BUSN 379 Week 8 Final Exam

1. (TCO 4) Which of the following is true regarding the evaluation of projects? (Points : 4)

sunk costs should be included

erosion effects should be considered

financing costs need to be included

opportunity costs are irrelevant 

Question 2. 2. (TCO 4) Which of the following investment ranking methods does not consider the time value of money? (Points : 4)

net present value method

payback method

internal rate of return method

all of these are time-adjusted methods 

Question 3. 3. (TCO 3 and 4) You can ensure that an investment is expected to create value for (Points : 4)

have a PI equal to zero.

produce negative rates of return.

have positive AARs.

have positive IRRs.

have positive NPVs.

Question 4. 4. (TCO 3 and 4) What is the net present value of a project with the following cash flows, if the discount rate is 10 percent?

Year

0

1

2

3

4

Cash flow

-$32,000

$9,000

$10,000

$15,200

$7,800

(Points : 4)

$1,085.25

$1,193.77

$3,498.28

$4,102.86

$4,513.15

Question 5. 5. (TCO 4) Howard Company is considering a new project that will require an initial cash investment of $575,000. The project will produce no cash flows for the first three years. The projected cash flows for years 4 through 8 are $73,000, $112,000, $124,000, $136,000, and $145,000, respectively. How long will it take the firm to recover its initial investment in this project? (Points : 4)

5.81 years

6.05 years

6.96 years

7.90 years

This project never pays back

Question 6. 6. (TCO 4) The postponement of a project until conditions are more favorable:(Points : 4)

is a valuable option.

is referred to as the option to extend.

could not cause a negative net present value project to become a positive net present value project.

will generally cause the internal rate of return for a project to decline.

Question 7. 7. (TCO 4) ___________, occurs when a firm cannot raise financing for a project under any circumstances. (Points : 4)

contingency planning.

hard rationing.

soft rationing.

capital constraint.

scenario analysis.

Question 8. 8. (TCO 4) ABC Cameras is considering an investment that will have a cost of $10,000 and the following cash flows: $6,000 in year 1, $4,000 in year 2 and $3,000 in year 3. Assume the cost of capital is 10%. Which of the following is true regarding this investment? (Points : 4)

The net present value of the project is approximately $1,011

This project should be accepted because it has a negative net present value

This project’s payback period is 10 years or more

All of the above are true

Question 9. 9. (TCO 4) Assume Company X plans to invest $60,000 in industrial equipment. Using Tables 9.6 and 9.7 of your textbook (Page 277), which is the first year depreciation amount under MACRS? (Points : 4)

$12,000

$8,574

$19,800

None of the above

Question 10. 10. (TCO 1 and 4) Assume a corporation has earnings before depreciation, and taxes of $100,000, depreciation of $40,000, and that it has a 30 percent tax bracket. What are the after-tax cash flows for the company? (Points : 4)

$82,000

$110,000

$42,000

none of these 

Question 11. 11. (TCO 8) Which of the following statements is true regarding systematic risk? (Points : 4)

is diversifiable

is the total risk associated with surprise events

it is measured by beta

it is measured by standard deviation

Question 12. 12. (TCO 8) Which statement is true regarding risk? (Points : 4)

the expected return is usually the same as the actual return

a key to assess risk is determining how much risk an investment adds to a portfolio

risks can always be decreased or mitigated by the financial manager

the higher the risk, the lower the return investors require for the investment 

Question 13. 13. (TCO 8) The stock of Chocolate Galore is expected to produce the following returns, given the various states of the economy. What is the expected return on this stock?

State of Economy

Probability of State of Economy

Rate of Return

Recession

.02

-.06

Normal

.88

.11

Boom

.10

.17

(Points : 4)

7.33 percent

9.82 percent

11.26 percent

11.33 percent

11.50 percent 

Question 14. 14. (TCO 8) You own a portfolio that consists of $8,000 in stock A, $4,600 in stock B, $13,000 in stock C, and $5,500 in stock D. What is the portfolio weight of stock D? (Points : 4)

17.68 percent

17.91 percent

18.42 percent

19.07 percent

19.46 percent