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FINA MCQ Revision Pool Questions and Answers
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FINA MCQ Revision Pool Questions and Answers
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FINA1221/2221 2016 Sem 1 Final Exam Multiple -Choice Question Revision Pool 1 Chapter 7 Investment Decision Rules 7.1 NPV and Stand -Alone Projects 1) Which of the following statements is FALSE? 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 analysis is to errors in this estimate. 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 Section: 7.1 NPV and Stand -Alone Projects Skill: Conceptual Use the following information to answer the question(s) below. Sarah Palin reportedly was paid a $11 million adv ance to write her book Going Rogue . The book took one year to write. In the time she spent writing, Palin could have been paid to give speeches and appear on TV news as a political commentator. Given her popularity, assume that she could have earned $8 mil lion over the year (paid at the end of the year) she spent writing the book. Assume that she was unable to fulfill her media commitments of appearing on TV news as a political commentator or give speeches.while she was writing the book. 2) Assume that on ce her book is finished, it is expected to generate royalties of $5 million in the first year (paid at the end of the year) and these royalties are expected to decrease by 40% per year in perpetuity. Assuming that Palin's cost of capital is 10% and given t hese royalties payments, the NPV of Palin's book deal is closest to: A) $3.75 million B) $12.20 million C) $13.00 million D) $13.75 million Answer: D Explanation: D) NPV = $11 - $8/(1.10) 1 + $5/(.10 - -0.40) = $ 13.72727 Diff: 3 Section: 7.1 NPV and St and-Alone Projects Skill: Analytical FINA1221/2221 2016 Sem 1 Final Exam Multiple -Choice Question Revision Pool 2 3) 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 alt ering 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 anal ysis 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 Section: 7.1 NPV and Stand -Alone Projects Skill: Conceptual Use the following information to answer the question(s) below. You are considering investing in a start up project at a cost of $100,000. You expect the project to return $500,000 to you in seven years. Given the risk of this project, your cost of capital is 20%. 4) The NPV for this project is closest to: A) $29,200 B) $39,500 C) $129,200 D) $139,500 Answer: B Explanation: B) NPV = -100,000 + 500,000/(1.020) 7 = 39,540.82 Diff: 1 Section: 7.1 NPV and Stand -Alon e Projects Skill: Analytical 5) The IRR for this project is closest to: A) 15.60% B) 18.95% C) 20.00% D) 25.85% Answer: D Explanation: D) IRR = - 1 = .25849895 Diff: 2 Section: 7.1 NPV and Stand -Alone Projects Skill: Analytical FINA1221/2221 2016 Sem 1 Final Exam Multiple -Choice Question Revision Pool 3 6) The decision you should take regarding this project is A) reject the project since the NPV is negative. B) reject the project since the NPV is positive. C) accept the project since the IRR < 20%. D) accept the project since the IRR > 20%. Answer: D Explanation: D) IRR = - 1 = .25849895 NPV = -100,000 + 500,000/(1.020) 7 = 39,540.82 Therefore we should accept because NPV > 0 and because IRR > 20%. Diff: 2 Section: 7.1 NPV and Stand -Alone Projects Skill: Analytical Use the following information to answer the question( s) below. Sarah Palin reportedly was paid a $11 million advance to write her book Going Rogue . The book took one year to write. In the time she spent writing, Palin could have been paid to give speeches and appear on TV news as a political commentator. Gi ven her popularity, assume that she could have earned $8 million over the year (paid at the end of the year) she spent writing the book. Assume that she was unable to fulfill her media commitments of appearing on TV news as a political commentator or give speeches.while she was writing the book. 7) Assuming that Palin's cost of capital is 10%, then the NPV of her book deal is closest to: A) $2.00 million B) $2.20 million C) $3.00 million D) $3.75 million Answer: D Explanation: D) NPV = $11 - $8/(1.10) 1 = $ 3.72727 Diff: 2 Section: 7.1 NPV and Stand -Alone Projects Skill: Analytical 8) The IRR of Palin's book deal is closest to: A) -27.25% B) -37.50% C) 27.25% D) 37.50% Answer: A Explanation: A) IRR = - 1 = -0.27272727 Diff: 2 Section: 7.1 NPV and Stand -Alone Projects Skill: Analytical FINA1221/2221 2016 Sem 1 Final Exam Multiple -Choice Question Revision Pool 4 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 9) If the appropriate discount rate for this project is 1 5%, 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: 1 Section: 7.1 NPV and Stand -Alone Projects Skill: Analytical Use the table for the question(s) below. Consider the following two projects: Project Year 0 Cash Flow Year 1 Cash Flow Year 2 Cash Flow Year 3 Cash Flow Year 4 Cash Flow Discount Rate A -100 40 50 60 N/A .15 B -73 30 30 30 30 .15 10) 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: 1 Section: 7.1 NPV and Stand -Alone Projects Skill: AnalyticalThe benefits of buying summaries with Stuvia:
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