present value (NPV)?
A)
-$1,460.
B)
$+1,245
C)
+$1,460.



First, calculate the weights for debt and equity

wd + we = 1
we = 1 − wd
wd /  we = 0.40
wd = 0.40 × (1 − wd)
wd = 0.40 − 0.40wd
1.40wd = 0.40
wd = 0.286, we = 0.714

Second, calculate WACC

WACC = (wd × kd) × (1 − t) + (we × ke) = (0.286 × 0.06 × 0.66) + (0.714 × 0.12) = 0.0113 + 0.0857 = 0.0970
Third, calculate the PV of the project cash flows

N = 5, PMT = -3,000, FV = 0, I/Y = 9.7, CPT → PV = 11,460

And finally, calculate the project NPV by subtracting out the initial cash flow

NPV = $11,460 − $10,000 = $1,460

作者: hinsafdar    时间: 2012-3-29 11:00

Which of the following statements about NPV and IRR is least accurate?
A)
For independent projects if the IRR is > the cost of capital accept the project.
B)
The NPV method assumes that all cash flows are reinvested at the cost of capital.
C)
For mutually exclusive projects you should use the IRR to rank and select projects.



For mutually exclusive projects you should use NPV to rank and select projects.
作者: hinsafdar    时间: 2012-3-29 11:00

Tapley Acquisition, Inc., is considering the purchase of Tangent Company. The acquisition would require an initial investment of $190,000, but Tapley's after-tax net cash flows would increase by $30,000 per year and remain at this new level forever. Assume a cost of capital of 15%. Should Tapley buy Tangent?
A)
No, because k > IRR.
B)
Yes, because the NPV = $30,000.
C)
Yes, because the NPV = $10,000.



This is a perpetuity.
PV = PMT / I = 30,000 / 0.15 = 200,000
200,000 − 190,000 = 10,000
作者: hinsafdar    时间: 2012-3-29 11:01

A company is considering the purchase of a copier that costs $5,000. Assume a cost of capital of 10 percent and the following cash flow schedule:Determine the project's payback period and discounted payback period.
Payback PeriodDiscounted Payback Period
A)
2.0 years2.4 years
B)
2.0 years1.6 years
C)
2.4 years1.6 years



Regarding the regular payback period, after 1 year, the amount to recover is $2,000 ($5,000 - $3,000). After the second year, the amount is fully recovered.The discounted payback period is found by first calculating the present values of each future cash flow. These present values of future cash flows are then used to determine the payback time period.

3,000 / (1 + .10)1 = 2,727
2,000 / (1 + .10)2 = 1,653  
2,000 / (1 + .10)3 = 1,503.

Then:

5,000 - (2,727 + 1,653) = 620
620 / 1,503 = .4.
So, 2 + 0.4 = 2.4.

作者: hinsafdar    时间: 2012-3-29 11:01

Edelman Enginenering is considering including an overhead pulley system in this year's capital budget. The cash outlay for the pully system is $22,430. The firm's cost of capital is 14%. After-tax cash flows, including depreciation are $7,500 for each of the next 5 years.
Calculate the internal rate of return (IRR) and the net present value (NPV) for the project, and indicate the correct accept/reject decision.
NPVIRRAccept/Reject
A)
$15,07014%Accept
B)
$15,07014%Reject
C)
$3,31820%Accept


Using the cash flow keys:
CF0 = -22,430; CFj = 7,500; Nj = 5; Calculate IRR = 20%
I/Y = 14%; Calculate NPV = 3,318
Because the NPV is positive, the firm should accept the project.
作者: hinsafdar    时间: 2012-3-29 11:02

Lane Industries has a project with the following cash flows:
YearCash Flow
0−$200,000
160,000
280,000
370,000
460,000
550,000

The project's cost of capital is 12%. The discounted payback period is closest to:
A)
2.9 years.
B)
3.9 years.
C)
3.4 years.



The discounted payback period method discounts the estimated cash flows by the project’s cost of capital and then calculates the time needed to recover the investment.
YearCash FlowDiscounted
Cash Flow
Cumulative
Discounted
Cash Flow
0−$200,000−$200,000.00−$200,000.00
160,00053,571.43−146,428.57
280,00063,775.51−82,653.06
370,00049,824.62−32,828.44
460,00038,131.085,302.64
550,00028,371.3033,673.98

discounted payback period =number of years until the year before full recovery +

作者: hinsafdar    时间: 2012-3-29 11:02

A firm is considering a $5,000 project that will generate an annual cash flow of $1,000 for the next 8 years. The firm has the following financial data:
Determine the project's net present value (NPV) and whether or not to accept it.
[td=1,1,100]NPVAccept / Reject
A)
+$33Accept
B)
+$4,968Accept
C)
-$33Reject



First, calculate the weights for debt and equity

wd + we = 1
wd = 0.50We
0.5We + We = 1
wd = 0.333, we = 0.667

Second, calculate WACC

WACC = (wd × kd) × (1 − t) + (we × ke) = (0.333 × 0.09 × 0.67) + (0.667 × 0.15) = 0.020 + 0.100 = 0.120

Third, calculate the PV of the project cash flows

N = 8, PMT = -1,000, FV = 0, I/Y = 12, CPT PV = 4,967


And finally, calculate the project NPV by subtracting out the initial cash flow

NPV = $4,967 − $5,000 = -$33

作者: hinsafdar    时间: 2012-3-29 11:02

Which of the following is the most appropriate decision rule for mutually exclusive projects?
A)
Accept the project with the highest net present value, subject to the condition that its net present value is greater than zero.
B)
Accept both projects if their internal rates of return exceed the firm’s hurdle rate.
C)
If the net present value method and the internal rate of return method give conflicting signals, select the project with the highest internal rate of return.



The project that maximizes the firm's value is the one that has the highest positive NPV.
作者: hinsafdar    时间: 2012-3-29 11:11

Which of the following statements about independent projects is least accurate?
A)
If the internal rate of return is less than the cost of capital, reject the project.
B)
The internal rate of return and net present value methods can yield different accept/reject decisions for independent projects.
C)
The net present value indicates how much the value of the firm will change if the project is accepted.



For independent projects the IRR and NPV give the same accept/reject decision. For mutually exclusive projects the IRR and NPV techniques can yield different accept/reject decisions.
作者: hinsafdar    时间: 2012-3-29 11:12

Which of the following statements about NPV and IRR is NOT correct?
A)
The NPV will be positive if the IRR is less than the cost of capital.
B)
The IRR can be positive even if the NPV is negative.
C)
When the IRR is equal to the cost of capital, the NPV equals zero.



This statement should read, "The NPV will be positive if the IRR is greater than the cost of capital. The other statements are correct. The IRR can be positive (>0), but less than the cost of capital, thus resulting in a negative NPV. One definition of the IRR is the rate of return for which the NPV of a project is zero.
作者: hinsafdar    时间: 2012-3-29 11:12

The underlying cause of ranking conflicts between the net present value (NPV) and internal rate of return (IRR) methods is the underlying assumption related to the:
A)
initial cost.
B)
cash flow timing.
C)
reinvestment rate.



The IRR method assumes all future cash flows can be reinvested at the IRR. This may not be feasible because the IRR is not based on market rates. The NPV method uses the weighted average cost of capital (WACC) as the appropriate discount rate.
作者: hinsafdar    时间: 2012-3-29 11:12

Which of the following statements regarding the net present value (NPV) and internal rate of return (IRR) is least accurate?
A)
For mutually exclusive projects, you must accept the project with the highest NPV regardless of the sign of the NPV calculation.
B)
For independent projects, the internal rate of return IRR and the NPV methods always yield the same accept/reject decisions.
C)
The NPV tells how much the value of the firm will increase if you accept the project.



If the NPV for two mutually exclusive projects is negative, both should be rejected.
作者: hinsafdar    时间: 2012-3-29 11:13

Which of the following statements about the internal rate of return (IRR) and net present value (NPV) is least accurate?
A)
The discount rate that causes the project's NPV to be equal to zero is the project's IRR.
B)
The IRR is the discount rate that equates the present value of the cash inflows with the present value of the outflows.
C)
For mutually exclusive projects, if the NPV rankings and the IRR rankings give conflicting signals, you should select the project with the higher IRR.



The NPV method is always preferred over the IRR, because the NPV method assumes cash flows are reinvested at the cost of capital. Conversely, the IRR assumes cash flows can be reinvested at the IRR. The IRR is not an actual market rate.
作者: hinsafdar    时间: 2012-3-29 11:13

Two projects being considered by a firm are mutually exclusive and have the following projected cash flows:
YearProject 1 Cash FlowProject 2 Cash Flow
0−$4.0?
1$3.0$1.7
2$5.0$3.2
3$2.0$5.8
[/table]
The crossover rate of the two projects’ NPV profiles is 9%. What is the initial cash flow for Project 2? [table]
A)
−$4.51.
B)
−$5.70.

C)
−$4.22.



The crossover rate is the rate at which the NPV for two projects is the same. That is, it is the rate at which the two NPV profiles cross. At a discount rate of 9%, the NPV of Project 1 is: CF0 = –4; CF1 = 3; CF2 = 5; CF3 = 2; I = 9%; CPT → NPV = $4.51. Now perform the same calculations except that we need to set the unknown CF0 = 0. The remaining entries are: CF1 = 1.7; CF2 = 3.2; CF3 = 5.8; I = 9%; CPT → NPV = $8.73. Since by definition the crossover rate produces the same NPV for both projects, we know that both projects should have an NPV = $4.51. Since the NPV of Project 2 (with CF0 = 0) is $8.73, the unknown cash flow must be a large enough negative amount to reduce the NPV for Project 2 from $8.73 to $4.51. Thus the unknown initial cash flow for Project 2 is determined as $4.51 = $8.73 + CF0, or CF0 = −$4.22.
作者: hinsafdar    时间: 2012-3-29 11:13

For a project with cash outflows during its life, the least preferred capital budgeting tool would be:
A)
internal rate of return.
B)
net present value.
C)
profitability index.



The IRR encounters difficulties when cash outflows occur throughout the life of the project. These projects may have multiple IRRs, or no IRR at all. Neither the NPV nor the PI suffer from these limitations.
作者: hinsafdar    时间: 2012-3-29 11:14

When a company is evaluating two mutually exclusive projects that are both profitable but have conflicting NPV and IRR project rankings, the company should:
A)
accept the project with the higher internal rate of return.
B)
accept the project with the higher net present value.
C)
use a third method of evaluation such as discounted payback period.



Net present value is the preferred criterion when ranking projects because it measures the firm’s expected increase in wealth from undertaking a project.
作者: hinsafdar    时间: 2012-3-29 11:14

If the calculated net present value (NPV) is negative, which of the following must be CORRECT. The discount rate used is:
A)
less than the internal rate of return (IRR).
B)
equal to the internal rate of return (IRR).
C)
greater than the internal rate of return (IRR).



When the NPV = 0, this means the discount rate used is equal to the IRR.  If a discount rate is used that is higher than the IRR, the NPV will be negative.  Conversely, if a discount rate is used that is lower than the IRR, the NPV will be positive.
作者: hinsafdar    时间: 2012-3-29 11:15

Which of the following statements regarding the internal rate of return (IRR) is most accurate? The IRR:
A)
can lead to multiple IRR rates if the cash flows extend past the payback period.
B)
assumes that the reinvestment rate of the cash flows is the cost of capital.
C)
and the net present value (NPV) method lead to the same accept/reject decision for independent projects.



NPV and IRR lead to the same decision for independent projects, not necessarily for mutually exclusive projects. IRR assumes that cash flows are reinvested at the IRR rate. IRR does not ignore time value of money (the payback period does), and the investor may find multiple IRRs if there are sign changes after time zero (i.e., negative cash flows after time zero).
作者: hinsafdar    时间: 2012-3-29 11:15

If a project has a negative cash flow during its life or at the end of its life, the project most likely has:
A)
a negative internal rate of return.
B)
more than one internal rate of return.
C)
multiple net present values.



Projects with unconventional cash flows (where the sign of the cash flow changes from minus to plus to back to minus) will have multiple internal rates of return. However, one will still be able to calculate a single net present value for the cash flow pattern.
作者: hinsafdar    时间: 2012-3-29 11:15

Which of the following statements about the internal rate of return (IRR) for a project with the following cash flow pattern is CORRECT?
A)
No IRRs can be calculated.
B)
It has a single IRR of approximately 38%.
C)
It has two IRRs of approximately 38% and 260%.


The number of IRRs equals the number of changes in the sign of the cash flow. In this case, from negative to positive and then back to negative. Although 38% seems appropriate, one should not automatically discount the value of 260%.
Check answers by calculation:
10,000 ÷ 1.38 - 10,000 ÷ 1.382 = 1995.38
And:
10,000 ÷ 3.6 - 10,000 ÷ 3.62 = 2006.17
Both discount rates give NPVs of approximately zero and thus, are IRRs.
作者: hinsafdar    时间: 2012-3-29 11:16

The NPV profile is a graphical representation of the change in net present value relative to a change in the:
A)
discount rate.
B)
prime rate.
C)
internal rate of return.



As discount rates change the net present values change. The NPV profile is a graphic illustration of how sensitive net present values are to different discount rates. By comparison, every project has a single internal rate of return and payback period because the values are determined solely by the investment’s expected cash flows.
作者: hinsafdar    时间: 2012-3-29 11:16

When using net present value (NPV) profiles:
A)
one should accept all independent projects with positive NPVs.
B)
the NPV profile's intersection with the vertical y-axis identifies the project's internal rate of return.
C)
one should accept all mutually exclusive projects with positive NPVs.



Where the NPV intersects the vertical y-axis you have the value of the cash inflows less the cash outflows, assuming an absence of money having a time value (i.e., the discount rate is zero). Where the NPV intersects the horizontal x-axis you have the project’s internal rate of return. At this cost of financing, the cash inflows and cash outflows offset each other. The NPV profile is a tool that graphically plots the project’s NPV as calculated using different discount rates. Assuming an appropriate discount rate, one should accept all projects with positive net present values, if the projects are independent. If projects are mutually exclusive select the one with the higher NPV at any given level of the cost of capital.
作者: hinsafdar    时间: 2012-3-29 11:17

Which of the following firms is most likely to use a discounted cash flow technique as its primary capital budgeting tool?
A)
A large, publicly held European firm that has managers with no formal business education.
B)
A small, privately held European firm that has managers with no formal business education.
C)
A large, publicly held U.S. firm where managers hold MBA degrees.



Companies that favor discounted cash flow capital budgeting techniques such as NPV and IRR over payback period or other non-DCF capital budgeting techniques tend to have the following characteristics:
作者: hinsafdar    时间: 2012-3-29 11:17

Osborn Manufacturing uses the NPV and IRR methods as its primary tools for evaluating capital projects. Which of the following most likely describes Osborn Manufacturing with regard to firm ownership and company size?
Firm ownershipCompany size
A)
PublicLarge
B)
PublicSmall
C)
PrivateLarge



Despite the theoretical superiority of the NPV and IRR methods for determining and ranking project profitability, surveys of corporate managers show that a variety of methods are used. Firms that use the NPV and IRR methods tend to be larger, publicly-traded, companies.
作者: hinsafdar    时间: 2012-3-29 11:18

Mollette Industries uses the payback period as its primary means for ranking capital projects. Which of the following most likely describes Mollette Industries with regard to location and management education?
LocationManagement education
A)
U.S. based firmUndergraduate degree or lower
B)
European-based firmMBA degree or higher
C)
European-based firmUndergraduate degree or lower



Despite the theoretical superiority of the NPV and IRR methods for determining and ranking project profitability, surveys of corporate managers show that a variety of methods are used. Firms that were most likely to use the payback period method were European firms and management teams with less education.
作者: hinsafdar    时间: 2012-3-29 11:18

Garner Corporation is investing $30 million in new capital equipment. The present value of future after-tax cash flows generated by the equipment is estimated to be $50 million. Currently, Garner has a stock price of $28.00 per share with 8 million shares outstanding. Assuming that this project represents new information and is independent of other expectations about the company, what should the effect of the project be on the firm’s stock price?
A)
The stock price will increase to $30.50.
B)
The stock price will increase to $34.25.
C)
The stock price will remain unchanged.



In theory, a positive NPV project should provide an increase in the value of a firm's shares.
NPV of new capital equipment = $50 million - $30 million = $20 million
Value of company prior to equipment purchase = 8,000,000 × $28.00 = $224,000,000
Value of company after new equipment project = $224 million + $20 million = $244 million
Price per share after new equipment project = $244 million / 8 million = $30.50
Note that in reality, changes in stock prices result from changes in expectations more than changes in NPV.
作者: terpsichorefan    时间: 2013-4-18 18:49

thanks for sharing




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