PSE 415 Midterm 2 Exam Questions &
Answers 2024/2025
NPV Equation - ANSWERSSUM((CashFlow_n/(1+rate)^n))-initial investment
Basic investment rule with NPV - ANSWERSAccept the project if NPV > 0
Reject the project if NPV < 0
Payback - ANSWERSlength of time required to recovery the cost of an investment
have a payback period less than or equal to 2 years the project should be accepted more than 2 years it
should be rejected
IRR - ANSWERSprovides a single number about the merits of a project
it's what causes the NPV to equal 0
IRR: Basic Investment Rule - ANSWERSAccept the project if IRR is higher than discount rate and reject if it
is lower
When can IRR not be calculated - ANSWERSWhen the Free Cash flow becomes negative
No such thing as a negative IRR
How to calculate Free Cash Flow - ANSWERSOriginal Cash flow- Capital Spending- Change in Net Working
capital
Sunk Cost - ANSWERSA cost that has already occurred
, They should not influence the decision to accept/reject the project
Opportunity Cost - ANSWERSThe benefits that could have been received by taking an alternate option
Land is an opportunity Cost
Erosion Side Effect - ANSWERSNEw product reduces the sales and the cash flows of existing products
Synergy Side Effect - ANSWERSa new project increases the cash flows of existing projects
Allocated Costs - ANSWERSCosts from different projects that determine income
they should be viewed as a cash outflow of a project only if it is an incremental cost of the project
Project Life - ANSWERSThe number of years of cash flows that are considered by the analyst
10-15 years
different from the real life of the asset
Terminal Value - ANSWERShelp see a difference between project life and real life
scrap value or resale value
=5*EBITDA in the terminal (last) year
number of steps that are common in investment analyses - ANSWERS1. There must be a base case (even
0) to compare investment against
Answers 2024/2025
NPV Equation - ANSWERSSUM((CashFlow_n/(1+rate)^n))-initial investment
Basic investment rule with NPV - ANSWERSAccept the project if NPV > 0
Reject the project if NPV < 0
Payback - ANSWERSlength of time required to recovery the cost of an investment
have a payback period less than or equal to 2 years the project should be accepted more than 2 years it
should be rejected
IRR - ANSWERSprovides a single number about the merits of a project
it's what causes the NPV to equal 0
IRR: Basic Investment Rule - ANSWERSAccept the project if IRR is higher than discount rate and reject if it
is lower
When can IRR not be calculated - ANSWERSWhen the Free Cash flow becomes negative
No such thing as a negative IRR
How to calculate Free Cash Flow - ANSWERSOriginal Cash flow- Capital Spending- Change in Net Working
capital
Sunk Cost - ANSWERSA cost that has already occurred
, They should not influence the decision to accept/reject the project
Opportunity Cost - ANSWERSThe benefits that could have been received by taking an alternate option
Land is an opportunity Cost
Erosion Side Effect - ANSWERSNEw product reduces the sales and the cash flows of existing products
Synergy Side Effect - ANSWERSa new project increases the cash flows of existing projects
Allocated Costs - ANSWERSCosts from different projects that determine income
they should be viewed as a cash outflow of a project only if it is an incremental cost of the project
Project Life - ANSWERSThe number of years of cash flows that are considered by the analyst
10-15 years
different from the real life of the asset
Terminal Value - ANSWERShelp see a difference between project life and real life
scrap value or resale value
=5*EBITDA in the terminal (last) year
number of steps that are common in investment analyses - ANSWERS1. There must be a base case (even
0) to compare investment against
