1

Question 1
A project is acceptable when the net present value:
1 point

Is negative.

Is positive.

Is negative provided the only cash outflows occurs at time zero.

None of the above.

2
Question 2
If the NPV of project A is +$50, and that of project B is +$40, and that of project C is -$30, what is the NPV of the co
1 point

$60

($30)

($60)

$90
3
Question 3
What is the net present value of a project with the following cash flows if the required rate of return is 8 percent?
Year 0 1 2 3
Cash Flow($78,100) $34,500 $22,140 $46,800
1 point

$88,077

($3,414)

$9,977

$9,238
4
Question 4
What is the internal rate of return on an investment with the following cash flows, if the required rate of return is 8 pe
Year 0 1 2 3
Cash Flow($78,100) $34,500 $22,140 $46,800
1 point
 8%

12%

15%

19%
5
Question 5
The length of time required for an investment to generate cash flows sufficient to recover the initial cost of the invest
1 point

Internal rate of return.

Payback period.

Discount cash flow method.

Net present value.

6
Question 6
The difference between an investment's market value and its cost is the:
1 point

Net present value

Payback period

Internal rate of return

Discount cash flow

7
Question 7
An investment has the following cash flows. Should the project be accepted if it has been assigned a required return
Year 0 1 2 3
Cash Flow-50,000 34,500 14,000 12,500
1 point

No; The IRR exceeds the required return by about 1.77 percent.

No; The IRR is less than the required return by about 1.77 percent.

Yes; The IRR is less than the required return by about 0.97 percent.
No; The IRR is less than the required return by about 0.97 percent.
8
Question 8
The internal rate of return (IRR):
a. rule states that a project is acceptable when the IRR exceeds the required rate of return.
b. ignores the initial investment in a project.
c. is the rate that causes the net present value of a project to equal zero.
d. considers the time value of money.
1 point

a and c only

c and d only

a, c, and d only

a, b, c, and d
 what is the NPV of the combined project?

of return is 8 percent?

quired rate of return is 8 percent?

the initial cost of the investment is called the:

assigned a required return of 15 percent? Why or why not?

 1
Question 1
Which one of the following is an example of a sunk cost?
1 point

$1,200 paid to repair a machine last month

$20,000 project that must be forfeited if another project is accepted

$4,500 reduction in current shoe sales if a store commences selling sandals

$1,800 increase in comic book sales if a store commences selling puzzles

2
Question 2
Which one of the following best illustrates erosion, or cannibalism, regarding a hot dog stand located on the beach?
1 point

providing both ketchup and mustard for its customers' use

repairing the roof of the hot dog stand because of water damage

selling fewer hot dogs because hamburgers were added to the menu

losing sales due to bad weather

3
Question 3
You have invested in fixed assets for a project for $2,000. The project’s life is 4 years. Salvage value is expected to
1 point

$400

$500

$600

$700
4
Question 4
You are considering a new project that will have annual revenue of $40,000. Annual operating cost is expected to be
1 point

$24,000

$12,000
 $8,000

($28,000)
5
Question 5
Your project has operating income (EBIT) of $98,520, depreciation of $27,000, and net working capital of $218,000.
1 point

$98,520

$309,038

$91,038

$64,038
6
Question 6
Your project needs to maintain 23 percent of its sales in net working capital. Currently, you are considering a 6-year
1 point

$6,900

($6,900)

$2,300

($2,300)
7
Question 7
What is the correct logical test for the IRR method if we use IF function in Excel to make an investment decision?
1 point

Calculated value > 0

Calculated value > Some preset limit

Calculated value > Discount rate

Calculated value > Length of the project

8
Question 8
Using Excel's Data Table menu, we can examine the effect of changes in up to how many variables?
1 point

1
2

4
stand located on the beach?

Salvage value is expected to be $400. What is the annual depreciation cost if the straight-line method is used?

erating cost is expected to be 70% of revenue. The project will have the initial investment of $40,000. This project is expected t
 working capital of $218,000. The firm has a tax rate of 35 percent. What is the amount of the operating cash flow?

you are considering a 6-year project, where annual revenue is expected to be $20,000, $30,000, and $45,000 for Years 4, 5, an

e an investment decision?

any variables?
s project is expected to have a 10-year life and will be depreciated to zero using straight-line depreciation. What is the amount
ash flow?

5,000 for Years 4, 5, and 6, respectively. What amount should be included in the project analysis for net working capital in Year
n. What is the amount of the operating income (EBIT) for this project?
working capital in Year 5 of the project?
1.
Question 1
Mutually exclusive projects are best defined as competing projects which:
1 point

would commence on the same day.

both require the total use of the same limited resource.

both have negative cash outflows at time zero.

have the same life period.

2.
Question 2
You are considering the following two mutually exclusive projects. The required rate of return is 12 percent for project A and 10 percent for project B. Which project should yo

Year Project A
0 -$100,000
1 50
2 40
3 60
1 point

Project A ; because it has the higher required rate of return.

Project A ; because its NPV is more than the NPV of project B.

Project B ; because it has the higher required rate of return.

Project B ; because its NPV is more than the NPV of project A.

3.
Question 3
You are considering an investment with the following cash flows. Should you accept the investment ? Which one of the following statement is correct? (discount rate is 12 perc

Year Cash Flow

0 -$25,000
1 12
2 27
3 -10
1 point
You should accept project based on NPV rule.

You should reject project based on NPV rule.

You should accept project based on IRR rule.

You should reject project based on IRR rule.

4.
Question 4
Compare mutual exclusive projects by equivalent annual cost (EAC). Which project should be chosen? Why ? (discount rate is 12 percent)

Year Project A
0 -$180,000
1 58
2 78
3 68
4 55
5 27
1 point

Project A ; because project A is higher EAC.

Project A ; because project A is higher NPV.

Project B ; because project B is higher EAC.

Project B ; because project A is higher NPV.

5.
Question 5
Shark Industries is considering expanding its current line of business and has developed the following expected cash flows for the projects. Which project should be accepted if

Year Project A
0 -$387,500
1 67.5
2 239
3 164.5
4 128.5
1 point

Accept Project A as it has the higher NPV.

Accept Project B as it has the higher NPV.

Accept Project A as it has the higher IRR.

Accept Project B as it has the higher IRR.

6.
Question 6
Which of the following explain the NPV best?
1 point

NPV is the best method of analyzing mutually exclusive projects.

NPV is less useful than the internal rate of return when comparing different sized projects.

NPV is the easiest method of evaluation for non-financial managers to use.

NPV is less useful than the profitability index when comparing mutually exclusive projects.

7.
Question 7
Choi Interiors is considering two mutually exclusive projects and have determined that the crossover rate for these projects is 11.7 percent. Project A has an IRR of 15.3 percen
1 point

Project A should be accepted as its IRR is closer to the crossover point than is Project B's IRR.

Project B should be accepted as it has the higher IRR.

Both projects should be accepted as both of the project's IRRs exceed the crossover rate.

You cannot determine which project should be accepted given the information provided.

8.
Question 8
Suppose a company uses only debt and internal equity to finance its capital budget. Company estimate that its WACC is 12%. The capital structure is 25% debt and 75% intern
1 point

14.33%

15.28%
12.55%

13.52%
ercent for project B. Which project should you accept and why?

Project B
-150
50
60
70

statement is correct? (discount rate is 12 percent)

 Year Project B
0 -$100,000
1 69
2 55
3 35

projects. Which project should be accepted if the discount rate is 15 percent?

Project B
-42.5
12.5
24.5
5.84
29.8
percent. Project A has an IRR of 15.3 percent and Project B has an IRR of 16.5 percent. Given this information, which one of the following statements is correct?

capital structure is 25% debt and 75% internal equity. After tax cost of debt is 5%. What is the cost of equity?
1.
Question 1
An option that can be exercised any time before expiration date is called:
1 point

An European option

An American option

2.
Question 2
The following are the main types of real options:

I) The option to expand if the immediate investment project succeeds.

II) The option to wait (and learn) before investing.

III) The option to shrink or abandon a project.

1 point

I only

I and II only

I, II and III

3.
Question 3
In the Black-Scholes model, the symbol "σ(sigma)" is used to represent the standard deviation of the:
1 point

Option premium on a call with a specified exercise price.

Rate of return on the underlying asset.

Rate of return on a risk-free asset.

4.
Question 4
The value of N(d) in the Black-Scholes model can take any value between:
1 point
-1 and +1

0 and +1

-1 and 0

None of the above

5.
Question 5
The buyer of a call option has the right to exercise, but the writer of the call option has:
1 point

The choice to offset with a put option.

None of the above

The choice to deliver shares or take a cash payoff.

The obligation to deliver the shares at exercise price.

6.
Question 6

MIST Inc. has call options on its common stock traded in the market. The options have an exercise price of $39 and expire in 1 years. The current price of the
Cola stock is $40. The risk-free rate is 6% per year and the standard deviation of the stock returns is 25%. Calculate the value of d2.

Hint: Use excel and Black-Scholes formula.

1 point

0.2163

0.4663

0.5856

0.6795

7.
Question 7
The opportunity to invest in a project can be thought of as a one year real option that is worth $500 with an exercise price of $800. Calculate the value of the
option given that standard deviation is 30% and interest rate is 6%.
Hint: Using Black-Scholes formula in excel.

8.
Question 8
True/False Question.

In real options, required investment is considered the exercise price.

1 point

TRUE

FALSE

1.
Question 1
Which is correct regarding put option?

A put option gives the owner the right ___________________.

1 point

but not the obligation to sell an asset at a given price

and the obligation to buy an asset at a given price.

but not the obligation to buy an asset at a given price

and the obligation to sell an asset at a given price.

2.
Question 2
Which one of the following examples is not related to expansion options ?
1 point

A pharmaceutical company may acquire a patent to market a new drug.

None of them

A film producing company acquiring the rights to a novel to produce a film based on the novel in the future.
A mining company may acquire rights to an ore body that is not worth developing today but could be profitable if product prices increase.

3.
Question 3
Which of the following conditions might lead a financial manager to delay a positive NPV project? Assume project NPV if undertaken immediately is held
constant.
1 point

Uncertainty about future project value increases.

Uncertainty about future project value decreases.

The first cash inflow generated by the project is lower than previously thought.

The first cash inflow generated by the project is higher than previously thought.

4.
Question 4
Which of the following variables is included in the Black-Scholes call option pricing formula?
1 point

Stock beta

Exercise price

Put option price

standard deviation of risk-free asset

5.
Question 5
The Black-Scholes model is a discrete time model
1 point

TRUE

FALSE

6.
Question 6
This figure shows _____________ of a call option payoff.
1 point

buyer

seller

7.
Question 7
Given the following data.

Stock price = $30; Exercise price = $28; Risk-free rate = 6%; standard deviation = 30%; Expiration = 6 months.

Calculate value of a European call option using Black-Scholes formula in excel.

8.
Question 8

K-Oil Petroleum Inc. owns a lease to extract crude oil from sea. It is considering the construction of a deep-sea oil rig at a cost of $4,000 and is expected to
remain constant. The price of oil P is $40/bbl and the extraction costs are $30/bbl. The quantity of oil Q = 300 bbl per year forever. The risk-free rate is 4%
per year and that is also the cost of capital (Ignore taxes). Also, standard deviation is 50% and time to expiration date is 1 year. Calculate the present value of
the project using Black-Scholes pricing model.

9.
Question 9
[Q9~Q10]

Deli&Co. is considering introducing a soft drink to the U.S. market. The drink will initially be introduced only in the
metropolitan areas of the U.S. and the cost of this “limited introduction” is $350, and the expected annual cash
flows from year 1 to year 4, are $100. Also, discount rate is 10%.

Year
CF
Calculate the NPV of this project.

10.
Question 10
[Q9~Q10]

Assume that there is 60% chance that annual cash flow will be $150 in year 2~year 4, and another 40% chance that annual cash flow will be negative -$50 per
year. Expected cash flows are shown below.
Year
CF (Scenario 1)
CF (Scenario 2)
Deli&Co. can observe the outcome in year 1, by checking whether the cash flow in year 1 is $150, or -$50. If Scenario 1 turns out to be correct, we would
like to exercise the option to expand. Re-write expected cash flows are shown below. Again, discount rate is 10%.

Year
CF (Scenario 1)
CF (Scenario 2)
Calculate the value of real option.

-$14252
5.
Question 5
[Q5~Q6] Real Option
8.1
 4.2

0
-350
0
-350

0
-350

1.
Question 1
The Black-Scholes Option Pricing Model can be used for:
1 point

American options but not European options.

European options but not American options.

Both European options and American options.

2.
Question 2

Suppose an investor sells (writes) a put option. What will happen if the stock price on the exercise date exceeds the exercise price?

1 point

The owner will not exercise his option

None of the above

The seller will be obliged to buy stock from the owner of the option

The owner will exercise his option

3.
Question 3

What is the value of a 9-month call with a strike price of $50 given the Black-Scholes Option Pricing Model and the following information?
Stock price : $60

Exercise price : $50

Time to expiration : 9-month

Risk-free rate : 5%

Volatility : 15%

4.
Question 4

Mining Inc. wants to develop the mine. It is considering the construction of a mining at a cost of $9 and is expected to remain constant. The price of silver is $2 per
pound and the extraction costs are $1.2/pound. The quantity of silver is 10 pound per year forever. The risk-free rate is 10% per year and that is also the cost of
capital (Ignore taxes). Also, standard deviation is 30% and time to expiration date is 2 year. Calculate the present value of the project using Black-Scholes pricing
model.

5.07

5.
Question 5
[Q5~Q6] Real Option

Deli&Co. is considering introducing a soft drink to the U.S. market. The drink will initially be introduced only in the metropolitan areas of the U.S. and the cost of
this “limited introduction” is $500, and the expected annual cash flows from year 1 to year 5, are $160. The discount rate is 20%.

Year
CF
-21.50

6
Calculate the NPV of this project.
Assume that there is 50% chance that annual cash flow will be $400 in year 2~year 4, and another 50% chance that annual cash flow will be negative -$50 per year.
Expected cash flows are shown below.

Year
CF (Scenario 1)
CF (Scenario 2)
Deli&Co. can observe the outcome in year 1, by checking whether the cash flow in year 1 is $400, or -$50. If Scenario 2 turns out to be correct, we would like to
abandon. Re-write expected cash flows are shown below. Again, discount rate is 20%.

Year
CF (Scenario 1)
CF (Scenario 2)
Calculate the value of real option.

969.07
7.
Question 7

Jane is a CEO of startup XYZ. She needs to make a decision on project X, which is composed of three projects A, B, and C which have NPVs of +$40, +70, -30,
respectively. How would she go about making the decision about whether to accept or reject the project?

1 point

Accept the startup’s joint project as it has positive NPV.

Reject the joint project.

Break up the project into its components: accept A and B and reject C.

None of the above.

8.
Question 8

A project will produce cash inflows of $3,250 a year for five years. The project initially costs $10,000 to get started. In year six, the project will end and will
provide a final cash flow of $3,500. What is the net present value of this project if the required rate of return is 12 percent?

1 point

$1,489

$2,489

$3,489

$4,489

9.
Question 9
All else equal, the payback period for a project will decrease whenever the:
1 point

Initial cost increases.

Required return for a project increases

Duration of a project is lengthened.

Cash inflows are adjusted such that they occur sooner.

10.
Question 10
[Q10 ~ Q12]

You are analyzing a project and have gathered the following data:

Year
Cash Flow
Required payback period: 3 years
Required return: 8.50 percent
Q10. Based on the internal rate of return of _____ percent for this project, you should _____ the project.
1 point

9.64 ; accept

10.44 ; accept

8.37 ; reject

9.46 ; reject

11.
Question 11
Based on the net present value of _____ for this project, you should _____ the project.
1 point

5,046 ; accept

3,631 ; accept

-3,631 ; reject

15,145 ; accept

12.
Question 12
Based on the payback period of _____ years for this project, you should _____ the project.
1 point

2.7 ; accept

3.0 ; accept
3.1 ; reject

3.7 ; reject

13.
Question 13
Which one of the following statements is correct in relation to independent projects?
1 point

IRR cannot be used to determine the acceptability of a project that has financing type cash flows.

A project with investing type cash flows is acceptable if its IRR exceeds the required return.

A project with financing type cash flows is acceptable if its IRR exceeds the required return.

NPV profile is upsloping for projects with both investing and financing type cash flows.

14.
Question 14

There are two distinct discount rates at which a particular project will have a zero net present value. In this situation, the project is said to:

1 point

have two net present value profiles.

have operational ambiguity.

create a mutually exclusive investment decision.

have multiple rates of return.

15.
Question 15
Which of the following statements related to the IRR are correct?

I. IRR method can be applied to handle non-conventional cash flows.

II. IRR that causes the net present value of the differences between two project's cash flows to equal zero is called the crossover rate.

III. Both the amount of a project's cash flows and the timing of the cash flow affect the value of the project's IRR.
1 point
I only

I and II only

II and III only

I, II, and III

16.
Question 16

Kevin has analyzed two mutually exclusive projects. He collected the following information. Which project shoud he
choose? Why?(Both projects have 3- year lives and both projects has similar size.)

NPV
Payback period
IRR

Required return

1 point

Both projects ; because both projects have positive NPV.

Project A ; because project A has shorter payback period than project B.

Project B ; because project B has higher NPV than project A.

Neither of Projects. ; because information is still not enough to determine.

17.
Question 17
Which of the following should be included in the analysis of a new product?

I. money already spent for research and development of the new product

II. reduction in sales for a current product once the new product is introduced

III. increase in accounts receivable needed to finance sales of the new product
IV. market value of a machine owned by the firm which will be used to produce the new product
1 point

II and IV only

I, II, and III only

II, III, and IV only

I, II, III, and IV

18.
Question 18
V&K Company is considering a new project. The equipment would cost $1.37 million, have a 12-year life, annual revenue of $1,000,000, and annual operating
cost of $696,000. The equipment will be depreciated using straight-line depreciation to a book value of zero. The tax rate is 35 percent. What is the net income
from this proposed project?
1 point

$189,833.33

-$326,000.00

$66,441.67

$123,391.67

19.
Question 19
A project will produce an operating cash flow of $25,000 a year from Year 1 to Year 4. The initial fixed asset investment in the project will be $80,000. The net
after-tax salvage value is estimated at $8,000 and will be received in the last year of the project's life. What is the net present value (NPV) of the project if the
required rate of return is 15 percent?
1 point

-$4,052

-$8,626

$28,000

$13,200

20.
Question 20
What Excel function do we use to conduct a sensitivity analysis for a business project?
1 point

Data Analysis

What-if Analysis - Data Table

Forecast Sheet

What-if Analysis - Scenario Manager

1 2 3 4
100 100 100 100
1 2 3 4
150 150 150 150
-50 -50 -50 -50

1 2 3 4
150 250 250 250
-50 -50 -50 -50
 60 d1 14.6714311358791
d2 14.2214311358791
50
N(d1) 1
9 N(d2) 1

5% C 28.1185924189113

15%

0 1 2 3 4 5
-500 160 160 160 160 160

0 1 2 3 4
-500 400 400 400 400
-50 -50 -50 -50

0 1 2 3 4
-500 400 400 400 400
-50
0 1 2 3 4
-154.3 35.4 86.3 45.4 22.8
Project A Project B
71.406 72.909
1.95 2.21
10.5
11 percent
percent
8.25 8.25
percent percent