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D076- FINANCE- MASTER LIST
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A potential project to expand the size of an apartment complex will cost $100,000. Its calculated net present value is $5,000. Given this information, which statement is correct? - The project should be accepted because it has a positive NPV. The YTM of a bond went from 8% to 7%. What can be pre...

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  • February 3, 2024
  • 20
  • 2023/2024
  • Exam (elaborations)
  • Questions & answers

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  • d076 finance master list

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D076- FINANCE- MASTER LIST
A potential project to expand the size of an apartment complex will cost $100,000. Its calculated net
present value is $5,000. Given this information, which statement is correct? - ✔✔The project should be
accepted because it has a positive NPV.



The YTM of a bond went from 8% to 7%. What can be predicted about the price of the bond? - ✔✔It
will increase.



0/1

The company Betsy's Wigs is considering three potential projects that are not mutually exclusive. The
IRR, NPV, and PI for each project are listed in the table below. Use this information to rank the projects
in the order in which Betsy's Wigs should accept them to bring the most value to the firm. - ✔✔Project
3, Project 2, Project 1

Correct! The projects with the highest PIs should be accepted first.



A company is trying to decide which of four projects to invest in.

Project 1 has an IRR of 14% and an NPV of $54,000.

Project 2 has an IRR of 11% and an NPV of $67,000.

Project 3 has an IRR of 9% and an NPV of $60,000.

Project 4 has an IRR of 13% and an NPV of $47,000.



If the company can do only one project, which project should it choose to add the greatest value to the
firm? - ✔✔Project 2

Correct! The project with the highest NPV will bring the most value to the company



Why is it important to have an accurate, carefully calculated required rate of return as part of the NPV? -
✔✔An inaccurate required rate estimate could cause a firm to reject good projects or accept bad
projects.

,Correct! While the required rate of return is the most difficult part of the NPV calculation to estimate, it
is also the most important.



Why is it important to consider all relevant cash flows in an ideal evaluation method for capital
investment? - ✔✔Without considering every cash flow of a potential project, you do not know how the
project will enhance the value of a firm.



Correct! You need to include all the cash flows coming from a potential project to understand how much
value they will add to the firm.



Talia is comparing four mutually exclusive projects. In order to choose the best project to optimize the
goal of the firm, which capital budgeting method should Talia use? - ✔✔Net present value (NPV)



Correct! When you compare mutually exclusive projects, you should look at how much value is added by
each project, because you can do only one of them. Therefore, you should use the NPV method to
choose a project.



Alphabet Co. has $50,000 to spend on capital investment projects for the next year. It will do as many
projects as it has cash for. Alphabet Co. calculates the potential incremental cash flows and costs of the
projects as well as the NPV, IRR, and PI for each project. How should the company decide which projects
to invest in if it wants to maximize the total amount of value created? - ✔✔It should choose the
projects with the highest PIs until all capital has been used.



Correct! By choosing the projects with the highest PI, Alphabet Co. will be able to use its limited capital
effectively to create the most overall value for the firm.



What is opportunity cost as it relates to the time value of money? - ✔✔t is the opportunity you forgo to
invest in other options due to the time scope of an investment.

Correct! Opportunity cost is the cost that you have to give up for something as a result of investing in
something else.

, Why is the timing of cash flows an important characteristic of capital investment? - ✔✔Timing of cash
flows is related to the opportunity cost associated with those cash flows.

Correct! The cash flows of an investment need to be compared to the cash flows of other projects.



0/1

You are considering four projects. The initial cost to start each project is $500,000, and the total cash
inflows generated by each project are $600,000. Each project also has the same level of risk. The only
difference between these four projects is the cash flow patterns.

Year 1 Year 2 Year 3

Project A $200,000 $200,000 $200,000

Project B $300,000 $200,000 $100,000

Project C $100,000 $200,000 $300,000

Project D $600,000 $300,000 -$300,000



Given the information above, which statement is correct about these four projects? - ✔✔Project D
should be chosen first given that the project will receive cash to sum to $600,000 the most quickly.



Correct! Project D receives cash flows the most quickly of the four projects. Given the concept of the
time value of money, Project D should generate the highest NPV.



Why is there always a cost for bringing funds into a business? - ✔✔A business must compensate
investors for the risk that they are taking to invest in the business.



1/1

What is the relationship between the risk and the rate of return? - ✔✔The higher the risk investors
have to take on, the higher return they require.

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