FIN 304 (Finance Economics) FA23
EXAMBANK STUDY GUID ELATEST
UPDATED RATED A.
Z7 Q1 Because "present value" refers to the value of cash flows that occur
at different points in time, a series of present values of cash flows should
not be summed to determine the value of a capital budgeting project.
False
Z7 Q2 Datta Computer Systems is considering a project that has the
following cash flow data. What is the project's IRR? Note that a project's
projected IRR can be less than the WACC (and even negative), in which
case it will be rejected. Year 0 1 2 3
Cash Flows -$2,200 $450 $890 $1,230
7.04%
Z7 Q3 Assume a project has normal cash flows. All else equal, which of
the following statements is CORRECT?
A project's NPV increases as the WACC declines.
Z7 Q4 CDCD Inc. is considering a project that has the following cash flow.
What is the project's payback?
Year 0 1 2 3
Cash Flows -$700 $500 $500 $500
1.4
Z7 Q5 If the IRR of normal Project X is greater than the IRR of mutually
exclusive (and also normal) Project Y, we can conclude that the firm
should always select X rather than Y if X has NPV > 0.
False
,Z7 Q6 An increase in the firm's WACC will decrease projects' NPVs, which
could change the accept/reject decision for any potential project. However,
such a change would have no impact on projects' IRRs. Therefore, the
accept/reject decision under the IRR method is independent of the cost of
capital.
False
Z7 Q7 Which of the following statements is CORRECT?
One defect of the IRR method is that it assumes that the cash flows to be
received from a project can be reinvested at the IRR itself, and that
assumption is often not valid.
Z7 Q8 A firm is considering Projects S and L, whose cash flows are shown
below. These projects are mutually exclusive, equally risky, and not
repeatable. The CEO wants to use the IRR criterion, while the CFO favors
the NPV method. You were hired to advise the firm on the best procedure.
If the wrong decision criterion is used, how much potential value would
the firm lose?
WACC 8.00%
Year 0 1 2 3 4
Project S -$1,025 $380 $380 $380 $380
Project L -$2,150 $765 $765 $765 $765
$150.17
Z7 Q9 Ehrmann Data Systems is considering a project that has the
following cash flow and WACC data. What is the project's IRR? Should this
project be rejected or accepted based on IRR?
WACC 12.75%
Year 0 1 2 3
Cash Flows -$1,100 $470 $460 $450
12.35%, rejected
Z7 Q10 Projects S and L are equally risky, mutually exclusive, and have
normal cash flows. Project S has an IRR of 15%, while Project L's IRR is
,12%. The two projects have the same NPV when the WACC is 7%. Which
of the following statements is CORRECT?
If the WACC is 10%, both projects will have positive NPVs.
P8 Q1 The expected cash flows of a project are as follows:
WACC: 9.5%
Year 0 1 2 3 4
Cash Flow -$12,000 $6,500 $4,000 $2,000 $1,000
Calculate the project's IRR, MIRR, payback and discounted payback
6.82%
8.32%
2.75
>4
P8 Q2 The expected cash flow forecasts for a project are listed in the table
below. The project has a 10% cost of capital and a 4-year holding period.
The depreciation will be calculated using straight line method and ignoring
salvage value.
Initial investment ($ thousands) 20,000
Salvage value ($ thousands) 3,000
Initial revenues ($ thousands) 18,000
Variable costs (% of revenues) 40.0%
Initial fixed costs ($ thousands) 4,000
Inflation rate (%) 5.0%
Discount rate (%) 10.0%
Receivables (% of sal
$3,334
$7,269
$1,583
P8 Q3 A startup company, XYX Inc., plans to produce lithium Batteries.
The projected number of batteries sold in the first year is 150,000, and the
variables cost for the first year is 40% of sales. The projected fixed cost is
, $120,000 and the depreciation is $150,000. With the information given,
calculate the break-even point for the selling price (per battery).
$3
P8 Q4 LLL Inc. can produce keepsakes that will be sold for $75 each. The
fixed cost (non-depreciation) is $900 per year, and variable cost per unit is
80% of the sale price. The initial investment of $2,000 will be depreciated
straight-line over its useful life of five years to a final value of zero, and
the discount rate is 9%. The firm's tax rate is 30%. Calculate (a) the
accounting break-even level of sales, and (b) the NPV break-even level of
sales.
86.67
97.54
P8 Q5 Discuss how changes in working capital can affect project cash
flows
if Working Capital increases, the company's cash flow decreases, and if
Working Capital decreases, the company's cash flow increases. That explains
why the Change in Working Capital has a negative sign when Working
Capital increases, while it has a positive sign when Working Capital
decreases.
P8 Q6 Discuss the relation between depreciation and project NPV, as well
as how accelerated depreciation affects NPV.
The accelerated depreciation method reduces tax outflows in the early years
and increases them in the later years leading to the after-tax cash flows
increasing in early years and decreasing in later years. This results to a higher
NPV
P8 Q7 Discuss how sensitivity analysis, scenario analysis, and break-even
analysis can affect investment decisions.
Sensitivity analysis adds credibility to any type of financial model by testing
the model across a wide set of possibilities. Financial Sensitivity Analysis
EXAMBANK STUDY GUID ELATEST
UPDATED RATED A.
Z7 Q1 Because "present value" refers to the value of cash flows that occur
at different points in time, a series of present values of cash flows should
not be summed to determine the value of a capital budgeting project.
False
Z7 Q2 Datta Computer Systems is considering a project that has the
following cash flow data. What is the project's IRR? Note that a project's
projected IRR can be less than the WACC (and even negative), in which
case it will be rejected. Year 0 1 2 3
Cash Flows -$2,200 $450 $890 $1,230
7.04%
Z7 Q3 Assume a project has normal cash flows. All else equal, which of
the following statements is CORRECT?
A project's NPV increases as the WACC declines.
Z7 Q4 CDCD Inc. is considering a project that has the following cash flow.
What is the project's payback?
Year 0 1 2 3
Cash Flows -$700 $500 $500 $500
1.4
Z7 Q5 If the IRR of normal Project X is greater than the IRR of mutually
exclusive (and also normal) Project Y, we can conclude that the firm
should always select X rather than Y if X has NPV > 0.
False
,Z7 Q6 An increase in the firm's WACC will decrease projects' NPVs, which
could change the accept/reject decision for any potential project. However,
such a change would have no impact on projects' IRRs. Therefore, the
accept/reject decision under the IRR method is independent of the cost of
capital.
False
Z7 Q7 Which of the following statements is CORRECT?
One defect of the IRR method is that it assumes that the cash flows to be
received from a project can be reinvested at the IRR itself, and that
assumption is often not valid.
Z7 Q8 A firm is considering Projects S and L, whose cash flows are shown
below. These projects are mutually exclusive, equally risky, and not
repeatable. The CEO wants to use the IRR criterion, while the CFO favors
the NPV method. You were hired to advise the firm on the best procedure.
If the wrong decision criterion is used, how much potential value would
the firm lose?
WACC 8.00%
Year 0 1 2 3 4
Project S -$1,025 $380 $380 $380 $380
Project L -$2,150 $765 $765 $765 $765
$150.17
Z7 Q9 Ehrmann Data Systems is considering a project that has the
following cash flow and WACC data. What is the project's IRR? Should this
project be rejected or accepted based on IRR?
WACC 12.75%
Year 0 1 2 3
Cash Flows -$1,100 $470 $460 $450
12.35%, rejected
Z7 Q10 Projects S and L are equally risky, mutually exclusive, and have
normal cash flows. Project S has an IRR of 15%, while Project L's IRR is
,12%. The two projects have the same NPV when the WACC is 7%. Which
of the following statements is CORRECT?
If the WACC is 10%, both projects will have positive NPVs.
P8 Q1 The expected cash flows of a project are as follows:
WACC: 9.5%
Year 0 1 2 3 4
Cash Flow -$12,000 $6,500 $4,000 $2,000 $1,000
Calculate the project's IRR, MIRR, payback and discounted payback
6.82%
8.32%
2.75
>4
P8 Q2 The expected cash flow forecasts for a project are listed in the table
below. The project has a 10% cost of capital and a 4-year holding period.
The depreciation will be calculated using straight line method and ignoring
salvage value.
Initial investment ($ thousands) 20,000
Salvage value ($ thousands) 3,000
Initial revenues ($ thousands) 18,000
Variable costs (% of revenues) 40.0%
Initial fixed costs ($ thousands) 4,000
Inflation rate (%) 5.0%
Discount rate (%) 10.0%
Receivables (% of sal
$3,334
$7,269
$1,583
P8 Q3 A startup company, XYX Inc., plans to produce lithium Batteries.
The projected number of batteries sold in the first year is 150,000, and the
variables cost for the first year is 40% of sales. The projected fixed cost is
, $120,000 and the depreciation is $150,000. With the information given,
calculate the break-even point for the selling price (per battery).
$3
P8 Q4 LLL Inc. can produce keepsakes that will be sold for $75 each. The
fixed cost (non-depreciation) is $900 per year, and variable cost per unit is
80% of the sale price. The initial investment of $2,000 will be depreciated
straight-line over its useful life of five years to a final value of zero, and
the discount rate is 9%. The firm's tax rate is 30%. Calculate (a) the
accounting break-even level of sales, and (b) the NPV break-even level of
sales.
86.67
97.54
P8 Q5 Discuss how changes in working capital can affect project cash
flows
if Working Capital increases, the company's cash flow decreases, and if
Working Capital decreases, the company's cash flow increases. That explains
why the Change in Working Capital has a negative sign when Working
Capital increases, while it has a positive sign when Working Capital
decreases.
P8 Q6 Discuss the relation between depreciation and project NPV, as well
as how accelerated depreciation affects NPV.
The accelerated depreciation method reduces tax outflows in the early years
and increases them in the later years leading to the after-tax cash flows
increasing in early years and decreasing in later years. This results to a higher
NPV
P8 Q7 Discuss how sensitivity analysis, scenario analysis, and break-even
analysis can affect investment decisions.
Sensitivity analysis adds credibility to any type of financial model by testing
the model across a wide set of possibilities. Financial Sensitivity Analysis
