Test Bank For Corporate Finance 2nd Canadian Edition Berk

Test Bank for Corporate Finance, 2nd Canadian Edition : Berk
Test Bank for Corporate Finance, 2nd Canadian

Edition : Berk
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Corporate Finance, 2Ce (Berk/DeMarzo/Stangeland)
Chapter 6 Investment Decision Rules
6.1 NPV and Stand-Alone Projects
1) Which of the following statements is false?

A) In general, the difference between the cost of capital and the IRR is the maximum amount of
estimation error in the cost of capital estimate that can exist without altering the original decision.
B) The IRR can provide information on how sensitive your analysis is to errors in the estimate of your
cost of capital.
C) If you are unsure of your cost of capital estimate, it is important to determine how sensitive your
analysis is to errors in this estimate.
D) If the cost of capital estimate is more than the IRR, the NPV will be positive.
Answer: D
Explanation: D) If the cost of capital estimate is more than the IRR, the NPV will be negative.
Diff: 1 Type: MC
Topic: 6.1 NPV and Stand-Alone Projects
Skill: Conceptual
Author: AZ
2) Which of the following statements is correct?

A) From 1977 to 2001, the percentage of firms that used the NPV rule for making investment decisions
increased from less than 50% to 74.9%.
B) From 1977 to 2001, the percentage of firms that used the NPV rule for making investment decisions
increased from 9.8% to less than 50%.
C) From 1977 to 2001, the percentage of firms that used the NPV rule for making investment decisions
increased from 9.8% to 74.9%.
D) From 1977 to 2001, the percentage of firms that used the NPV rule for making investment decisions
decreased from 75% to 74.9%.
Answer: C
Diff: 1 Type: MC
Skill: Definition
Author: AZ
3) Unconventional cash flows normally means

A) that you have cash outflows at the beginning of the investment and have cash inflows afterwards.
B) that you have cash inflows at the beginning of the investment and have cash outflows afterwards.
C) that you have major cash outflows at the beginning of the investment and have both cash outflows and
cash inflows afterwards.
D) none of the above.
Answer: B
Diff: 1 Type: MC
Skill: Conceptual
Author: AZ
1
Copyright © 2012 Pearson Canada Inc.
A) According to a 1995 study, less than 80% of Canadian firms used the rule of NPV, but about 50% of
firms used some form of discounted cash flow analysis.
B) According to a 1995 study, less than 50% of Canadian firms used the rule of NPV, but about 79% of
firms used some form of discounted cash flow analysis.
C) According to a 1995 study, every Canadian firm used the rule of NPV, and about 80% of firms used
some form of discounted cash flow analysis.
D) According to a 1995 study, no Canadian firms used the rule of NPV, but about 79% of firms used some
form of discounted cash flow analysis.
Answer: B
Diff: 1 Type: MC
Skill: Definition
Author: AZ
5) Which of the following statements is incorrect?

A) When firms make an investment decision, they should treat stand-alone projects the same as exclusive
projects.
B) When firms make an investment decision, they should not treat stand-alone projects the same as
exclusive projects.
C) There are no differences between stand-alone projects and exclusive projects when an investment
decision is made.
D) Answers A and B
Answer: A
Diff: 1 Type: MC
Skill: Conceptual
Author: AZ

A) About 75% of firms surveyed used the NPV rule for making investment decisions.
B) If you are unsure of your cost of capital estimate, it is important to determine how sensitive your
C) To decide whether to invest using the NPV rule, we need to know the cost of capital.
D) NPV is positive only for discount rates greater than the internal rate of return.
Answer: D
Diff: 1 Type: MC
Skill: Conceptual
Author: AZ
2
A) Investment decisions should be treated separately from the related capital budgeting decisions.
B) Investment decisions should not be treated separately from the related capital budgeting decisions.
C) Investment decisions should be treated the same as the related capital budgeting decisions.
D) Investment decisions should be treated differently than the related capital budgeting decisions.
Answer: A
Diff: 1 Type: MC
Skill: Conceptual
Author: AZ
Use the table for the question(s) below.
Consider a project with the following cash flows:
Year Cash Flow

0 -10,000
1 4,000
2 4,000
3 4,000
4 4,000
8) If the appropriate discount rate for this project is 15%, then the NPV is closest to:
A) $6,000
B) -$867
C) $1,420
D) $867
Answer: C
Explanation: C) NPV = -10,000 + 4000 / (1.15)1 + 4000 / (1.15)2 + 4000 / (1.15)3 + 4000 / (1.15)4 = 1419.91
Diff: 2 Type: MC
Skill: Analytical
Author: AZ
3
Consider the following two projects:
Year 0 Year 1 Year 2 Year 3 Year 4 Discount

Project Cash Flow Cash Flow Cash Flow Cash Flow Cash Flow Rate
A -100 40 50 60 N/A .15
B -73 30 30 30 30 .15
9) The NPV of project A is closest to:

A) 12.0
B) 12.6
C) 15.0
D) 42.9
Answer: A
Explanation: A) NPV = -100 + 40 / (1.15)1 + 50 / (1.15)2 + 60 / (1.15)3 = 12.04
Diff: 2 Type: MC
Skill: Analytical
Author: AZ
10) The NPV of project B is closest to:

A) 12.6
B) 23.3
C) 12.0
D) 15.0
Answer: A
Explanation: A) NPV = -73+ 30 / (1.15)1 + 30 / (1.15)2 + 30 / (1.15)3 + 30 / (1.15)4 = 12.6494
Diff: 2 Type: MC
Skill: Analytical
Author: AZ
4
Use the information for the question(s) below.
The Sisyphean Company is planning on investing in a new project. This will involve the purchase of
some new machinery costing $450,000. The Sisyphean Company expects cash inflows from this project as
detailed below:
Year One Year Two Year Three Year Four

$200,000 $225,000 $275,000 $200,000
The appropriate discount rate for this project is 16%.
11) The NPV for this project is closest to:

A) $176,270
B) $123,420
C) $450,000
D) $179,590
Answer: A
Explanation: A) NPV = -450000+ 200,000 / (1.16)1 +225000 / (1.15)2 + 275000 / (1.15)3 +200,000 / (1.15)4 =
176,265
Diff: 2 Type: MC
Skill: Analytical
Author: AZ
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Discount

Project C/F C/F C/F C/F C/F C/F C/F C/F Rate
Alpha -79 20 25 30 35 40 N/A N/A 15%
Beta -80 25 25 25 25 25 25 25 16%
12) The NPV for project Alpha is closest to:

A) $20.96
B) $16.92
C) $24.01
D) $14.41
Answer: B
Explanation: B) NPV = -79+ 20 / (1.15)1 + 25 / (1.15)2 + 30 / (1.15)3 + 35 / (1.15)4 + 40 / (1.15)5= 16.92
Diff: 3 Type: MC
Skill: Analytical
Author: AZ
5
13) The NPV for project Beta is closest to:
A) $24.01
B) $16.92
C) $20.96
D) $14.41
Answer: C
Explanation: C) NPV = -80+ 25 / (1.16)1 + 25 / (1.16)2 + 25 / (1.16)3 + 25 / (1.16)4 + 25 / (1.16)5 + 50 / (1.16)6 +
25 / (1.16)7= 20.96
Diff: 3 Type: MC
Skill: Analytical
Author: AZ
Larry the Cucumber has been offered $14 million to star in the lead role of the next three Larry Boy
adventure movies. If Larry takes this offer, he will have to forgo acting in other Veggie movies that
would pay him $5 million at the end of each of the next three years. Assume Larry's personal cost of
capital is 10% per year.
14) The NPV of Larry's three-movie Larry Boy offer is closest to:
A) 3.5 million
B) -1.6 million
C) 1.6 million
D) -1.0 million
Answer: C
Explanation: C) NPV = 14 + -5 / (1.10)1 + -5 / (1.10)2 + -5 / (1.10)3 = 1.57
Diff: 3 Type: MC
Skill: Analytical
Author: AZ
6
Boulderado has come up with a new composite snowboard. Development will take Boulderado four
years and cost $250,000 per year, with the first of the four equal investments payable today upon
acceptance of the project. Once in production the snowboard is expected to produce annual cash flows of
$200,000 each year for 10 years. Boulderado's discount rate is 10%.
15) The NPV for Boulderado's snowboard project is closest to:

A) $228,900
B) $46,900
C) $51,600
D) $23,800
Answer: C
Explanation: C) CF0 = -250,000
CF1 = -250,000
CF2 = -250,000
CF3 = -250,000
CF4 = +200,000
CF5 = +200,000
CF6 = +200,000
CF7 = +200,000
CF8 = +200,000
CF9 = +200,000
CF10 = +200,000
CF11 = +200,000
CF12 = +200,000
CF13 = +200,000
I = 10
Compute NPV = 51,588
Diff: 3 Type: MC
Skill: Analytical
Author: AZ
6.2 Internal Rate of Return
1) Take any investment opportunity where the IRR ________ the opportunity cost of capital. Turn down
any opportunity whose IRR is ________ than the opportunity cost of capital.
A) exceeds, less
B) exceeds, higher
C) go below, less
D) go below, higher
Answer: A
Diff: 1 Type: MC
Topic: 6.2 Internal Rate of Return
Skill: Conceptual
Author: AZ
7
A) In general, the IRR rule works for a stand-alone project if all of the project's positive cash flows
precede its negative cash flows.
B) There is no easy fix for the IRR rule when there are multiple IRRs.
C) The payback rule is primarily used because of its simplicity.
D) No investment rule that ignores the set of alternative investment alternatives can be optimal.
Answer: A
Diff: 2 Type: MC
Skill: Conceptual
Author: AZ

A) It is possible that an IRR does not exist for an investment opportunity.
B) If the payback period is less than a pre-specified length of time you accept the project.
C) The internal rate of return (IRR) investment rule is based upon the notion that if the return on other
alternatives is greater than the return on the investment opportunity you should undertake the
investment opportunity.
D) It is possible that there is no discount rate that will set the NPV equal to zero.
Answer: C
Diff: 2 Type: MC
Skill: Conceptual
Author: AZ

A) The IRR investment rule states that you should turn down any investment opportunity where the IRR
is less than the opportunity cost of capital.
B) The IRR investment rule states that you should take any investment opportunity where the IRR
exceeds the opportunity cost of capital.
C) Since the IRR rule is based upon the rate at which the NPV equals zero, like the NPV decision rule, the
IRR decision rule will always identify the correct investment decisions.
D) There are situations in which multiple IRRs exist.
Answer: C
Diff: 2 Type: MC
Skill: Conceptual
Author: AZ
8
A) The payback investment rule is based on the notion that an opportunity that pays back its initial
investments quickly is a good idea.
B) An IRR will always exist for an investment opportunity.
C) An NPV will always exist for an investment opportunity.
D) In general, there can be as many IRRs as the number of times the project's cash flows change sign over
time.
Answer: B
Diff: 2 Type: MC
Skill: Conceptual
Author: AZ

A) The IRR investment rule will identify the correct decision in many, but not all, situations.
B) By setting the NPV equal to zero and solving for r, we find the IRR.
C) If you are unsure of your cost of capital estimate, it is important to determine how sensitive your
D) The simplest investment rule is the NPV investment rule.
Answer: D
Diff: 1 Type: MC
Skill: Conceptual
Author: AZ

A) The IRR rule must be reversed for projects with conventional and unconventional cash flows.
B) The IRR rule must be the same for projects with conventional and unconventional cash flows.
C) The IRR rule must be useless for projects with conventional and unconventional cash flows.
D) There is no difference between when the IRR rule is used with conventional and unconventional cash
flows.
Answer: A
Diff: 2 Type: MC
Skill: Conceptual
Author: AZ
9
Boulderado has come up with a new composite snowboard. Development will take Boulderado four
years and cost $250,000 per year, with the first of the four equal investments payable today upon
acceptance of the project. Once in production the snowboard is expected to produce annual cash flows of
$200,000 each year for 10 years. Boulderado's discount rate is 10%.
8) The IRR for Boulderado's snowboard project is closest to:

A) 10.4%
B) 10.0%
C) 11.0%
D) 15.1%
Answer: C
Explanation: C) CF0 = -250,000
CF1 = -250,000
CF2 = -250,000
CF3 = -250,000
CF4 = +200,000
CF5 = +200,000
CF6 = +200,000
CF7 = +200,000
CF8 = +200,000
CF9 = +200,000
CF10 = +200,000
CF11 = +200,000
CF12 = +200,000
CF13 = +200,000
Compute IRR = 11.01%
Diff: 2 Type: MC
Skill: Analytical
Author: AZ
10
9) Calculate the IRR for the snow board project and use it to determine the maximum deviation allowable
in the cost of capital estimate that leaves the investment decision unchanged. The maximum deviation
allowable is closest to:
A) 11.0%
B) 0.0%
C) 2.5%
D) 1.0%
Answer: D
Explanation: D) CF0 = -250,000
CF1 = -250,000
CF2 = -250,000
CF3 = -250,000
CF4 = +200,000
CF5 = +200,000
CF6 = +200,000
CF7 = +200,000
CF8 = +200,000
CF9 = +200,000
CF10 = +200,000
CF11 = +200,000
CF12 = +200,000
CF13 = +200,000
Maximum deviation = IRR - Cost of Capital = 11.0% - 10.0% = 1.0%

Diff: 3 Type: MC
Skill: Analytical
Author: AZ

A) The normal IRR rule prevails to give the correct answer in unconventional cases; IRR itself also
provides useful information in conjunction with the NPV rule.
B) Because the normal IRR rule fails to give the correct answer in unconventional cases, IRR itself cannot
provide useful information in conjunction with the NPV rule.
C) Because the normal IRR rule can be used in conventional cases, it cannot provide useful information in
conjunction with the NPV rule.
D) The normal IRR rule fails to give the correct answer in unconventional cases, but IRR itself still
provides useful information in conjunction with the NPV rule.
Answer: D
Diff: 3 Type: MC
Skill: Conceptual
Author: AZ
11
Larry the Cucumber has been offered $14 million to star in the lead role of the next three Larry Boy
adventure movies. If Larry takes this offer, he will have to forgo acting in other Veggie movies that would
pay him $5 million at the end of each of the next three years. Assume Larry's personal cost of capital is
10% per year.
11) The IRR for Larry's three movie deal offer is closest to:
A) 3.5%
B) 1.6%
C) -3.5%
D) -1.6%
Answer: A
Explanation: A) CF0 = +14
CF1 = -5
CF2 = -5
CF3 = -5
Compute IRR = 3.53%
Diff: 2 Type: MC
Skill: Analytical
Author: AZ
12) Larry should:

A) Reject the offer because the NPV < 0
B) Accept the offer even though the IRR < 10%, because the NPV > 0
C) Reject the offer because the IRR < 10%
D) Accept the offer because the IRR > 0%
Answer: B
Explanation: B) NPV = 14 + -5 / (1.10)1 + -5 / (1.10)2 + -5 / (1.10)3 = 1.57
CF0 = +14
CF1 = -5
CF2 = -5
CF3 = -5
Compute IRR = 3.53%
Diff: 3 Type: MC
Skill: Analytical
Author: AZ
12
13) Explain why the NPV decision rule might provide Larry with a different decision outcome than the
IRR rule when evaluating Larry's three movie deal offer.
Answer: The NPV rule will always give the right decision. In this problem, Larry starts with the cash up
front, a positive cash flow, followed by three negative cash flows. This is the exact opposite of what we
want with the IRR. The IRR assumes that we start with a negative outflow followed by inflow(s). Since
we start with a positive cash inflow, the IRR rule cannot be trusted to give the correct answer.
Diff: 3 Type: ES
Skill: Conceptual
Author: AZ
14) You are considering an investment in an everlasting gobstopper machine. This machine will cost $10
million and will produce cash flows of $1 million at the end of every year forever. The appropriate cost of
capital is 8%. Compute the economic value added (EVA) for this project. Calculate the PV of the EVAs for
this project.
Answer: The EVA in every year is:
Cn - 10r = 1 - 10r
Using the perpetuity formula, the present value of these EVAs is

1 - 10r 1 - 10(.08) 1
PV(EVA) =  = = - 10 = $2.5 million
(1 + .08)n .08 .08
Diff: 2 Type: ES
Skill: Analytical
Author: AZ
15) You are considering purchasing a new automated forklift system for your firm's warehouse. The
automated forklift will cost $500,000 and generate cash flows of $125,000 per year. The forklift will
depreciate evenly over the next five years, at which point it must be replaced. The cost of capital is 8% per
year. Based upon the EVA investment rule, should you invest in the automated forklift?
Answer: The EVA is calculated as follows (all values in thousands):

Year 0 1 2 3 4 5
Capital 500 400 300 200 100 0
Cash Flow 125 125 125 125 125
Capital Charge -40 -32 -24 -16 -8
Depreciation -100 -100 -100 -100 -100
EVA -15 -7 1 9 17
PV of EVA -13.89 -6.00 0.79 6.62 11.57
Sum of PV(EVA) -0.91
For example, EVA1 = $125 - 8%($500) - $100 = -15

Since the PV(EVA) = -91,000 < 0 you should not invest.
Diff: 3 Type: ES
Skill: Analytical
Author: AZ
13
6.3 The Payback Rule
1) To apply the payback rule, you first calculate the amount of time it takes to pay back ________, called
the payback period.
A) the all cash flows
B) all cash inflows
C) the incremental cash flows
D) the initial investment
Answer: D
Diff: 1 Type: MC
Topic: 6.3 The Payback Rule
Skill: Conceptual
Author: AZ
2) In addition to the NPV rule that is used as an investment decision rule, we also use the following rules
for single, stand-alone projects within the firm:
A) the payback rule, IRR rule, and EVA rule.
B) the payback rule, discounted payback rule and ROE rule.
C) the payback rule, ROE rule and ROA rule.
D) the payback rule, IRR rule and ROI rule.
Answer: A
Diff: 1 Type: MC
Skill: Conceptual
Author: AZ

A) The payback rule is useful in cases where the cost of making an incorrect decision might not be large
enough to justify the time required for calculating the NPV.
B) The payback rule is reliable because it considers the time value of money and depends on the cost of
capital.
C) For most investment opportunities expenses occur initially and cash is received later.
D) Fifty percent of firms surveyed reported using the payback rule for making decisions.
Answer: B
Diff: 2 Type: MC
Skill: Conceptual
Author: AZ
14
A) The distinction between simply making money and creating value is the essence of the NPV
calculation.
B) The concept of economic profit has been popularized recently under the name Economic Value Added
(EVA).
C) EVA is a measure of value created over the life of a project.
D) The EVA investment rule can be stated as "accept any investment opportunity in which the present
value of all future EVAs is positive."
Answer: C
Diff: 2 Type: MC
Skill: Conceptual
Author: AZ
Year Cash Flow

0 -10,000
1 4,000
2 4,000
3 4,000
4 4,000
5) Assume the appropriate discount rate for this project is 15%. The payback period for this project is
closest to:
A) 3
B) 2.5
C) 2
D) 4
Answer: B
Explanation: B) Payback = 10000 / 4000 = 2.5
Diff: 2 Type: MC
Skill: Analytical
Author: AZ
15
6) Assume the appropriate discount rate for this project is 15%. The IRR for this project is closest to:
A) 21%
B) 22%
C) 15%
D) 60%
Answer: B
Explanation: B) CF0 = -10000
CF1 = 4000
CF2 = 4000
CF3 = 4000
CF4 = 4000
Diff: 2 Type: MC
Skill: Analytical
Author: AZ

A -100 40 50 60 N/A .15
B -73 30 30 30 30 .15
7) The payback period for project A is closest to:

A) 2.0 years
B) 2.4 years
C) 2.5 years
D) 2.2 years
Answer: D
Explanation: D) Payback period. It is clear that the project is not paid off after two years since we have
only received 90 toward the 100 investment. To calculate the fraction of the third year, we take the $10 yet
to be repaid ($100 investment - $40 (year 1) - $50 (year 2)) / $60 (cash flow in year 3) = .166667 so the
payback is 2.166667 years.
Diff: 2 Type: MC
Skill: Analytical
Author: AZ
16
8) The payback period for project B is closest to:
A) 2.5 years
B) 2.0 years
C) 2.2 years
D) 2.4 years
Answer: D
Explanation: D) Payback = 73 / 30 = 2.43 years
Diff: 1 Type: MC
Skill: Analytical
Author: AZ
9) The internal rate of return (IRR) for project A is closest to:

A) 7.7%
B) 21.6%
C) 23.3%
D) 42.9%
Answer: B
CF1 = 40
CF2 = 50
CF3 = 60
Diff: 2 Type: MC
Skill: Analytical
Author: AZ
10) The internal rate of return (IRR) for project B is closest to:
A) 21.6%
B) 23.3%
C) 42.9%
D) 7.7%
Answer: B
CF1 = 30
CF2 = 30
CF3 = 30
CF4 = 30
Diff: 2 Type: MC
Skill: Analytical
Author: AZ
17
A) You should accept project A since its IRR > 15%.
B) You should reject project B since its NPV > 0.
C) You should accept project A since its NPV < 0.
D) You should accept project B since its IRR < 15%.
Answer: A
Explanation: A) NPVA = -100 + 40/(1.15)1 + 50/(1.15)2 + 60/(1.15)3 = 12.04
NPVB = -73+ 30/(1.15)1 + 30/(1.15)2 + 30/(1.15)3 + 30/(1.15)4 = 12.65
IRR A
CF0 = -100
CF1 = 40
CF2 = 50
CF3 = 60
IRR B
CF0 = -73
CF1 = 30
CF2 = 30
CF3 = 30
CF4 = 30
Diff: 3 Type: MC
Skill: Analytical
Author: AZ
12) The maximum number of IRRs that could exist for project B is:
A) 3
B) 1
C) 2
D) 0
Answer: B
Diff: 1 Type: MC
Skill: Conceptual
Author: AZ
18

Alpha -79 20 25 30 35 40 N/A N/A 15%
Beta -80 25 25 25 25 25 25 25 16%
13) The payback period for project Alpha is closest to:

A) 3.2 years
B) 2.9 years
C) 3.1 years
D) 2.6 years
Answer: C
Explanation: C) It is clear that the project will not be paid off until sometime after year 3. After the cash
flow in year three there will still be $4 remaining to be paid back in year four
(79 - 20 - 25 - 30) = 4
To find the fractional year take 4 / 35 = .1143 so payback is 3.11 years

Diff: 1 Type: MC
Skill: Analytical
Author: AZ
14) The payback period for project Beta is closest to:

A) 2.9 years
B) 3.1 years
C) 2.6 years
D) 3.2 years
Answer: D
Explanation: D) Payback = 80 / 25 = 3.2
Diff: 1 Type: MC
Skill: Analytical
Author: AZ
19
15) The internal rate of return (IRR) for project Alpha is closest to:
A) 25.0%
B) 22.2%
C) 24.5%
D) 22.7%
Answer: D
Explanation: D) CF0 = -79
CF1 = 20
CF2 = 25
CF3 = 30
CF4 = 35
CF5 = 40
Compute IRR = 22.68
Diff: 2 Type: MC
Skill: Analytical
Author: AZ
16) The internal rate of return (IRR) for project Beta is closest to:
A) 25.0%
B) 22.7%
C) 24.5%
D) 22.2%
Answer: C
Explanation: C) PV = -80
PMT = 25
FV = 0
N=7
Compute I = 24.52
Diff: 2 Type: MC
Skill: Analytical
Author: AZ
20
A) You should invest in project Beta since NPVBeta > 0.
B) You should invest in project Alpha since IRRAlpha > IRRBeta.
C) You should invest in project Alpha since NPVAlpha < 0.
D) You should invest in project Beta since IRRBeta > 0.
Answer: A
Explanation: A) NPV Alpha
NPV = -79 + 20 / (1.15)1 + 25 / (1.15)2 + 30 / (1.15)3 + 35 / (1.15)4 + 40 / (1.15)5= 16.92
NPV Beta
NPV = -80 + 25 / (1.16)1 + 25 / (1.16)2 + 25 / (1.16)3 + 25 / (1.16)4 + 25 / (1.16)5 + 25 / (1.16)6 + 25 / (1.16)7=
20.96
IRR Alpha
CF0 = -79
CF1 = 20
CF2 = 25
CF3 = 30
CF4 = 35
CF5 = 40
Compute IRR = 22.68
IRR Beta
PV = -80
PMT = 25
FV = 0
N=7
Compute I = 24.52
Diff: 3 Type: MC
Skill: Analytical
Author: AZ
some
new machinery costing $450,000. The Sisyphean Company expects cash inflows from this project as
detailed below:

$200,000 $225,000 $275,000 $200,000
21
18) The payback period for this project is closest to:
A) 2.1 years
B) 3.0 years
C) 2 years
D) 2.2 years
Answer: A
Explanation: A) It is clear that the project will not be paid off after 2 years. The balance due after the
second year is equal to 450000 - 200000 - 225000 = $25,000, so to find the fractional year we take
25000/275000 = .0909 so the payback period = 2.09 years
Diff: 1 Type: MC
Skill: Analytical
Author: AZ
19) The IRR for this project is closest to:

A) 18.9%
B) 22.7%
C) 34.1%
D) 39.1%
Answer: C
Explanation: C) CF0 = -450000
CF1 = 200000
CF2 = 225000
CF3 = 275000
CF4 = 200000
Diff: 3 Type: MC
Skill: Analytical
Author: AZ
6.4 Choosing Between Projects
1) You are trying to decide between three mutually exclusive investment opportunities. The most
appropriate tool for identifying the correct decision is:
A) the NPV.
B) the Profitability Index.
C) the IRR.
D) the Incremental IRR.
Answer: A
Diff: 1 Type: MC
Topic: 6.4 Choosing Between Projects
Skill: Conceptual
Author: AZ
22
2) Consider two mutually exclusive projects A & B. If you subtract the cash flows of opportunity B from
the cash flows of opportunity A, then you should
A) take opportunity A if the regular IRR exceeds the cost of capital.
B) take opportunity A if the incremental IRR exceeds the cost of capital.
C) take opportunity B if the regular IRR exceeds the cost of capital.
D) take opportunity B if the incremental IRR exceeds the cost of capital.
Answer: B
Diff: 1 Type: MC
Skill: Conceptual
Author: AZ
3) When an investment decision has to be made for mutually exclusive projects and source constraints
A) the NPV rule prevails.
B) the IRR rule prevails.
C) the Payback rule prevails.
D) the ROA rule prevails.
Answer: A
Diff: 1 Type: MC
Skill: Conceptual
Author: AZ

A) Problems can arise using the IRR method when the mutually exclusive investments have different
cash flow patterns.
B) The IRR is affected by the scale of the investment opportunity.
C) Multiple incremental IRRs might exist.
D) The incremental IRR rule assumes that the riskiness of the two projects is the same.
Answer: B
Diff: 1 Type: MC
Skill: Conceptual
Author: AZ
5) When the IRR rule is used for mutually exclusive projects, we should mainly rely on
A) the rule of the Modified Internal Rate of Return (MIRR).
B) the rule of the Incremental Internal Rate of Return (IIRR).
C) the rule of the Net Present Value (NPV).
D) the rule of the normal Internal Rate of Return (IRR).
Answer: C
Diff: 2 Type: MC
Skill: Conceptual
Author: AZ
23
A) The incremental IRR investment rule applies the IRR rule to the difference between the cash flows of
the two mutually exclusive alternatives.
B) When a manager must choose among mutually exclusive investments, the NPV rule provides a
straightforward answer.
C) The likelihood of multiple IRRs is greater with the regular IRR rule than with the incremental IRR rule.
D) Problems can arise using the IRR method when the mutually exclusive investments have differences
in scale.
Answer: C
Diff: 2 Type: MC
Skill: Conceptual
Author: AZ

A) When using the incremental IRR rule, you must keep track of which project is the incremental project
and ensure that the incremental cash flows are initially positive and then become negative.
B) Picking one project over another simply because it has a larger IRR can lead to mistakes.
C) Problems arise using the IRR method when the mutually exclusive investments have differences in
scale.
D) When the risks of two projects are different, only the NPV rule will give a reliable answer.
Answer: A
Diff: 2 Type: MC
Skill: Conceptual
Author: AZ

A) The incremental IRR need not exist.
B) If a change in the timing of the cash flows does not affect the NPV, then the change in timing will not
impact the IRR.
C) Although the incremental IRR rule can provide a reliable method for choosing among projects, it can
be difficult to apply correctly.
D) When projects are mutually exclusive, it is not enough to determine which projects have positive
NPVs.
Answer: B
Diff: 2 Type: MC
Skill: Conceptual
Author: AZ
24

A -100 40 50 60 N/A .15
B -73 30 30 30 30 .15
9) Assume that projects A and B are mutually exclusive. What is the correct investment decision and the
best rationale for that decision?
A) Invest in project A since NPVB < NPVA
B) Invest in project B since IRRB > IRRA
C) Invest in project B since NPVB > NPVA
D) Invest in project A since NPVA > 0
Answer: C
Explanation: C) NPVA = -100 + 40 / (1.15)1 + 50 / (1.15)2 + 60 / (1.15)3 = 12.04
NPVB = -73+ 30 / (1.15)1 + 30 / (1.15)2 + 30 / (1.15)3 + 30 / (1.15)4 = 12.64
IRR A
CF0 = -100
CF1 = 40
CF2 = 50
CF3 = 60
IRR B
CF0 = -73
CF1 = 30
CF2 = 30
CF3 = 30
CF4 = 30
Diff: 3 Type: MC
Skill: Analytical
Author: AZ
25
10) The incremental IRR of Project B over Project A is closest to:
A) 12.6%
B) 23.3%
C) 1.7%
D) 17.3%
Answer: A
Explanation: A) First we need to find the incremental cash flows by taking cash flows of A - cash flows of
B.
IRR A - B
CF0 = (-100 - -73) = -27

CF1 = (40 - 30) = 10
CF2 = (50 - 30) = 20
CF3 = (60 - 30) = 30
CF4 = (0 - 30) = -30
Diff: 3 Type: MC
Skill: Analytical
Author: AZ
11) The maximum number of incremental IRRs that could exist for project B over project A is?
A) 1
B) 2
C) 0
D) 3
Answer: B
Diff: 3 Type: MC
Skill: Conceptual
Author: AZ
26

Alpha -79 20 25 30 35 40 N/A N/A 15%
Beta -80 25 25 25 25 25 25 25 16%
12) Assume that projects Alpha and Beta are mutually exclusive. The correct investment decision and the
best rational for that decision is to?
A) Invest in project Beta since NPVBeta > 0
B) Invest in project Alpha since NPVBeta < NPVAlpha
C) Invest in project Beta since IRRB > IRRA
D) Invest in project Beta since NPVBeta > NPVAlpha > 0
Answer: D
Explanation: D) NPV Alpha

NPV = -79 + 20 / (1.15)1 + 25 / (1.15)2 + 30 / (1.15)3 + 35 / (1.15)4 + 40 / (1.15)5= 16.92
NPV Beta
NPV = -80 + 25 / (1.16)1 + 25 / (1.16)2 + 25 / (1.16)3 + 25 / (1.16)4 + 25 / (1.16)5 +
50 / (1.16)6 + 25 / (1.16)7= 20.96
IRR Alpha
CF0 = -79
CF1 = 20
CF2 = 25
CF3 = 30
CF4 = 35
CF5 = 40
Compute IRR = 22.68
IRR Beta
PV = -80
PMT = 25
FV = 0
N=7
Compute I = 24.52
Diff: 3 Type: MC
Skill: Analytical
Author: AZ
27
13) Assume that projects Alpha and Beta are mutually exclusive. Which of the following statements is
true regarding the investment decision tools' suitability for deciding between projects Alpha & Beta?
A) The incremental IRR should not be used since the projects have different lives.
B) The incremental IRR should not be used since the projects have different discount rates
C) The incremental IRR should not be used since the projects have different cash flow patterns.
D) Both the NPV and incremental IRR approaches are appropriate to solve this problem.
Answer: B
Diff: 2 Type: MC
Skill: Conceptual
Author: AZ
Consider two mutually exclusive projects with the following cash flows:
Project C/F0 C/F1 C/F2 C/F3 C/F4 C/F5 C/F6

A $(41,215) $12,500 $14,000 $16,500 $18,000 20,000 N/A
B $(46,775) $15,000 $15,000 $15,000 $15,000 $15,000 $15,000
14) You are considering using the incremental IRR approach to decide between the two mutually
exclusive projects A & B. How many potential incremental IRRs could there be?
A) 3
B) 0
C) 2
D) 1
Answer: A
Explanation: A)
A ($41,215) $12,500 $14,000 $16,500 $18,000 20,000 0
B ($46,775) $15,000 $15,000 $15,000 $15,000 $15,000 $15,000
B-A ($5,560) $2,500 $1,000 ($1,500) ($3,000) ($5,000) $15,000
Note that there are three sign changes hence there are three potential IRRs.
Diff: 1 Type: MC
Skill: Analytical
Author: AZ
28
15) If the discount rate for project A is 16%, then what is the NPV for project A?
Answer: NPV A
CF0 = -41,215
CF1 = 12,500
CF2 = 14,000
CF3 = 16,500
CF4 = 18,000
CF5 = 20,000
I = 16
Compute NPV = $9,999.50
Diff: 2 Type: ES
Skill: Analytical
Author: AZ
16) If the discount rate for project B is 15%, then what is the NPV for project B?
Answer: NPV B
CF0 = -46,775
CF1 = 15,000
CF2 = 15,000
CF3 = 15,000
CF4 = 15,000
CF5 = 15,000
CF6 = 15,000
Diff: 2 Type: ES
Skill: Analytical
Author: AZ
17) What is the incremental IRR for project B over project A? Would you feel comfortable basing your
decision on the incremental IRR?
Answer:
A ($41,215) $12,500 $14,000 $16,500 $18,000 20,000 0
B ($46,775) $15,000 $15,000 $15,000 $15,000 $15,000 $15,000
B-A ($5,560) $2,500 $1,000 ($1,500) ($3,000) ($5,000) $15,000
Compute IRR = 8.95%. The answer is No, since there are multiple sign changes in the incremental cash
flows.
Diff: 2 Type: ES
Skill: Analytical
Author: AZ
29
18) Assuming that the discount rate for project A is 16% and the discount rate for B is 15%, then given
that these are mutually exclusive projects, which project would you take and why?
Answer: NPV A
CF0 = -41,215
CF1 = 12,500
CF2 = 14,000
CF3 = 16,500
CF4 = 18,000
CF5 = 20,000
I = 16
NPV B
CF0 = -46,775
CF1 = 15,000
CF2 = 15,000
CF3 = 15,000
CF4 = 15,000
CF5 = 15,000
CF6 = 15,000
Take A, since NPV of A > NPV of B and both are positive.

Diff: 3 Type: ES
Skill: Analytical
Author: AZ
6.5 Project Selection with Resource Constraints
1) You are opening up a brand new retail strip mall. You presently have more potential retail outlets
wanting to locate in your mall than you have space available. What is the most appropriate tool to use if
you are trying to determine the optimal allocation of your retail space?
A) IRR
B) Payback period
C) NPV
D) Profitability index
Answer: D
Diff: 1 Type: MC
Topic: 6.5 Project Selection with Resource Constraints
Skill: Conceptual
Author: AZ
30
A) The profitability index measures the value created in terms of NPV per unit of resource consumed.
B) The profitability index is the ratio of value created to resources consumed.
C) The profitability index can be easily adapted for determining the correct investment decisions when
multiple resource constraints exist.
D) The profitability index measures the "bang for your buck."
Answer: C
Diff: 1 Type: MC
Skill: Conceptual
Author: AZ
Year Cash Flow

0 -10,000
1 4,000
2 4,000
3 4,000
4 4,000
3) Assume the appropriate discount rate for this project is 15%. The profitability index for this project is
closest to:
A) .14
B) .22
C) .60
D) .15
Answer: A
4,000 4 ,000 4,000 4 ,000
Explanation: A) NPV = -10,000 + + + + = $1420
(1.15)1 (1.15) 2 (1.15) 3 (1.15) 4
PI = NPV / investment = 1420 / 10000 = .1420
Diff: 1 Type: MC
Skill: Analytical
Author: AZ
31
A) If there is a fixed supply of resources available, you should rank projects by the profitability index,
selecting the project with the lowest profitability index first and working your way down the list until the
resource is consumed.
B) Practitioners often use the profitability index to identify the optimal combination of projects when
there is a fixed supply of resources.
C) If there is a fixed supply of resources available, so that you cannot undertake all possible
opportunities, then simply picking the highest NPV opportunity might not lead to the best decision.
D) The profitability index is calculated as the NPV divided by the resources consumed by the project.
Answer: A
Diff: 2 Type: MC
Skill: Conceptual
Author: AZ
5) If firm's objective is to maximize wealth,

A) the rule of the Profitability Index will always give you the correct answer.
B) the rule of the Net Present Value will always give you the correct answer.
C) the rule of the Payback Period will always give you the correct answer.
D) the rule of the Internal Rate of Return will always give you the correct answer.
Answer: B
Diff: 2 Type: MC
Skill: Conceptual
Author: AZ
6) The investment rule with the Internal Rate of Return states:

A) Take any investment opportunity whose IRR is less than the opportunity cost of capital. Turn down
any opportunity whose IRR exceeds the opportunity cost of capital.
B) Forego any investment opportunity whose IRR exceeds the opportunity cost of capital. Take any
opportunity whose IRR is less than the opportunity cost of capital.
C) Take any investment opportunity whose IRR exceeds the opportunity cost of capital. Turn down any
opportunity whose IRR is less than the opportunity cost of capital.
D) None of the above
Answer: C
Diff: 2 Type: MC
Skill: Conceptual
Author: AZ
32

A -100 40 50 60 N/A .15
B -73 30 30 30 30 .15
7) The profitability index for project A is closest to:

A) 0.12
B) 21.65
C) 0.17
D) 12.04
Answer: A
Explanation: A) PI = NPV / Investment (or resources consumed)
NPV = -100 + 40 / (1.15)1 + 50 / (1.15)2 + 60 / (1.15)3 = 12.04
So, PI = 12.04 / 100 = .1204

Diff: 2 Type: MC
Skill: Analytical
Author: AZ
8) The profitability index for project B is closest to:

A) 23.34
B) 12.64
C) 0.17
D) 0.12
Answer: C
Explanation: C) PI = NPV / Investment (or resources consumed)
NPV = -73 + 30 / (1.15)1 + 30 / (1.15)2 + 30 / (1.15)3 + 30 / (1.15)4 = 12.64
So, PI = 12.64 / 73 = .1732

Diff: 2 Type: MC
Skill: Analytical
Author: AZ
33
Consider the following list of projects:
Project Investment NPV

A 135,000 6,000
B 200,000 30,000
C 125,000 20,000
D 150,000 2,000
E 175,000 10,000
F 75,000 10,000
G 80,000 9,000
H 200,000 20,000
I 50,000 4,000
9) Assuming that your capital is constrained, which investment tool should you use to determine the
correct investment decisions?
A) Profitability Index
B) Incremental IRR
C) NPV
D) IRR
Answer: A
Diff: 1 Type: MC
Skill: Conceptual
Author: AZ
34
10) Assuming that your capital is constrained, which project should you invest in first?
A) Project C
B) Project G
C) Project B
D) Project F
Answer: A
Explanation: A)
Profitability
Project Investment NPV Index Rank
A 135,000 6,000 0.0444 8
B 200,000 30,000 0.1500 2
C 125,000 20,000 0.1600 1
D 150,000 2,000 0.0133 9
E 175,000 10,000 0.0571 7
F 75,000 10,000 0.1333 3
G 80,000 9,000 0.1125 4
H 200,000 20,000 0.1000 5
I 50,000 4,000 0.8000 6
Diff: 2 Type: MC
Skill: Analytical
Author: AZ
35
11) Assuming that your capital is constrained, what is the fifth project that you should invest in?
A) Project H
B) Project I
C) Project B
D) Project A
Answer: A
Explanation: A)
Profitability
A 135,000 6,000 0.0444 8
B 200,000 30,000 0.1500 2
C 125,000 20,000 0.1600 1
D 150,000 2,000 0.0133 9
E 175,000 10,000 0.0571 7
F 75,000 10,000 0.1333 3
G 80,000 9,000 0.1125 4
H 200,000 20,000 0.1000 5
I 50,000 4,000 0.8000 6
Diff: 2 Type: MC
Skill: Analytical
Author: AZ
36
12) Assuming that your capital is constrained, which project should you invest in last?
A) Project A
B) Project I
C) Project D
D) Project C
Answer: C
Explanation: C)
Profitability
A 135,000 6,000 0.0444 8
B 200,000 30,000 0.1500 2
C 125,000 20,000 0.1600 1
D 150,000 2,000 0.0133 9
E 175,000 10,000 0.0571 7
F 75,000 10,000 0.1333 3
G 80,000 9,000 0.1125 4
H 200,000 20,000 0.1000 5
I 50,000 4,000 0.8000 6
Diff: 2 Type: MC
Skill: Analytical
Author: AZ
37
13) Assuming that your capital is constrained, so that you only have $600,000 available to invest in
projects, which four projects should you invest in and in what order?
A) CBFH
B) CBGF
C) BCFG
D) CBFG
Answer: A
Explanation: A)
Profitability
A 135,000 6,000 0.0444 8
B 200,000 30,000 0.1500 2
C 125,000 20,000 0.1600 1
D 150,000 2,000 0.0133 9
E 175,000 10,000 0.0571 7
F 75,000 10,000 0.1333 3
G 80,000 9,000 0.1125 4
H 200,000 20,000 0.1000 5
I 50,000 4,000 0.8000 6
This is a tricky problem in that by the rankings CBFG seem optimal, but this combination leaves $120,000
on the table uninvested. By replacing G with H the full $600,000 is invested and the NPV of the
combination of projects is increased by $11,000. Therefore you should invest in projects CBFH.
Diff: 3 Type: MC
Skill: Analytical
Author: AZ
38
14) Assume that your capital is constrained, so that you only have $600,000 available to invest in projects.
If you invest in the optimal combination of projects given your capital constraint, then the total NPV for
all the projects you invest in will be closest to:
A) $65,000
B) $80,000
C) $69,000
D) $111,000
Answer: B
Explanation: B)
Profitability
A 135,000 6,000 0.0444 8
B 200,000 30,000 0.1500 2
C 125,000 20,000 0.1600 1
D 150,000 2,000 0.0133 9
E 175,000 10,000 0.0571 7
F 75,000 10,000 0.1333 3
G 80,000 9,000 0.1125 4
H 200,000 20,000 0.1000 5
I 50,000 4,000 0.8000 6
This is a tricky problem in that by the rankings CBFG seem optimal, but this combination leaves $120,000
on the table uninvested. By replacing G with H the full $600,000 is invested and the NPV of the
combination of projects is increased by $11,000. Therefore you should invest in projects CBFH.
The NPV = NPVC + NPVB + NPVF + NPVH = 20000 + 30000 + 10000 + 20000 = $80,000.
Diff: 3 Type: MC
Skill: Analytical
Author: AZ
39
15) Assume that your capital is constrained, so that you only have $500,000 available to invest in projects.
If you invest in the optimal combination of projects given your capital constraint, then the total NPV for
all the projects you invest in will be closest to:
A) $111,000
B) $69,000
C) $80,000
D) $58.000
Answer: B
Explanation: B)
Profitability
A 135,000 6,000 0.0444 8
B 200,000 30,000 0.1500 2
C 125,000 20,000 0.1600 1
D 150,000 2,000 0.0133 9
E 175,000 10,000 0.0571 7
F 75,000 10,000 0.1333 3
G 80,000 9,000 0.1125 4
H 200,000 20,000 0.1000 5
I 50,000 4,000 0.8000 6
The optimal combination based upon PI rankings is CBFG, so the total NPV = 20000 + 30000 + 10000 +
9000 = $69,000
Diff: 3 Type: MC
Skill: Analytical
Author: AZ
40
some
new machinery costing $450,000. The Sisyphean Company expects cash inflows from this project as
detailed below:

$200,000 $225,000 $275,000 $200,000
16) The profitability index for this project is closest to:

A) .44
B) .26
C) 0.39
D) .34
Answer: C
Explanation: C) PI = NPV / Investment
NPV = -450000 + 200000/(1.16)1 + 225000/(1.16)2 + 275000/(1.16)3 + 2000000/(1.16)4 = 176,265
So, PI = 176265 / 450000 = 0.39

Diff: 1 Type: MC
Skill: Analytical
Author: AZ
41
Your firm is preparing to open a new retail strip mall and you have multiple businesses that would like
lease space in it. Each business will pay a fixed amount of rent each month plus a percentage of the gross
sales generated each month. The cash flows from each of the businesses have approximately the same
amount of risk. The business names, square footage requirements, and monthly expected cash flows for
each of the businesses that would like to lease space in your strip mall are provided below:
Square Feet Expected Monthly

Business Name Required Cash Flow
Videos Now 4,000 70,000
Gords Gym 3,500 52,500
Pizza Warehouse 2,500 52,500
Super Clips 1,500 25,500
30 1/2 Flavors 1,500 28,500
S-Mart 12,000 180,000
WalVerde Drugs 6,000 147,000
Multigular Wireless 1,000 22,250
17) If your new strip mall will have 15,000 square feet of retail space available to be leased, to which
businesses should you lease and why?
Answer:
Square Feet Expected Monthly C/F per Project
Business Name Required Cash Flow S.F. Rank
Videos Now 4,000 70,000 17.5 5
Gords Gym 3,500 52,500 15 7
Pizza Warehouse 2,500 52,500 21 3
Super Clips 1,500 25,500 17 6
30 1/2 Flavors 1,500 28,500 19 4
S-Mart 12,000 180,000 15 8
WalVerde Drugs 6,000 147,000 24.5 1
Multigular Wireless 1,000 22,250 22.25 2
So we select projects based upon their ranking until we run out of space. The optimal combination is
shown below:
WalVerde Drugs 6,000 147,000 24.5 1

30 1/2 Flavors 1,500 28,500 19 4
Videos Now 4,000 70,000 17.5 5
Total 15,000 $320,250
Diff: 3 Type: ES
Skill: Analytical
Author: AZ
42
18) If your new strip mall will have 16,000 square feet of retail space available to be leased, to which
businesses should you lease and why?
Answer:
Square Feet Expected Monthly C/F per Project
Business Name Required Cash Flow S.F. Rank
Videos Now 4,000 70,000 17.5 5
Gords Gym 3,500 52,500 15 7
Super Clips 1,500 25,500 17 6
30 1/2 Flavors 1,500 28,500 19 4
S-Mart 12,000 180,000 15 8
WalVerde Drugs 6,000 147,000 24.5 1
So we select projects based upon their ranking until we run out of space. This combination is shown
below:
WalVerde Drugs 6,000 147,000 24.5 1

30 1/2 Flavors 1,500 28,500 19 4
Videos Now 4,000 70,000 17.5 5
Total 15,000 $320,250
But notice that this combination leaves 1,000 square feet unleased. We therefore should look to see if there
is a combination that leases more space and offers a higher monthly cash flow. If we forgo renting to
Videos Now and instead rent to both Super Clips and Gords Gym we will obtain a higher monthly cash
flow. The optimal combination is shown below:
WalVerde Drugs 6,000 147,000 24.5 1

30 1/2 Flavors 1,500 28,500 19 4
Super Clips 1,500 25,500 17 6
Gords Gym 3,500 52,500 15 7
Total 16,000 $328,250
Diff: 3 Type: ES
Skill: Analytical
Author: AZ
43
Test Bank for Corporate Finance, 2nd Canadian Edition : Berk
19) Consider the following list of projects:
Project Investment NPV

A 405,000 18,000
B 600,000 90,000
C 375,000 60,000
D 450,000 6,000
E 525,000 30,000
F 225,000 30,000
G 240,000 27,000
H 600,000 60,000
I 150,000 12,000
J 270,000 30,000
You are given a budget of only $1,800,000 to invest in projects. Which projects will you select, in what
order will you select them, and why?
Answer:
Project Investment NPV PI Rank
A 405,000 18,000 0.0444 9
B 600,000 90,000 0.1500 2
C 375,000 60,000 0.1600 1
D 450,000 6,000 0.0133 10
E 525,000 30,000 0.0571 8
F 225,000 30,000 0.1333 3
G 240,000 27,000 0.1125 4
H 600,000 60,000 0.1000 6
I 150,000 12,000 0.0800 7
J 270,000 30,000 0.1111 5
Beginning Project Cost Ending

1,800,000 C 375,000 1,425,000
1,425,000 B 600,000 825,000
825,000 F 525,000 300,000
300,000 J 270,000 30,000
Normally we would want to take projects CBFG. However, we can do better by dumping G and taking J
instead. Although it has a lower profitability index, it has a higher NPV and allows more capital to be
invested.
Diff: 3 Type: ES
Skill: Analytical
Author: AZ
44
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6.1 NPV and Stand-Alone Projects

1) Which of the following statements is false?

2) Which of the following statements is correct?

3) Unconventional cash flows normally means

5) Which of the following statements is incorrect?

6) Which of the following statements is false?

Use the table for the question(s) below.

Consider a project with the following cash flows:

Year Cash Flow

Consider the following two projects:

Year 0 Year 1 Year 2 Year 3 Year 4 Discount

9) The NPV of project A is closest to:

10) The NPV of project B is closest to:

Year One Year Two Year Three Year Four

The appropriate discount rate for this project is 16%.

11) The NPV for this project is closest to:

Use the table for the question(s) below.

Consider the following two projects:

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Discount

12) The NPV for project Alpha is closest to:

Use the information for the question(s) below.

15) The NPV for Boulderado's snowboard project is closest to:

6.2 Internal Rate of Return

3) Which of the following statements is false?

4) Which of the following statements is false?

6) Which of the following statements is false?

7) Which of the following statements is correct?

8) The IRR for Boulderado's snowboard project is closest to:

Maximum deviation = IRR - Cost of Capital = 11.0% - 10.0% = 1.0%

10) Which of the following statements is correct?

12) Larry should:

Using the perpetuity formula, the present value of these EVAs is

Answer: The EVA is calculated as follows (all values in thousands):

Sum of PV(EVA) -0.91

For example, EVA1 = $125 - 8%($500) - $100 = -15

3) Which of the following statements is false?

Use the table for the question(s) below.

Consider a project with the following cash flows:

Year Cash Flow

Use the table for the question(s) below.

Consider the following two projects:

Year 0 Year 1 Year 2 Year 3 Year 4 Discount

7) The payback period for project A is closest to:

9) The internal rate of return (IRR) for project A is closest to:

Consider the following two projects:

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Discount

13) The payback period for project Alpha is closest to:

To find the fractional year take 4 / 35 = .1143 so payback is 3.11 years

14) The payback period for project Beta is closest to:

Use the information for the question(s) below.

Year One Year Two Year Three Year Four

The appropriate discount rate for this project is 16%.

19) The IRR for this project is closest to:

6.4 Choosing Between Projects