Fin 370 - Set 8

Which of the following is not an important step in the financial evaluation of an investment opportunity?

Estimate the accounting rate of return for the investment.

Which of the following figures of merit does not directly take into consideration the time value of money? I. Payback period II. Internal rate of return III. Net present value (NPV) IV. Accounting rate of return

I & IV only

Which of the following figures of merit might not use all possible cash flows in its calculations? I. Payback period II. Internal rate of return III. Net present value (NPV) IV. Accounting rate of return

I & IV only

Which of the following statements related to the internal rate of return (IRR) are correct? I. The IRR is the discount rate at which an investment's NPV equals zero. II. An investment should be undertaken if the discount rate exceeds the IRR. III. The IRR tends to be used more than net present value simply because its results are easier to comprehend. IV. The IRR is the best tool available for deciding between mutually exclusive investments.

I and III only

Pro forma free cash flows for a proposed project should: I. exclude the cost of employing existing assets that could be sold anyway. II. exclude interest expense. III. include the depreciation tax shield related to the project. IV. exclude any required increase in operating current assets.

II and III only

Which of the following should be included in the analysis of a new product? I. Money already spent for research and development of the new product II. Reduction in sales for a current product once the new product is introduced III. Increase in working capital needed to finance sales of the new product IV. Interest expense on the loan used to finance the new product launch

II and III only

When making a capital budgeting decision, which of the following is/are NOT relevant? I. The size of a cash flow. II. The risk of a cash flow. III. The accounting earnings from a cash flow. IV. The timing of a cash flow.

III only

Ian is going to receive $20,000 six years from now. Sunny is going to receive $20,000 nine years from now. Which one of the following statements is correct if both Ian and Sunny apply a 7 percent discount rate to these amounts?

In today's dollars, Ian's money is worth more than Sunny's.

You plan to pay $50 for a share of preferred stock that pays a $2.40 dividend per year forever. What annual rate of return will you realize?

4.80 percent