1. Which statement is CORRECT?
a) The IRR method assumes that Cash flows
are reinvested at the firm’s WACC
b) The use
of Accelerated Depreciation methods (instead of Straight-Line) results in
higher operating cash flows in a projects early years.
c) For
independent projects with normal cash flows, the NPV, Payback and IRR methods
will always lead to the same decision.
d) For
normal projects, lower costs of capital lead to lower NPVs.
2. Which of the
following is true for normal projects if the cost of capital is positive?
a) If a project’s IRR is positive, then its
NPV will always be positive
b) If a
project’s NPV is negative, then its Modified IRR will be negative
c) If a
project’s NPV is positive, then its Profitability Index will always be positive
d) If a
project’s IRR is positive, then its Discounted Payback Period will exist
3. The
_____________ option says that a firm can end a project at any time if a
project is performing poorly while the __________ option may involve having
excess capacity in case a project performs better than expected.
a)
Abandonment; Expansion
b) Timing;
Expansion
c)
Shutdown; Timing
d)
Flexibility; Abandonment
4. Which statement is CORRECT?_
a) The Crossover Rate is used to compare two
repeatable projects with different lives.
b) The
Equivalent Annual Annuity is the rate at which two projects have the same NPV.
c) The IRR
is used as the required return for projects of average risk
d)
Sensitivity Analysis measures the impact on project’s NPV when a single
assumption is changed
5. Projects A and B are equally risky, mutually
exclusive projects with normal cash flows. Project A has an IRR of 15%, while
Project B’s IRR is 12%. The two projects have the same NPV when the WACC is
10%. Which of the following statements
is CORRECT?
a. If the WACC
is 9%, Project A will have the higher NPV.
b. Project A
is probably larger in scale
c. If the WACC
is 13%, Project B will have a negative NPV.
d. If the cost
of capital is 9%, Project B will have a higher profitability index
QUESTIONS 6-8: A company wants to update their
operations by buying some new machinery and selling some old equipment. The new
machinery will cost $100,000 and will be depreciated using 3-year MACRS (33%,
45%, 15%, 7%). At the end of the third year, the machinery is expected to be
sold for $17,000.
The old equipment was bought three years ago for
$60,000 and was being depreciated over four years using straight-line
depreciation. It can be sold today for
$15,000. If they do not buy the new machinery and replace the old equipment,
then the old equipment is expected to be held for another three years at which
point it will be worthless.
Net Working Capital will have to be increased today by
$40,000, but that amount will be recovered at the end of the project in three
year
Sales will be $100,000 for the next three years if
they don’t do the project and $150,000 if they do update their project,
Additionally, COGS will fall from 70% of Sales if they don’t do the project to
Sales to 60% of Sales if they buy the new machinery. The tax rate is 40%.
(Hint: You have to Calculate COGS if they don’t do the project and if they do
the project and then you will use the change in COGS. For Sales, you use the
change in Sales
6. What is the
Net Investment (Initial Cash Outflow or CF0) for this project?
a)
$75,000 c) $155,000
b)
$115,000
d) $185,000
7. What is the
Operating Cash Flow in year two for this project?
a)
30,000
c) 45,000
b)
36,000
d) 60,000
8. What is the Terminal Value at the end of this
project in three years (include everything in the end column, but do NOT
include the operating cash flow in year 3)?
a) 23,000
c) 44,000
b)
36,000 d) 53,000
.
