NPTEL COURSE

FINANCIAL MANAGEMENT
ASSIGNMENT VI

1. Which one of the following may not be generally relevant in establishing the time horizon
for cash flow analysis?
a. Investment planning horizon of the firm
b. Product market life of the plant
c. Physical life of the plant
d. Technological life of the plant
2. Which of the following statements regarding cash flow patterns (for time periods 0, 1, 2, 3,
and 4) is correct?
a. The sequence of -$100, $50, $40, $60, and $50 is a nonconventional cash flow
pattern.
b. The sequence of -$100, $600, -$1,100, $600, and $20 has at most two internal rates of
return.
c. The sequence of +$100, -$1,100, and $1,600 is a conventional cash flow pattern.
d. The sequence of -$50, $50, $70, $60, and -$150 has at most two internal rates of
return.
3. The American Co. is considering the purchase of a new machine that would increase the
speed of packaging and save money. The net cost of this machine is Rs. 45,000. The annual
cash flows have the following projections.
Year Cash Flow
1 Rs. 15,000
2 20,000
3 25,000
4 10,000
5 5,000
What is the internal rate of return?
a. About 7%
b. About 10%
c. About 23%
d. About 27%
4. Which of the following is not an element of the cash flow stream of a project?
a. Sunk cost of a project
 b. Initial investment
c. Operating cash flows
d. Terminal cash flows
5. For purposes of investment analysis, what matters is:
a. Overhead costs allocated to the project
b. Incremental overhead costs attributable to the project
c. Weighted average overhead costs attributable to the project
d. Projected average overhead costs attributable to the project
6. Which one of the following is a sunk cost
a. Preliminary survey expenses before setting up the plant
b. R & D expenditure not leading to a product
c. Sponsorship expenses of Indian cricket team
d. Contribution to Prime Ministers Relief Fund
7. Calculate the discounted payback period for a project with an initial cash outlay of Rs. 700
and annual free flows of Rs. 420, Rs. 103, Rs. 250, Rs. 350 and Rs. 200 in year 1, year 2,
year 3, year 4, and year 5 respectively. Interest rate is 8%.
a. 3.5 years
b. 3.092 years
c. 3.92 years
d. 4 years
8. While defining the cash flows on the investment side, interest cost is not considered
because:
a. It is a proxy to the rate of return
b. Historical interest rates have no relevance
c. It is included in the cost of capital
d. Both b and c
9. All incidental effects of a project on the rest of the firm should be considered while
estimating project cash flows because:
a. It may have a complementary relationship with the existing activities
b. It may have a competitive relationship with the existing activities
c. It may have a supplementary relationship with the existing activities
d. Both a and b
10. Usually, revenue projections in a firm are provided by;
a. Engineering department
b. Product development department
c. Marketing department
d. Cost accountants
11. Product cannibalisation involves
a. Erosion of sales of an existing product due to own new product
 b. Erosion of sales of an existing product due to an own older product
c. Erosion of sales due to a competitor’s existing product
d. Erosion of sales due to a competitor’s new product
12. Guidelines on which of the following should be borne in mind in estimating the
incremental cash flows of a firm?
a. All incidental effects
b. Opportunity costs
c. Incremental overhead costs
d. All of the above
ANSWER KEY
1(c) 2(d) 3(c) 4(a) 5(b) 6(a)
7(b) 8(c) 9(d) 10(c) 11(a) 12(d)