Q7. Which of the following statements about the discounted payback period is least accurate? The discounted payback:

A)   period is generally shorter than the regular payback.

B)   frequently ignores terminal values.

C)   method can give conflicting results with the NPV.

Q8. 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.

Q9. A company is considering a $10,000 project that will last 5 years.

• Annual after tax cash flows are expected to be $3,000

• Target debt/equity ratio is 0.4

• Cost of equity is 12%

• Cost of debt is 6%

• Tax rate 34%

What is the project's net present value (NPV)?

A)   -$1,460.

B)   +$1,460.

C)   $+1,245

Q10. 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.

Q11. 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:

• Debt/equity ratio is 50%.

• Cost of equity capital is 15%.

• Cost of new debt is 9%.

• Tax rate is 33%.

Determine the project's net present value (NPV) and whether or not to accept it.

NPV                 Accept / Do not accept

A)  -$33                                        Do not accept

B)  +$33                                       Accept

C)   +$4,968                               Accept

答案和详解如下：

Q7. Which of the following statements about the discounted payback period is least accurate? The discounted payback:

A)   period is generally shorter than the regular payback.

B)   frequently ignores terminal values.

C)   method can give conflicting results with the NPV.

Correct answer is A)

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.

Q8. 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.

Correct answer is C)

For mutually exclusive projects you should use NPV to rank and select projects.

Q9. A company is considering a $10,000 project that will last 5 years.

• Annual after tax cash flows are expected to be $3,000

• Target debt/equity ratio is 0.4

• Cost of equity is 12%

• Cost of debt is 6%

• Tax rate 34%

What is the project's net present value (NPV)?

A)   -$1,460.

B)   +$1,460.

C)   $+1,245

Correct answer is B)

First, calculate the weights for debt and equity

w_d + w_e = 1

w_e = 1 − w_d

w_d /  w_e = 0.40

w_d = 0.40 × (1 − w_d)

w_d = 0.40 − 0.40w_d

1.40w_d = 0.40

w_d = 0.286, w_e = 0.714

Second, calculate WACC

WACC = (w_d × k_d) × (1 − t) + (w_e × k_e) = (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

Q10. 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.

Correct answer is C)

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; CF_2-8 = +$200,000; CF₉ = -$170,000. One simply has to discount all of the cash flows to today at a 16% rate. NPV = $280,913.

Q11. 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:

• Debt/equity ratio is 50%.

• Cost of equity capital is 15%.

• Cost of new debt is 9%.

• Tax rate is 33%.

Determine the project's net present value (NPV) and whether or not to accept it.

NPV                 Accept / Do not accept

A)  -$33                                        Do not accept

B)  +$33                                       Accept

C)   +$4,968                               Accept

Correct answer is A)

First, calculate the weights for debt and equity

d + w_e = 1

d = 0.50W_e

e + W_e = 1

d = 0.333, w_e = 0.667

Second, calculate WACC

WACC = (w_d × k_d) × (1 − t) + (w_e × k_e) = (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

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Q12. A firm is considering a $200,000 project that will last 3 years and has the following financial data:

• Annual after-tax cash flows are expected to be $90,000.

• Target debt/equity ratio is 0.4.

• Cost of equity is 14%.

• Cost of debt is 7%.

• Tax rate is 34%.

Determine the project's payback period and net present value (NPV).

          Payback Period                     NPV

A)      2.43 years                       $18,716

B)      2.22 years                      $18,716

C)      2.22 years                      $21,872

Correct answer is B)

Payback Period

$200,000 / $90,000 = 2.22 years

NPV Method

First, calculate the weights for debt and equity

w_d + w_e = 1
w_e = 1 ? w_d
w_d / w_e = 0.40
w_d = 0.40 × (1 ? w_d)
w_d = 0.40 ? 0.40w_d
1.40w_d = 0.40
w_d = 0.286, w_e = 0.714

Second, calculate WACC

WACC = (w_d × k_d) × (1 ? t) + (w_e × k_e) = (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

Q13. 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)   monitoring.

C)   capital budgeting.

Correct answer is C)

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.

Q14. 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:

• Year 1: $3,000

• Year 2: $2,000

• Year 3: $2,000

Determine the project's NPV and IRR.

          NPV                                          IRR

A)   $883                                      20%

B)   $243                                      20%

C)   $883                                      15%

Correct answer is A)

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%.

Q15. Which of the following statements about the payback period is FALSE?

A)   The payback period provides a rough measure of a project's liquidity and risk.

B)   The payback method considers all cash flows throughout the entire life of a project.

C)   The payback period is the number of years it takes to recover the original cost of the investment.

Correct answer is B)

The payback period does not take any cash flows after the payback point into consideration.