Chapter 32 - Corporate Finance

A $2.2 million investment will result in the cash flows shown below (on page 85): Using an 8% opportunity cost of capital, the project's net present value (NPV) is closest to: A) $2.47 million. B) $3.40 million. C) $4.67 million.

A) $2.47 million.

Kim Corporation is considering an investment of 750 million won with expected after-tax cash inflows of 175 million won per year for seven years. The required rate of return is 10 percent. What is the project's NPV and IRR? A) NPV - 102 million won; IRR - 14.0% B) NPV - 157 million won; IRR - 23.3% C) NPV - 193 million won; IRR - 10.0%

A) NPV - 102 million won; IRR - 14.0%

Shirley Shea has evaluated an investment proposal and found that its payback period is one year, it has a negative NPV and it has a positive IRR. Is this combination of results possible? A) Yes. B) No, because a project with a positive IRR has a positive NPV. C) No, because a project with such a rapid payback period has a positive NPV.

A) Yes.

With regard to the net present value (NPV) profiles of two projects, the cross-over rate is best described as the discount rate at which: A) two projects have the same NPV. B) two projects have the same internal rate of return. C) a project's NPV changes from positive to negative.

A) two projects have the same NPV.

An investment has an outlay of 100 and after-tax cash flows of 40 annually for four years. A project enhancement increases the outlay by 15 and the annual after-tax cash flows by 5. As a result, the vertical intercept of the NPV profile of the enhanced project shifts: A) up and the horizontal intercept shifts left. B) up and the horizontal intercept shifts right. C) down and the horizontal intercept shifts left.

A) up and the horizontal intercept shifts left.

An investment of $100 generates after-tax cash flows of $40 in Year 1, $80 in Year 2 and $120 in Year 3. The required rate of return is 20 percent. The net present value is closest to: A) $42.22. B) $58.33. C) $68.52.

B) $58.33.

A three-year investment requires an initial outlay of $1,000. It is expected to provide three year-end cash flows of $200 plus a net salvage value of $700 at the end of three years. Its internal rate of return (IRR) is closest to: A) 10%. B) 11%. C) 20%.

B) 11%.

Kim Corporation is considering an investment of 750 million won with expected after-tax cash inflows of 175 million won per year for seven years. The required rate of return is 10 percent. Expressed in years, the project's payback period and discounted payback period, respectively, are closest to: A) 4.3 years and 5.4 years. B) 4.3 years and 5.9 years. C) 4.8 years and 6.3 years.

B) 4.3 years and 5.9 years.

Consider the two projects below on page 87. The cash flows as well as the NPV and IRR for the two projects are given. For both projects, the required rate of return is 10 percent. What discount rate would result in the same NPV for both projects? A)A rate between 0.00 percent and 10.00 percent. B) A rate between 10.00 percent and 15.02 percent. C) A rate between 15.02 percent and 16.37 percent.

B) A rate between 10.00 percent and 15.02 percent.

With regard to capital budgeting, an appropriate estimate of the incremental cash flows from a project is least likely to include: A) externalities. B) interest costs. C) opportunity costs.

B) interest costs.

Erin Chou is reviewing a profitable investment project that has a conventional cash flow pattern. If the cash flows for the project, initial outlay, and future after-tax cash flows all double, Chou would predict that the IRR would: A) increase and the NPV would increase. B) stay the same and the NPV would increase. C) stay the same and the NPV would stay the same.

B) stay the same and the NPV would increase.

With regard to net present value (NPV) profiles, the point at which a profile crosses the vertical axis is best described as: A) the point at which two projects have the same NPV. B) the sum of the undiscounted cash flows from a project. C) a project's internal rate of return when the project's NPV is equal to zero.

B) the sum of the undiscounted cash flows from a project.

Given the following cash flows for a capital project as shown on page 85, calculate its payback period and discounted payback period. The required rate of return is 8 percent. The discounted payback period is: A) 0.16 years longer than the payback period. B) 0.51 years longer than the payback period. C) 1.01 years longer than the payback period.

C) 1.01 years longer than the payback period.

An investment of $20,000 will create a perpetual after-tax cash flow of $2,000. The required rate of return is 8 percent. What is the investment's profitability index? A) 1.08. B) 1.16. C) 1.25.

C) 1.25.

Hermann Corporation is considering an investment of $375 million with expected after-tax cash inflows of $115 million per year for 7 years and an additional after-tax salvage value of $50 million in Year 7. The required rate of return is 10 percent. What is the investment's PI? A) 1.19. B) 1.33. C) 1.56.

C) 1.56.

An investment of $150,000 is expected to generate an after-tax cash flow of $100,000 in one year and another $120,000 in two years. The cost of capital is 10 percent. What is the internal rate of return? A) 28.39 percent. B) 28.59 percent. C) 28.79 percent.

C) 28.79 percent.

Projects 1 & 2 have similar outlays as shown on page 87, although the patterns of future cash flows are different. The cash flows as well as the NPV and IRR for the two projects are shown below. For both projects, the required rate of return is 10 percent. The two projects are mutually exclusive. What is the appropriate investment decision? A) Invest in both projects. B) Invest in Project 1 because it has the higher IRR. C) Invest in Project 2 because it has the higher NPV.

C) Invest in Project 2 because it has the higher NPV.

Given the following cash flows as shown on page 85, calculate the NPV and IRR. The required rate of return is 8 percent. A) NPV - $1,905; IRR - 10.9% B) NPV - $1,905; IRR - 26.0% C) NPV - $3,379; IRR - 10.9%

C) NPV - $3,379; IRR - 10.9%

Wilson Flannery is concerned that this project has multiple IRRS (page 88). How many discount rates produce a zero NPV for this project? A) One, a discount rate of 0 percent. B) Two, discount rates of 0 percent and 32 percent. C) Two, discount rates of 0 percent and 62 percent.

C) Two, discount rates of 0 percent and 62 percent.

With regard to net present value (NPV) profiles, the point at which a profile crosses the horizontal axis is best described as: A) the point at which two projects have the same NPV. B) the sum of the undiscounted cash flows from a project. C) a project's internal rate of return when the project's NPV is equal to zero.

C) a project's internal rate of return when the project's NPV is equal to zero.

The internal rate of return (IRR) is best described as the: A) opportunity cost of capital. B) time-weighted rate of return. C) discount rate that makes the net present value equal to zero.

C) discount rate that makes the net present value equal to zero.

The net present value (NPV) of an investment is equal to the sum of the expected cash flows discounted at the: A) internal rate of return B) risk-free rate C) opportunity cost of capital

C) opportunity cost of capital