FNAN 522 FINAL EXAM QUESTIONS AND CORRECT ANSWER 2023 Graded A+

FNAN 522 FINAL EXAM QUESTIONS AND CORRECT ANSWER 2023 Graded A+. Comparing NPV and IRR analysis: a) may result in conflict with mutually exclusive projects, b) may result in conflict with independent projects, c) will always result in conflict with mutually exclusive projects, or d) will always result in conflict with independent projects - CORRECT ANSWER a) may result in conflict with mutually exclusive projects 20. The is the discount rate the equate the present value of the cash inflows with the initial investment - CORRECT ANSWER Internal Rate of Return (IRR) 21. On a purely theoretical basis, the NPV is the better approach to capital budgeting due to all of the following reasons except: a) that it measures the benefits relative to the amount investments, b) for the reasonableness of the reinvestment rate assumption, c) that there may be multiple solutions for the IRR computation, and d) that it maximizes shareholder wealth - CORRECT ANSWER b) for the reasonableness of the reinvestment rate assumption 22. A project has an initial investment of $600,000 and a profitability index of 1.21. The NPV of the project is... - CORRECT ANSWER ...$725,000 23. measure(s) the risk of a capital budgeting project by estimating the NPV's associated with the change in one of the projects cash flow assumptions. - CORRECT ANSWER Sensitivity Analysis 24. Project post-audit reviews are rarely of practical value because capital investments are sunk, irreversible costs. True or False. - CORRECT ANSWER False. 25. Pro forma financial statements are: a) used by the firms auditors, b) used by the finance manager for financial forecasting, c) used by the IRS to determine tax liability, or d) used by investors to determine stock value. - CORRECT ANSWER b) used by the finance manager for financial forecasting 26. Stikes, Lawsuits, regulatory actions, and increased competition are all examples of.... - CORRECT ANSWER diversifiable risk. 27. A company is analyzing a variety of potential investments using different capital budgeting methods. Which of the following represents the most profitable choice based on the information provided? - CORRECT ANSWER The company picks a project with profitability index of 1.25 over a project with a PI of -.25 28. A firm is trying to choose the most profitable project to invest in. Which of the following should be used as the company's discount rate? - CORRECT ANSWER The company's reinvestment rate or weighted average cost of capital. 29. Calculate the discounted payback period for a project with a discount rate of 5% the following cash flows: 30. Year 0: -$2000Year 1: $1000Year 2: -$1000Year 3: $1000Year 4: $3000Year 5: $2000 - CORRECT ANSWER 3.44 years. 31. In which of the following situations would it be appropriate to use the IRR method to make an investment decision? - CORRECT ANSWER To compare two projects that have an equal initial investment and lifespan. 32. The tax rate that applies to the last dollar of the tax base and is often applied to the change in one's tax obligation as income rises is called . - CORRECT ANSWER the marginal tax rate 33. When evaluating the cash flows from a project, a financial manager needs to analyze the: - CORRECT ANSWER costs, benefits, and opportunity costs of the project. 34. Which of the following describes an advantage the internal rate of return has over net present value for capital budgeting purposes? - CORRECT ANSWER Internal rate of return is an indicator of the efficiency, quality or yield of an investment. 35. Which of the following is a correct definition of a capital budgeting method? - CORRECT ANSWER The internal rate of return is the discount rate that gives a net present value of zero. 36. Which of the following is a way cash flow factors can be used to improve a business? - CORRECT ANSWER It can be used to .determine a project's rate of return or value, It can be used to evaluate the ""quality"" of income generated by accrual accounting, It can be used to NEW 2022 UPDATE FNAN 522: FINAL EXAM ALL EXAM QUESTIONS AND CORRECT ANSWER NEW 2022 UPDATE FNAN 522: FINAL EXAM ALL EXAM QUESTIONS AND CORRECT ANSWER determine problems with a business's liquidity. NEW 2022 UPDATE FNAN 522: FINAL EXAM ALL EXAM QUESTIONS AND CORRECT ANSWER NEW 2022 UPDATE FNAN 522: FINAL EXAM ALL EXAM QUESTIONS AND CORRECT ANSWER 37. Which of the following is an element needed to calculate an asset's depreciation? - CORRECT ANSWER The cost of the asset minus the asset's salvage value, The estimated useful life of the asset, A method of apportioning the cost of the asset. 38. You have an opportunity to invest $48,900 now in return for $61,200 in one year. If your cost of capital is 8.6%, 39. what is the NPV of thisinvestment? - CORRECT ANSWER $7,453.59 40. You have an opportunity to invest $115,000 now in return for $81,200 in one year and $43,200 in two years. If your cost of capital is 9.6%, what is the NPV of this investment? - CORRECT ANSWER -$4,948.85 41. You run a construction firm. You have just won a contract to build a government office building. Building it will require an investment of $10.6 million today and $5.8 million in one year. The government will pay you $22.2 million in one year upon the building's completion. Suppose the interest rate is 11.3%. What is the NPV of this opportunity? - CORRECT ANSWER $4.14 million 42. Marian Cebrian owns his own business and is considering an investment. If he undertakes the investment, it will pay $6,840 at the end of each of the next 3 years. The opportunity requires an initial investment of $1,710 plus an additional investment at the end of the second year of $8,550. What is the NPV of this opportunity if the interest rate is 2.6% per year? Should Marian take it? - CORRECT ANSWER The NPV is $9,665. Yes, he should take it. 43. You are a real estate agent thinking of placing a sign advertising your services at a local bus stop. The sign will cost $6,300 and will be posted for one year. You expect that it will generate additional revenue of $1,386 a month. What is the payback period? - CORRECT ANSWER 4.5 months 44. You have just been offered a contract worth $1.28 million per year for 6 years. However, to take the contract, you will need to purchase some new equipment. Your discount rate for this project is 12.6%. 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? - CORRECT ANSWER $5.17 million NEW 2022 UPDATE FNAN 522: FINAL EXAM ALL EXAM QUESTIONS AND CORRECT ANSWER NEW 2022 UPDATE FNAN 522: FINAL EXAM ALL EXAM QUESTIONS AND CORRECT ANSWER 45. You are deciding between two mutually exclusive investment opportunities. Both require the same initial investment of $11.0 million. Investment A will generate $2.40 million per year (starting at the end of the first year) in perpetuity. Investment B will generate $1.70 million at the end of the first year, and its revenues will grow at 3.2% per year for every year after that. NEW 2022 UPDATE FNAN 522: FINAL EXAM ALL EXAM QUESTIONS AND CORRECT ANSWER NEW 2022 UPDATE FNAN 522: FINAL EXAM ALL EXAM QUESTIONS AND CORRECT ANSWER 46. Which investment has the higher IRR? 47. Which investment has the higher NPV when the cost of capital is 8.1%? 48. Which investment should you select? - CORRECT ANSWER Project A had the higher IRR, project B has the higher NPV. Select project B with the higher NPV. IRR can only be used to compare projects with equal initial investments. 49. You are considering the following two projects and can take only one. Your cost of capital is 11.9%. The cash flows for the two projects are as follows ($ million): 50. Project Year 0 Year 1 Year 2 Year 3 Year 4 A -$ B -$ 51. What is the IRR of each project? Which project should you choose? - CORRECT ANSWER IRR of Project A = 17.7%, IRR of Project B = 21.7%.