FIN 301 Exam 2

Net present value:

is the best method of analyzing mutually exclusive projects.

Assume you are investing $100 today in a savings account. Which one of the following terms refers to the total value of this investment one year from now?

Future value

The stand-alone principle advocates that project analysis should be based solely on which one of the following costs?

Incremental

If a firm accepts Project X it will not be feasible to also accept Project Z because both projects would require the simultaneous and exclusive use of the same piece of machinery. These projects are considered to be:

Mutually Exclusive

Salazar's Salads is considering two projects. Project X consists of creating an outdoor eating area on the unused portion of the restaurant's property. Project Z would instead use that outdoor space for creating a drive-thru service window. When trying to decide which project to accept, the firm should rely most heavily on which one of the following analytical methods?

Net Present Value

Eunchae invested $2,000 six years ago at 4.5 percent interest. She spends all of her interest earnings immediately so she only receives interest on her initial $2,000 investment. Which type of interest is she earning?

Simple interest

Which one of the following types of costs was incurred in the past and cannot be recouped?

Sunk

Which one of the following statements related to the internal rate of return (IRR) is correct?

The IRR is equal to the required return when the net present value is equal to zero

Which one of the following statements concerning interest rates is correct?

The effective annual rate equals the annual percentage rate when interest is compounded annually.

The interest rate that is most commonly quoted by a lender is referred to as the:

annual percentage rate.

The internal rate of return is defined as the:

discount rate which causes the net present value of a project to equal zero.

Which one of the following statements related to loan interest rates is correct?

When comparing loans you should compare the effective annual rates.

Cullen invested $5,000 five years ago and earns 6 percent annual interest. By leaving his interest earnings in her account, he increases the amount of interest he earns each year. His investment is best described as benefitting from:

compounding.

Nirav just opened a savings account paying 2 percent interest, compounded annually. After four years, the savings account will be worth $5,000. Assume there are no additional deposits or withdrawals. Given this information, Nirav:

could have deposited less money today and still had $5,000 in four years if the account paid a higher rate of interest.

Perpetuity is defined as:

unending equal payments paid at equal time intervals.