Saint MBA570 module 3 quiz Question # 00031286 Posted By: neil2103 Updated on: 11/09/2014 03:07 PM Due on: 11/30/2014 Subject Finance Topic Finance Tutorials: 1 See full Answer Question Question 1. 1. 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%. The NPV for this project is closest to __________. (Points : 10) $29,200 $39,500 $129,200 $139,500 Question 2. 2. Which of the following statements is false? (Points : 10) The IRR investment rule states you should turn down any investment opportunity where the IRR is less than the opportunity cost of capital. The IRR investment rule states that you should take any investment opportunity where the IRR exceeds the opportunity cost of capital. Since the IRR rule is based upon the rate at which the NPV equals zero, like the NPV decision rule, the IRR decision rule will always identify the correct investment decisions. There are situations in which multiple IRRs exist. Question 3. 3. Which of the following statements is false? (Points : 10) The payback investment rule is based on the notion that an opportunity that pays back its initial investments quickly is a good idea. An IRR will always exist for an investment opportunity. A NPV will always exist for an investment opportunity. In general, there can be as many IRRs as the number of times the project's cash flows change sign over time. Question 4. 4. Consider two mutually exclusive projects A and B. If you subtract the cash flows of opportunity B from the cash flows of opportunity A, then you should: (Points : 10) take opportunity A if the regular IRR exceeds the cost of capital. take opportunity A if the incremental IRR exceeds the cost of capital. take opportunity B if the regular IRR exceeds the cost of capital. take opportunity B if the incremental IRR exceeds the cost of capital. Question 5. 5. Which of the following statements is false? (Points : 10) We begin the capital budgeting process by determining the incremental earnings of a project. The marginal corporate tax rate is the tax rate the firm will pay on an incremental dollar of pre-tax income. Investments in plant, property, and equipment are directly listed as expense when calculating earnings. The opportunity cost of using a resource is the value it could have provided in its best alternative use. Question 6. 6. Which of the following costs would you consider when making a capital budgeting decision? (Points : 10) Sunk cost Opportunity cost Interest expense Fixed overhead cost Question 7. 7. Which of the following statements is false? (Points : 10) Project externalities are direct effects of the project that may increase of decrease the profits of other business activities of the firm. Incremental earnings are the amount by which the firm's earnings are expected to change as a result of the investment decision. The average selling price of a product and its cost of production will generally change over time. Any money that has already been spent is a sunk cost and therefore irrelevant in the capital budgeting process. Question 8. 8. Which of the following cash flows are relevant incremental cash flows for a project that you are currently considering investing in? (Points : 10) The tax savings brought about by the project's depreciation expense The cost of a marketing survey you conducted to determine demand for the proposed project Interest payments on debt used to finance the project Research and development expenditures you have made Question 9. 9. Which of the following statements is false? (Points : 10) Depreciation is not a cash expense paid by the firm. Net Working Capital = Cash + Inventory + Payables - Receivables. Since 1997, companies can "carry back" losses for two years and "carry forward" losses for 20 years. Earnings do not represent real profits. Question 10. 10. Which of the following statements is false? (Points : 10) The break-even level of an input is the level for which the investment has an IRR of zero. The most difficult part of capital budgeting is deciding how to estimate the cash flows and the cost of capital. When evaluating a capital budgeting project, financial managers should make the decision that maximizes NPV. Sensitivity analysis reveals which aspects of the project are most critical when we are actually managing the project. Rating: 4.9/5
Solution: Saint MBA570 module 3 quiz