fnan_522_finals_exam.pdf

investment of $200,000. In the first year, it will have $100,000 in net cash inflows (one year after the initial investment). In year 2, it will have cash inflows of $100,000 (two years after the initial investment), and in year 3 the project will generate $200,000 (three years after the initial investment). What is the project's NPV? Assume all cash flows occur at the end of the year. Select one: a. $190,476 b. $358,708 c. $158,709 d. $193,204 The correct answer is: $158,709 A project has an initial investment requirement of $100,000. In year 1, it should earn $25,000; in year two, $30,000; and in year 3, $50,000. What is the project's internal rate of return? Assume the cash flows in years one, two, and three happen at the end of the year. Select one: a. 5.0% b. 6.21% c. 7.56% d. 2.21% The correct answer is: 2.21% Question 3 Correct Mark 1.00 out of 1.00 Question 4 Incorrect Mark 0.00 out of 1.00 In which of the following situations would it be appropriate to use the IRR method to make an investment decision? Select one: a. To compare two projects that have an equal initial investment and lifespan. b. All of these answers. c. To assess a project which cash flows fluctuate between positive and negative. d. To compare two investments that have different durations. The correct answer is: To compare two projects that have an equal initial investment and lifespan. Under the internal rate of return rule in capital budgeting, which of the following statements CANNOT be true? Select one: a. The internal rate of return can vary throughout the life of a project. b. The internal rate of return can be equal to the cost of capital. c. The cash inflows can be estimates. d. The initial investment can be the cost from purchasing new equipment. The correct answer is: The internal rate of return can vary throughout the life of a project. Question 5 Correct Mark 1.00 out of 1.00 Question 6 Correct Mark 1.00 out of 1.00 Question 7 Correct Mark 1.00 out of 1.00 You have just been offered a contract worth $5.6 million per year for 3 years. However, to take the contract, you will need to purchase some new equipment. Your discount rate for this project is 15.3%. You are still negotiating the purchase price of the equipment. What is the most you can pay for the equipment and still have a positive NPV? Select one: a. $12.6 million b. $16.8 million c. $5.6 million d. $23.4 million The correct answer is: $12.6 million Which of the following could be a sunk cost? Select one: a. All of these answers. b. A feasibility study that attempted to determine the economic viability of a project. c. Labor hours spent on planning project. d. Equipment purchased to pursue a project. The correct answer is: All of these answers. Which of the following is an example of an opportunity cost? Select one: a. If you watch a game instead of going for a run, the cost is poorer personal health. b. All of these answers. c. If you buy a candy bar instead of a soda, the cost is thirst. d. If invest in one of two projects, the cost is the lost revenue from the other project. The correct answer is: All of these answers. Question 8 Incorrect Mark 0.00 out of 1.00 Question 9 Incorrect Mark 0.00 out of 1.00 Which of the following is the best reason to use the payback method to evaluate investments? Select one: a. The payback method covers all cash inflows and outflows for the duration of the investment. b. The payback method adjusts for the project's riskiness. c. The payback method is easy to use and understand for most people, regardless of training. d. If you use the payback method, you do not need to perform additional analyses. The correct answer is: The payback method is easy to use and understand for most people, regardless of training. You are analyzing two different investments and will present your findings to company executives. Both projects have cash flows that alternate between positive and negative. Which budgeting method should you use to evaluate the projects? Select one: a. Modified Internal Rate of Return and Net Present Value. b. Any of these choices are appropriate. c. Payback period method. d. Internal Rate of Return and Net Present Value. The correct answer is: Mod