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D076 Unit 6 Practice Questions with 100- correct answers.
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D076 Unit 6 Practice Questions with 100- correct answers.
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D076 Unit 6 PracticeQuestions with 100%
correct answers
What indicates to a firm that a project will increase
shareholder wealth?
-The project's cash flows are projected closer to the
present.
-The NPV is positive.
-The project's cash flows are projected far into the
future.
-The NPV is negative. - answer B
What part of the NPV calculation is very important
but difficult to estimate?
-The expected cash flows
-The initial outlay
-The life of the project
-The cost of capital - answer D
What is an advantage of using the NPV method?
,-It can be used to compare multiple projects when
a firm faces capital constraints.
-It calculates the dollar value that would be added
to the firm by doing the project.
-It does not consider the time value of money.
-It tells the percent return on an investment. -
answer B
What is a disadvantage of using the NPV method?
-It is not an effective way to compare projects with
different time spans.
-It does not consider the time value of money.
-It often underestimates cash flows.
-It is not an effective way to compare projects of
different sizes. - answer D
Suppose Alice is trying to explain to her friend,
who knows nothing about the time value of money,
why she should invest in Alice's new company.
Which method of valuation should Alice use to
convince her friend to invest?
-Net present value (NPV)
-Internal rate of return (IRR)
-Cash budgeting
-Debt-to-equity ratio - answer B
,Which NPV value indicates that the IRR has been
reached?
-(-$100.00)
-($99.99)
-($0.00)
-($15.00) - answer C
Why is the IRR a poor valuation method for a
project with unconventional cash flows?
-The hurdle rate is always too large for projects
with unconventional cash flows.
-The IRR method can be used only to calculate
projects that add value to a firm, and projects with
unconventional cash flows never add value to a
firm.
-There are multiple sign changes in the calculation
resulting in multiple IRRs, and it is impossible to
tell which IRR is the correct one.
-Projects with unconventional cash flows are only
possible to evaluate using trial and error, which is
not an acceptable way to calculate the IRR. -
answer C
A company called Bobby's Books is considering
purchasing a new bookbinding machine. The
company calculates the hurdle rate of the project
, to be 9% and the IRR to be 11%. Should the
company purchase the bookbinding machine?
-No, because the hurdle rate is lower than the IRR.
-Yes, because the IRR exceeds the cost of capital.
-Yes, because newer models of equipment are
always profitable investments.
-No, because the old bookbinding machine still
works. - answer B
Which capital investment evaluation method is
presented as a ratio?
-Profitability index (PI)
-Internal rate of return (IRR)
-Quick ratio
-Net present value (NPV) - answer A
How does the PI aid in interpretation of the NPV?
-It gives an idea of the return generated by a
project.
-It does not take into account the initial outlay of
the project, which makes the NPV easier to
understand in comparison.
-It communicates the value that would be lost to
the company if it rejected the project.
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