Chapter 11 - BUS 361 Sample Test

1. Determine the net present value for a project that costs \$146,000 and would yield after-tax cash flows of \$34,000 the first year, \$36,000 the second year, \$39,000 the third year, \$41,000 the fourth year, \$45,000 the fifth year, and \$51,000 the sixth year. Your firm's cost of capital is 15.00%.

a. \$150,293.07

b. \$4,293.07

c. \$246,000.00

d. \$100,000.00

e. \$273,847.20

2. Determine the net present value for a project that costs \$143,000 and would yield after-tax cash flows of \$22,000 the first year, \$24,000 the second year, \$27,000 the third year, \$29,000 the fourth year, \$33,000 the fifth year, and \$39,000 the sixth year. Your firm's cost of capital is 13.00%.

a. \$111,406.64

b. -\$31,593.36

c. \$174,000.00

d. \$31,000.00

e. \$193,696.80

3. Your company has an opportunity to invest in a project that is expected to result in after-tax cash flows of \$23,000 the first year, \$25,000 the second year, \$28,000 the third year, \$8,000 the fourth year, \$35,000 the fifth year, and \$41,000 the sixth year. The project would cost the firm \$120,000. If the firm's cost of capital is 15%, what is the modified internal rate of return for the project?

a. 11.00%

b. 10.00%

c. 9.00%

d. 7.00%

e. 6.00%

4. Assume a project has normal cash flows (that is, the initial cash flow is negative, and all other cash flows are positive). Which of the following statements is most correct?

a. All else equal, a project's IRR increases as the cost of capital declines.

b. All else equal, a project's NPV increases as the cost of capital declines.

c. The payback period increases as the cost of capital increases.

5. Your company has an opportunity to invest in a project that is expected to result in after-tax cash flows of \$8,000 the first year, \$10,000 the second year, \$13,000 the third year, \$8,000 the fourth year, \$20,000 the fifth year, and \$26,000 the sixth year. The project would cost the firm \$59,000. If the firm's cost of capital is 10%, what is the modified internal rate of return for the project?

a. 7.91%

b. 9.29%

c. 9.64%

d. 10.08%

e. 12.60%

6. The NPV calculation implicitly assumes that all cash flows are reinvested at a rate of return equal to the:

a. cost of debt

b. cost of preferred stock

c. internal rate of return for a project

d. firm's cost of capital.

7. Determine the payback period (in years) for a project that costs \$56,000 and would yield after-tax cash flows of \$14,000 the first year, \$16,000 the second year, \$19,000 the third year, \$21,000 the fourth year, \$25,000 the fifth year, and \$31,000 the sixth year.

a. 3.33

b. 2.81

c. 3.14

d. 2.70

e. 3.51

8. ____________ projects are projects whose cash flows are not affected by the acceptance of other projects.

a. Crossover

b. Independent

c. Internal rate

d. Mutually exclusive

9. Project A and Project B are mutually exclusive projects with equal risk. Project A has an internal rate of return of 12 percent, while Project B has an internal rate of return of 15 percent. The two projects have the same net present value when the cost of capital is 7 percent. (In other words, the "crossover rate" is 7 percent.) Assume each project has an initial cash outflow followed by a series of inflows. Which of the following statements is correct?

a. If the cost of capital is 10 percent, each project will have a positive net present value.

b. If the cost of capital is 6 percent, Project B has a higher net present value than Project A.

c. If the cost of capital is 13 percent, Project A has a higher net present value than Project B.

d. All of the above are correct.

10. Determine the net present value for a project that costs \$220,000 and is expected to yield after-tax cash flows of \$34,000 per year for the first five years, \$42,000 per year for the next five years, and \$59,000 per year for the following five years. Your firm's cost of capital is 10.00%. (Use the Nj key for this problem).

a. \$202,300.83

b. \$362,300.83

c. \$93,974.76

d. \$83,128.31

e. \$60,913.20

11. The post-audit is used to:

a. Improve cash flow forecasts.

b. Stimulate management to improve operations and bring results into line with forecasts.

c. Eliminate potentially profitable but risky projects.

d. Statements a and b are correct.

12. One factor that makes capital budgeting one of the most important function of financial managers is that:

a. the decisions generally have a short-term effect on the firm's performance.

b. the decisions generally do not involve long-term assets.

c. the decisions generally do not involve substantial expenditures

d. all of the above are true

e. none of the above are true

13. Which of the following statements is most correct? The modified IRR (MIRR) method:

a. Overcomes the problem of multiple internal rates of return.

b. Compounds cash flows at the cost of capital.

c. Overcomes the problems of cash flow timing and project size that lead to criticism of the regular IRR method.

d. a and b are correct.

14. NPV indicates a project is deemed desirable (acceptable) when:

a. the NPV is greater than or equal to zero

b. the NPV is less than zero

c. the NPV is greater than or equal to the risk-adjusted cost of capital

d. the NPV is less than or equal to the risk-adjusted cost of capital