BU 440 BU440 EXAM 1 ANSWERS - ASHWORTH
BU440 Managerial Finance II Exam 1 Answers
Lennon, Inc., is considering a five-year project that has an initial outlay or cost of $80,000. The respective future cash inflows from its project for years 1, 2, 3, 4, and 5 are $15,000, $25,000, $35,000, $45,000, and $55,000. Lennon uses the internal rate of return method to evaluate projects. What is Lennon's IRR?
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The IRR is less than 22.50%.
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Which of the statements below is FALSE?
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The net present value decision model is an economically sound model when comparing different projects across a wide variety of products, services and activities under capital constraint.
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The greater the NPV of a project, the greater the "bag of money" for doing the project, and more money is better. Therefore, if a company is short of capital it would choose those projects that provide the largest "bag of money."
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Despite all of the advantages of using the NPV model, it is inconsistent with the concept of the time value of money.
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By discounting all future cash flows to the present, adding up all inflows, and subtracting all outflows, we are determining the current value of the project.
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__________ is at the heart of corporate finance because it is concerned with making the best choices about project selection.
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Which of the statements below is true of the payback period model?
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It ignores the cash flow after the initial outflow has been recovered.
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It is biased against projects with early term payouts.
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It incorporates time-value-of-money principles.
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It focuses on cash flows after the initial outflow has been recovered.
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The initial outlay or cost is $1,000,000 for a four-year project. The respective future cash inflows for years 1, 2, 3, and 4 are: $500,000, $300,000, $300,000 and $300,000. What is the payback period without discounting cash flows?
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The __________ model provides a single measure (return) but must apply risk outside the model, thus allowing for errors in rankings of projects.
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internal rate of return (IRR)
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There are two ways to correct for projects with unequal lives when using the NPV model. Which of the answers below is one of these ways?
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One way is to find a common life, without the need to extend the projects to the least common multiple of their lives.
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One way is to find the present value factors and then compare them.
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One way is to compare the lengths of the projects and take the project with the shortest life.
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One way is to find a common life by extending the projects to the least common multiple of their lives.
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The __________ model determines at what point in time cash outflow is recovered by the corresponding future cash inflow.
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internal rate of return (IRR)
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Acme, Inc., is considering a four-year project that has an initial outlay or cost of $100,000. The respective future cash inflows from its project for years 1, 2, 3, and 4 are: $50,000, $40,000, $30,000 and $20,000, respectively. Will Acme accept the project if the payback period is 31 months?
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Yes, because it pays back in 25 months.
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Yes, because it pays back in 28 months.
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No, because it pays back in over 31 months.
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No, because it pays back in over 35 months.
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The capital budgeting decision model that uses all the discounted cash flow of a project is the __________ model.
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internal rate of return (IRR)
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discounted payback period
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We can separate short-term and long-term decisions into three dimensions. Which of the below is NOT one of these dimensions?
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Degree of information-gathering prior to the decision
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Personality of CEO making the decisions
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The __________ is a modification of NPV to produce the ratio of the present value of the benefits (future cash inflow) to the present value of the costs (initial investment).
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modified internal rate of return (MIRR) method
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discounted cash flow method
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Consider the following 10-year project: The initial after-tax outlay or after-tax cost is $1,000,000. The future after-tax cash inflows each year for years 1 through 10 are $200,000 per year. What is the payback period without discounting cash flows?
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The net present value of an investment is the present value of all:
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benefits (cash inflows) minus the present value of all costs (cash outflows) of the project.
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costs (cash outflows) of the project.
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costs (cash outflow) minus the present value of all benefits (cash inflow) of the project.
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Lincoln Industries, Inc., is considering a project that has an initial after-tax outlay or after-tax cost of $350,000. The respective future cash inflows from its five-year project for years 1 through 5 are $75,000 each year. Lincoln expects an additional cash flow of $50,000 in the fifth year. The firm uses the net present value method and has a discount rate of 10%. Will Lincoln accept the project?
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Lincoln accepts the project because it has an NPV greater than $5,000.
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Lincoln rejects the project because it has an NPV less than $0.
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Lincoln accepts the project because it has an NPV greater than $18,000.
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There is not enough information to make a decision.
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In the NPV model, all cash flows are stated in:
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future value dollars, and the total inflow is "netted" against the outflow to see if the net amount is positive or negative.
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present value or current dollars, and the outflow is "netted" against the total inflow to see if the gross amount is positive or negative.
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present value or current dollars, and the total inflow is "netted" against the initial outflow to see if the net amount is positive or negative.
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future dollars, and the initial outflow is "netted" against the total inflow to see if the net amount is positive.
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Which of the statements below is TRUE?
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The hurdle rate is the cost of debt needed to fund a project.
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If the IRR exceeds a project's hurdle rate, the project should be rejected.
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If the IRR clears the hurdle rate, the project is rejected.
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The hurdle rate should be set so that it reflects the proper risk level for the project.
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Flynn, Inc., is considering a four-year project that has an initial outlay or cost of $80,000. The future cash inflows from its project are $40,000, $40,000, $30,000, and $30,000 for years 1, 2, 3, and 4, respectively. Flynn uses the internal rate of return method to evaluate projects. What is the approximate IRR for this project?
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The IRR is less than 12%.
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The IRR is between 12% and 20%.
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Which of the statements below describes the IRR decision criterion?
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The decision criterion is to accept a project if the IRR falls below the desired or required return rate.
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The decision criterion is to reject a project if the IRR exceeds the desired or required return rate.
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The decision criterion is to accept a project if the IRR exceeds the desired or required return rate.
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The decision criterion is to accept a project if the NPV is positive.
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The __________ model is usually considered one the most important capital budgeting decision-making models.
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internal rate of return (IRR)
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discounted payback period
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