FIN 3113 TEST QUESTIONS WITH
CORRECT ANSWERS
Which of these are sets of cash flows where all the initial cash flows are negative and all
the subsequent ones are either zero or positive? - Answer- Normal cash flows
Suppose your firm is considering two mutually exclusive, required projects with the cash
flows shown below. The required rate of return on projects of both of their risk class is 8
percent, and that the maximum allowable payback and discounted payback statistic for
the projects are 2 and 3 years, respectively.
Time: 0 1 2 3
Project A Cash Flow -30,000 20,000 40,000 11,000
Project B Cash Flow -40,000 20,000 30,000 60,000
Use the NPV decision rule to evaluate these projects; which one(s) should it be
accepted or rejected? - Answer- reject A, accept B
Compute the PI statistic for Project Z if the appropriate cost of capital is 6 percent. (Do
not round intermediate calculations and round your final answer to 2 decimal places.)
Project Z Time: 0 1 2 3 4 5
Cash flow: -$3,200 $710 $840 $1,010 $660 $460 - Answer- NPV = -$3,200 +
($710/(1.06)^1) + ($840/(1.06)^2) + ($1,010/(1.06)^3) + ($660/(1.06)^4) +
($460/(1.06)^5)
= $-68.06
PI = (-$68.06 + $3,200)/$3,200 = 0.98
Since PI < 1, the project should be rejected.
Suppose your firm is considering two mutually exclusive, required projects with the cash
flows shown below. The required rate of return on projects of both of their risk class is
11 percent, and that the maximum allowable payback and discounted payback statistic
for the projects are 2 and 3 years, respectively.
Time: 0 1 2 3
Project A Cash Flow -38,000 28,000 48,000 19,000
Project B Cash Flow -48,000 28,000 38,000 68,000
, Use the PI decision rule to evaluate these projects; accept the project with the higher PI
value. - Answer- reject A, accept B
Of the capital budgeting techniques discussed, which works equally well with normal
and non-normal cash flows and with independent and mutually exclusive projects? -
Answer- Net present value
Compute the payback statistic for Project A if the appropriate cost of capital is 7 percent
and the maximum allowable payback period is four years. (Round your answer to 2
decimal places.)
Project A Time: 0 1 2 3 4 5
Cash flow: -$1,700 $630 $690 $660 $440 $240 - Answer- Year 0 1 2 3 4 5
Cash flow: -$ 1,700 $ 630 $ 690 $ 660 $ 440 $ 240 Cumulative cash flow: -$ 1,700 -$
1,070 -$ 380 $ 280
This project will achieve payback at time
2 + $380/$660 = 2.58 years.
Compute the IRR for Project F. The appropriate cost of capital is 13 percent. (Do not
round intermediate calculations and round your final answer to 2 decimal places.)
Project F Time: 0 1 2 3 4
Cash flow: -$11,700 $4,200 $5,030 $2,370 $3,000 - Answer- 0 + (-$11,700/(1+IRR)^0)
+ ($4,200/(1+IRR)^1) + ($5,030/(1+IRR)^2) + ($2,370/(1+IRR)^3) + ($3,000/(1+IRR)^4)
IRR = 10.45%
Since IRR < i, this project should be rejected.
Suppose you sell a fixed asset for $117,000 when it's book value is $139,000. If your
company's marginal tax rate is 33 percent, what will be the effect on cash flows of this
sale (i.e., what will be the after-tax cash flow of this sale) - Answer- AT CF = $139,000 +
($117,000 − $139,000) x (1 − .33) = $124,260
Your company has spent $270,000 on research to develop a new computer game. The
firm is planning to spend $47,000 on a machine to produce the new game. Shipping and
installation costs of the machine will be capitalized and depreciated; they total $5,700.
The machine has an expected life of 10 years, a $32,000 estimated resale value, and
falls under the MACRS 15-Year class life. Revenue from the new game is expected to
be $370,000 per year, with costs of $170,000 per year. The firm has a tax rate of 30
percent, an opportunity cost of capital of 12 percent, and it expects net working capital
to increase by $57,000 at the beginning of the project. What will be the net cash flow for
year one of this project? - Answer- Sales 370,000
-Fixed costs -170,000
-Depreciation -2,635
CORRECT ANSWERS
Which of these are sets of cash flows where all the initial cash flows are negative and all
the subsequent ones are either zero or positive? - Answer- Normal cash flows
Suppose your firm is considering two mutually exclusive, required projects with the cash
flows shown below. The required rate of return on projects of both of their risk class is 8
percent, and that the maximum allowable payback and discounted payback statistic for
the projects are 2 and 3 years, respectively.
Time: 0 1 2 3
Project A Cash Flow -30,000 20,000 40,000 11,000
Project B Cash Flow -40,000 20,000 30,000 60,000
Use the NPV decision rule to evaluate these projects; which one(s) should it be
accepted or rejected? - Answer- reject A, accept B
Compute the PI statistic for Project Z if the appropriate cost of capital is 6 percent. (Do
not round intermediate calculations and round your final answer to 2 decimal places.)
Project Z Time: 0 1 2 3 4 5
Cash flow: -$3,200 $710 $840 $1,010 $660 $460 - Answer- NPV = -$3,200 +
($710/(1.06)^1) + ($840/(1.06)^2) + ($1,010/(1.06)^3) + ($660/(1.06)^4) +
($460/(1.06)^5)
= $-68.06
PI = (-$68.06 + $3,200)/$3,200 = 0.98
Since PI < 1, the project should be rejected.
Suppose your firm is considering two mutually exclusive, required projects with the cash
flows shown below. The required rate of return on projects of both of their risk class is
11 percent, and that the maximum allowable payback and discounted payback statistic
for the projects are 2 and 3 years, respectively.
Time: 0 1 2 3
Project A Cash Flow -38,000 28,000 48,000 19,000
Project B Cash Flow -48,000 28,000 38,000 68,000
, Use the PI decision rule to evaluate these projects; accept the project with the higher PI
value. - Answer- reject A, accept B
Of the capital budgeting techniques discussed, which works equally well with normal
and non-normal cash flows and with independent and mutually exclusive projects? -
Answer- Net present value
Compute the payback statistic for Project A if the appropriate cost of capital is 7 percent
and the maximum allowable payback period is four years. (Round your answer to 2
decimal places.)
Project A Time: 0 1 2 3 4 5
Cash flow: -$1,700 $630 $690 $660 $440 $240 - Answer- Year 0 1 2 3 4 5
Cash flow: -$ 1,700 $ 630 $ 690 $ 660 $ 440 $ 240 Cumulative cash flow: -$ 1,700 -$
1,070 -$ 380 $ 280
This project will achieve payback at time
2 + $380/$660 = 2.58 years.
Compute the IRR for Project F. The appropriate cost of capital is 13 percent. (Do not
round intermediate calculations and round your final answer to 2 decimal places.)
Project F Time: 0 1 2 3 4
Cash flow: -$11,700 $4,200 $5,030 $2,370 $3,000 - Answer- 0 + (-$11,700/(1+IRR)^0)
+ ($4,200/(1+IRR)^1) + ($5,030/(1+IRR)^2) + ($2,370/(1+IRR)^3) + ($3,000/(1+IRR)^4)
IRR = 10.45%
Since IRR < i, this project should be rejected.
Suppose you sell a fixed asset for $117,000 when it's book value is $139,000. If your
company's marginal tax rate is 33 percent, what will be the effect on cash flows of this
sale (i.e., what will be the after-tax cash flow of this sale) - Answer- AT CF = $139,000 +
($117,000 − $139,000) x (1 − .33) = $124,260
Your company has spent $270,000 on research to develop a new computer game. The
firm is planning to spend $47,000 on a machine to produce the new game. Shipping and
installation costs of the machine will be capitalized and depreciated; they total $5,700.
The machine has an expected life of 10 years, a $32,000 estimated resale value, and
falls under the MACRS 15-Year class life. Revenue from the new game is expected to
be $370,000 per year, with costs of $170,000 per year. The firm has a tax rate of 30
percent, an opportunity cost of capital of 12 percent, and it expects net working capital
to increase by $57,000 at the beginning of the project. What will be the net cash flow for
year one of this project? - Answer- Sales 370,000
-Fixed costs -170,000
-Depreciation -2,635
