Q4. The financial manager at IBFM, a farm implement distributor, is contemplating the following three mutually exclusive projects. IBFM’s required rate of return is 9.5%. Based on the information provided, which should the financial manager select and why?

Project      Investment at t = 0     Cash Flow at t = 1     IRR  NPV @ 9.5%

A     $10,000     $11,300    13.00        $320

B     $25,000     $29,000    16.00        $1,484

C     $35,000     $40,250    15.00        $1,758

A)   Project A with the lowest initial investment.

B)   Project C with the highest net present value.

C)   All of the projects, because they all earn more than 9.5%.

Q5. Financial managers should always select the project that provides the highest net present value (NPV) whenever NPV and IRR methods conflict, because maximizing:

A)   shareholder wealth is the goal of financial management.

B)   the shareholders' rate of return is the goal of financial management.

C)   revenues is the goal of financial management.

Q6. The financial manager at Johnson & Smith estimates that its required rate of return is 11%. Which of the following independent projects should Johnson & Smith accept?

A)   Project A requires an up-front expenditure of $1,000,000 and generates an NPV of -$4,600.

B)   Project B requires an up-front expenditure of $800,000 and generates a positive IRR of 10.5%.

C)   Project C requires an up-front expenditure of $600,000 and generates a positive internal rate of return of 12.0%.

答案和详解如下：

Q4. The financial manager at IBFM, a farm implement distributor, is contemplating the following three mutually exclusive projects. IBFM’s required rate of return is 9.5%. Based on the information provided, which should the financial manager select and why?

Project      Investment at t = 0     Cash Flow at t = 1     IRR  NPV @ 9.5%

A     $10,000     $11,300    13.00        $320

B     $25,000     $29,000    16.00        $1,484

C     $35,000     $40,250    15.00        $1,758

A)   Project A with the lowest initial investment.

B)   Project C with the highest net present value.

C)   All of the projects, because they all earn more than 9.5%.

Correct answer is B)

When projects are mutually exclusive, only one can be chosen. Project selection should be done on the basis of which project will enhance firm value the most. That project, Project C in this case, is the one with the highest NPV.

Q5. Financial managers should always select the project that provides the highest net present value (NPV) whenever NPV and IRR methods conflict, because maximizing:

A)   shareholder wealth is the goal of financial management.

B)   the shareholders' rate of return is the goal of financial management.

C)   revenues is the goal of financial management.

Correct answer is A)

Focusing on the maximization of earnings does not consider the differences in risk across projects, while focusing on revenues precludes concern for the expenses incurred. Earning a higher return on a small project provides less of a benefit than earning a slightly lower rate of return on a much larger project.

Q6. The financial manager at Johnson & Smith estimates that its required rate of return is 11%. Which of the following independent projects should Johnson & Smith accept?

A)   Project A requires an up-front expenditure of $1,000,000 and generates an NPV of -$4,600.

B)   Project B requires an up-front expenditure of $800,000 and generates a positive IRR of 10.5%.

C)   Project C requires an up-front expenditure of $600,000 and generates a positive internal rate of return of 12.0%.

Correct answer is C)

When projects are independent, you can use either the NPV method or IRR method to make the accept or reject decision. Only Project C has an IRR in excess of 11%. Acceptance of Project A reduces the firm’s value by $4,600.

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