Final/Exam 3 Sample Questions with Answers
1. Your company is considering three different methods of producing its product: purchase production equipment,
lease production equipment, or contract with a supplier to purchase the product from them. The methods have differing
lives and cash flow streams. You are responsible for choosing one of the methods. Of the following, the best statement of
your objective is to
A) choose the method that will least affect the balance sheet of the company
B) choose the method that maximizes future cash inflows
C) choose the method that will result in the highest accounting net income
D) choose the method that minimizes initial cash outflows
E) choose the method that maximizes shareholder wealth
2. Which of the following is true about net working capital?
A) Projects in which a firm expands its operations and sales will generally not lead to changes in net working capital
B) Changes in net working capital account for differences between accounting sales and costs and actual cash
receipts and payments
C) Net working capital is typically an expense at the beginning of a project and an equal inflow at the end, thus
having no impact on NPV
D) Dollar changes in the cash account and in net working capital are generally equal
E) Net working capital is not considered an investment for the firm
3. The NPV computed using static DCF analysis is _________ if the project gives us the opportunity to invest
additional funds if things go well, that is, it includes an option to expand.
A) understated B) overstated C) accurately stated even
D) not conservative enough E) useless
4. Given the following information and assuming straight-line depreciation to zero, what is the NPV of this project?
Initial investment = $400,000; life = 5 years; revenues = $150,000 per year; sale price = $30,000 in year 5; tax rate =
34%; discount rate = 14%.
A) -$149,841 B) -$33,117 C) $0 D) $19,800 E) $41,832
5. A project costs $20,000, will be depreciated straight-line to zero over its 3-year life, will require a net working
capital investment of $5,000 up front, has a tax rate of 34% and a required return of 10%. The fixed assets will be sold for
$2,000 at the end of year three. The project generates OCF of $13,000. What is the project's NPV?
A) $10,724 B) $11,033 C) $12,588 D) $13,426 E) $15,942
6. Given the following information and assuming straight-line depreciation to zero, what is the payback period for
this project? Initial investment = $500,000; life = 5 years; revenues = $160,000 per year; sale price = $30,000 in year 5;
tax rate = 34%; discount rate = 13%.
A) 2.5 years B) 3.6 years C) 3.9 years D) 4.4 years
E) The payback period is greater than the project's life
7. Given the following information and assuming straight-line depreciation to zero, what is the IRR of this project?
Initial investment = $400,000; life = 4 years; revenues = $125,000 per year; sale price = $20,000 in year 4; tax rate =
34%; discount rate = 12%.
A) 6.25% B) 7.44% C) 8.15% D) 9.43% E) 10.24%
1
, Use the following to answer questions 8-10:
The managers of PonchoParts, Inc. plan to manufacture engine blocks for classic cars from the 1960s. They expect to sell
250 blocks annually for the next 5 years. The necessary foundry and machining equipment will cost a total of $800,000
and will be depreciated on a SL basis to zero over the project's life. The firm expects to be able to sell the equipment for
$150,000 at the end of 5 years. Labor and materials costs total $500 per engine block, fixed costs are $125,000 per year.
Assume a 35% tax rate and a 12% discount rate.
8. What is the expected after-tax cash flow to the firm when the equipment is sold in year five?
A) $97,100 B) $150,000 C) $162,000 D) $175,000 E) $180,260
9. Assume that management believes that auto restorers will pay $3,000 per block. What is the NPV of this project?
A) $260,769 B) $401,187 C) $521,309 D) $620,684 E) $644,678
10. Assume that management believes that auto restorers will pay $3,000 per block. What is the PI of this project?
A) 0.79 B) 1.33 C) 1.65 D) 1.78 E) 1.84
11. An investment's return on investment usually has two components, one of which is ___________ which reflects
the cash you receive directly while you own the investment.
A) the capital gain B) the income component C) your reward for bearing risk
D) your total dollar return E) your gross return on that investment
12. You purchased a bond for $900 one year ago. Today, you receive your only interest payment for the year of $100. The bond
could be sold for $975 today. Your percentage return on your investment is ____________. (Ignore taxes)
A) 8.3% B) 11.1% C) 18.0% D) 19.4% E) 23.8%
13. Given the following historical returns, what is the standard deviation? Year 1 = 20%; year 2 = -12%; year 3 =
16%; year 4 = 3%; and year 5 = -15%.
A) 11.89% B) 12.48% C) 14.18% D) 15.85% E) 16.87%
14. Which of the following two stocks is more volatile based on their historical returns?
Year Stock A Return Stock B Return
1 .04 .08
2 .06 .09
3 .08 .10
4 .10 .11
5 .12 .12
A) A because it has a lower mean B) B because it has a higher mean
C) A because it has a higher standard deviation D) B because it has a lower standard deviation
E) B because it has a higher variance
15. What is the expected return for the following stock?
State Probability E(Ri)
Average .55 .20
Recession .20 .10
Depression .25 -.20
A) .055 B) .080 C) .095 D) .105 E) .110
16. What is the expected portfolio return given the following information:
Asset Port. Weight E(Ri)
A .25 15%
B .25 20%
C .30 10%
D .20 35%
A) 7.71% B) 9.23% C) 18.75% D) 19.25% E) 21.15%
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1. Your company is considering three different methods of producing its product: purchase production equipment,
lease production equipment, or contract with a supplier to purchase the product from them. The methods have differing
lives and cash flow streams. You are responsible for choosing one of the methods. Of the following, the best statement of
your objective is to
A) choose the method that will least affect the balance sheet of the company
B) choose the method that maximizes future cash inflows
C) choose the method that will result in the highest accounting net income
D) choose the method that minimizes initial cash outflows
E) choose the method that maximizes shareholder wealth
2. Which of the following is true about net working capital?
A) Projects in which a firm expands its operations and sales will generally not lead to changes in net working capital
B) Changes in net working capital account for differences between accounting sales and costs and actual cash
receipts and payments
C) Net working capital is typically an expense at the beginning of a project and an equal inflow at the end, thus
having no impact on NPV
D) Dollar changes in the cash account and in net working capital are generally equal
E) Net working capital is not considered an investment for the firm
3. The NPV computed using static DCF analysis is _________ if the project gives us the opportunity to invest
additional funds if things go well, that is, it includes an option to expand.
A) understated B) overstated C) accurately stated even
D) not conservative enough E) useless
4. Given the following information and assuming straight-line depreciation to zero, what is the NPV of this project?
Initial investment = $400,000; life = 5 years; revenues = $150,000 per year; sale price = $30,000 in year 5; tax rate =
34%; discount rate = 14%.
A) -$149,841 B) -$33,117 C) $0 D) $19,800 E) $41,832
5. A project costs $20,000, will be depreciated straight-line to zero over its 3-year life, will require a net working
capital investment of $5,000 up front, has a tax rate of 34% and a required return of 10%. The fixed assets will be sold for
$2,000 at the end of year three. The project generates OCF of $13,000. What is the project's NPV?
A) $10,724 B) $11,033 C) $12,588 D) $13,426 E) $15,942
6. Given the following information and assuming straight-line depreciation to zero, what is the payback period for
this project? Initial investment = $500,000; life = 5 years; revenues = $160,000 per year; sale price = $30,000 in year 5;
tax rate = 34%; discount rate = 13%.
A) 2.5 years B) 3.6 years C) 3.9 years D) 4.4 years
E) The payback period is greater than the project's life
7. Given the following information and assuming straight-line depreciation to zero, what is the IRR of this project?
Initial investment = $400,000; life = 4 years; revenues = $125,000 per year; sale price = $20,000 in year 4; tax rate =
34%; discount rate = 12%.
A) 6.25% B) 7.44% C) 8.15% D) 9.43% E) 10.24%
1
, Use the following to answer questions 8-10:
The managers of PonchoParts, Inc. plan to manufacture engine blocks for classic cars from the 1960s. They expect to sell
250 blocks annually for the next 5 years. The necessary foundry and machining equipment will cost a total of $800,000
and will be depreciated on a SL basis to zero over the project's life. The firm expects to be able to sell the equipment for
$150,000 at the end of 5 years. Labor and materials costs total $500 per engine block, fixed costs are $125,000 per year.
Assume a 35% tax rate and a 12% discount rate.
8. What is the expected after-tax cash flow to the firm when the equipment is sold in year five?
A) $97,100 B) $150,000 C) $162,000 D) $175,000 E) $180,260
9. Assume that management believes that auto restorers will pay $3,000 per block. What is the NPV of this project?
A) $260,769 B) $401,187 C) $521,309 D) $620,684 E) $644,678
10. Assume that management believes that auto restorers will pay $3,000 per block. What is the PI of this project?
A) 0.79 B) 1.33 C) 1.65 D) 1.78 E) 1.84
11. An investment's return on investment usually has two components, one of which is ___________ which reflects
the cash you receive directly while you own the investment.
A) the capital gain B) the income component C) your reward for bearing risk
D) your total dollar return E) your gross return on that investment
12. You purchased a bond for $900 one year ago. Today, you receive your only interest payment for the year of $100. The bond
could be sold for $975 today. Your percentage return on your investment is ____________. (Ignore taxes)
A) 8.3% B) 11.1% C) 18.0% D) 19.4% E) 23.8%
13. Given the following historical returns, what is the standard deviation? Year 1 = 20%; year 2 = -12%; year 3 =
16%; year 4 = 3%; and year 5 = -15%.
A) 11.89% B) 12.48% C) 14.18% D) 15.85% E) 16.87%
14. Which of the following two stocks is more volatile based on their historical returns?
Year Stock A Return Stock B Return
1 .04 .08
2 .06 .09
3 .08 .10
4 .10 .11
5 .12 .12
A) A because it has a lower mean B) B because it has a higher mean
C) A because it has a higher standard deviation D) B because it has a lower standard deviation
E) B because it has a higher variance
15. What is the expected return for the following stock?
State Probability E(Ri)
Average .55 .20
Recession .20 .10
Depression .25 -.20
A) .055 B) .080 C) .095 D) .105 E) .110
16. What is the expected portfolio return given the following information:
Asset Port. Weight E(Ri)
A .25 15%
B .25 20%
C .30 10%
D .20 35%
A) 7.71% B) 9.23% C) 18.75% D) 19.25% E) 21.15%
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