Midterm Solutions 2

Midterm Solutions 2 - 1 McGill University Faculty of...

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1 McGill University Faculty of Management Finance I (280-341) Mid-Term Examination - Part II Fall 2001 Instructor: Dr. Wajeeh Elali Date: Tuesday, October 30, 2001 Student Name: Student ID: Version A ***Suggested Solutions*** INSTRUCTIONS: This is a CLOSED BOOK examination. You are allowed TRANSLATION dictionaries ONLY. You are permitted noiseless, non-programmable CALCULATORS. You may use the opposite side of the paper for any rough work. This examination is worth 15% of your final mark. This examination consists of 15 questions on a total of 10 pages, including cover page. Please ensure that you have a complete examination paper before starting. Indicate your name and ID on the computer sheet. For each multiple choice question, choose ONLY ONE answer. No part marks will be awarded for incorrect answers. Good Luck! Honor Code In recognition and spirit of the Honor Code, I certify that I have not and will not receive or give aid on the examination and that I will report, to the best of my ability, all honor Code violations observed by me. Signed_________________________________________________ THIS EXAMINATION PAPER MUST BE RETURNED
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1. Which of the following statements is FALSE? a. The discount rate that gives a NPV of a zero is the project's IRR. b. The internal rate of return is the discount rate that equates the present value of the cash flows with the outflows. c. On mutually exclusive projects if the NPV method and IRR method give conflicting signals you should use the IRR to select the project. d. The NPV method assumes that cash flows will be reinvested at the cost of capital while the IRR method assume that they are reinvested at the IRR. Answer: c 2. Which of the following should be considered as an incremental cash flow when analyzing a proposed corporate investment? I. sunk costs II. changes in net working capital III. opportunity costs IV. Externalities a. I and III only b. II and IV only c. II, III, and IV only d. I, II, III, and IV Answer: c 3 . McGill Inc. is considering the following mutually exclusive projects: Year Project A Cash Flow Project B Cash Flow 0 -$5,000 -$5,000 1 200 3,000 2 800 3,000 3 3,000 800 4 5,000 200 At what discount rate (cost of capital) would the two projects have the same net present value (NPV)? a.
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This note was uploaded on 04/17/2008 for the course MGCR 341 taught by Professor Trainor during the Spring '08 term at McGill.

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Midterm Solutions 2 - 1 McGill University Faculty of...

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