FIN 301 Exam 2
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
What is an example of a sunk cost?
$2,000 paid last year to rent equipment
Mutually Exclusive Investment
A situation in which taking one investment prevents the taking of another
Isaac has analyzed two mutually exclusive projects that have 3-year lives. Project A has an NPV of $81,406, a payback period of 2.48 years, and an AAR of 9.31 percent. Project B has an NPV of $82,909, a payback period of 2.57 years, and an AAR of 9.22 percent. The required return for Project A is 11.5 percent while it is 12 percent for Project B. Both projects have a required AAR of 9.25 percent. Isaac must make a recommendation and justify it in 15 words or less. What should his recommendation be?
Accept Project B and reject Project A based on the NPVs
Initial investment cash out flows
Benefits to other projects
Incremental cash flows
Cash flows that should be included in a capital budgeting analysis are those that will only occur (or not occur) if the project is accepted
Opportunity costs
Costs of lost options (existing land or buildings)
Sunk costs
Costs that have accrued in the past
Impact of after-tax salvage on cash flow
If the salvage value is different from the BV of the asset, there is a tax effect
Impact of net working capital on cash flows
Increases in inventory or receivables
The stand-alone principle advocates that project analysis should be based solely on which one of the following costs?
Incremental
Erosion impact on cash flow
Negative side effects - costs to other projects
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
Bui Bakery has a required payback period of two years for all of its projects. Currently, the firm is analyzing two independent projects. Project X has an expected payback period of 1.4 years and a net present value of $6,100. Project Z has an expected payback period of 2.6 years with a net present value of $18,600. Which project(s) should be accepted based on the payback decision rule?
Project X only
The fact that a proposed project is analyzed based on the project's incremental cash flows is the assumption behind which one of the following principles?
Stand-alone principle
Which one of the following types of costs was incurred in the past and cannot be recouped?
Sunk
What statement 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.
What statement about concerning interest rates is correct?
The effective annual rate equals the annual percentage rate when interest is compounded annually.
What statement is related to loan interest rates is correct?is the best method of analyzing mutually exclusive projects.
When comparing loans you should compare the effective annual rates
Payback Decision Rule
an investment is acceptable if its calculated payback period is less than some respecified number of years
The interest rate that is most commonly quoted by a lender is referred to as the:
annual percentage rate
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.
The internal rate of return is defined as the:
discount rate which causes the net present value of a project to equal zero
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
Net present value:
is the best method of analyzing mutually exclusive projects.
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
A perpetuity is defined as:
unending equal payments paid at equal time intervals