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Fin 335 CH 11 - CHAPTER 11 THE BASICS OF CAPITAL...

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(Difficulty Levels: Easy, Easy/Medium, Medium, Medium/Hard, and Hard) PART I – New and Revised Carryover Problems and Questions Multiple Choice: Problems NPV (constant cash flows; 3 years) Answer: a EASY 1 . Thomson Electric Systems is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that a project's projected NPV can be negative, in which case it will be rejected. WACC = 10% Year: 0 1 2 3 Cash flows: -$1,000 $500 $500 $500 a. $243.43 b. $251.23 c. $268.91 d. $272.46 e. $289.53 NPV (constant cash flows; 4 years) Answer: c EASY 2 . Blanchford Enterprises is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that a project's projected NPV can be negative, in which case it will be rejected. WACC = 10% Year: 0 1 2 3 4 Cash flows: -$1,000 $475 $475 $475 $475 a. $482.16 b. $496.38 c. $505.69 d. $519.05 e. $524.72 Chapter 11: The Basics of Capital Budgeting Page 107 CHAPTER 11 THE BASICS OF CAPITAL BUDGETING
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NPV (constant cash flows; 5 years) Answer: e EASY 3 . Tapley Dental Associates is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that a project's projected NPV can be negative, in which case it will be rejected. WACC = 10% Year: 0 1 2 3 4 5 Cash flows: -$1,000 $300 $300 $300 $300 $300 a. $116.73 b. $123.15 c. $128.47 d. $131.96 e. $137.24 IRR (constant cash flows; 3 years) Answer: b EASY 4 . Blanchford Enterprises is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's projected IRR can be less than the WACC (and even negative), in which case it will be rejected. Year: 0 1 2 3 Cash flows: -$1,000 $450 $450 $450 a. 16.20% b. 16.65% c. 17.10% d. 17.55% e. 18.00% IRR (constant cash flows; 4 years) Answer: d EASY 5 . Blanchford Enterprises is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's projected IRR can be less than the WACC (and even negative), in which case it will be rejected. Year: 0 1 2 3 4 Cash flows: -$1,000 $400 $400 $400 $400 a. 17.76% b. 19.17% c. 20.56% d. 21.86% e. 23.01% Page 108 Chapter 11: The Basics of Capital Budgeting
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IRR (constant cash flows; 5 years) Answer: a EASY 6 . Smithfield Foods is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's projected IRR can be less than the WACC (and even negative), in which case it will be rejected. Year: 0 1 2 3 4 5 Cash flows: -$1,000 $350 $350 $350 $350 $350 a. 22.11% b. 22.74% c. 23.58% d. 24.14% e. 24.93% Payback (constant cash flows; 3 years) Answer: c EASY 7 . Blanchford Enterprises is considering a project that has the following cash flow data. What is the project's payback? Year: 0 1 2 3 Cash flows: -$1,000 $500 $500 $500 a. 1.50 years b. 1.75 years c. 2.00 years d. 2.25 years e. 2.50 years Payback (nonconstant cash flows; 5 years) Answer: e EASY/MEDIUM 8 . Tapley Dental Associates is considering a project that has the following cash flow data. What is the project's payback? Year: 0 1 2 3 4 5 Cash flows: -$1,000 $300 $310 $320 $330 $340 a. 2.11 years b. 2.50 years c. 2.71 years d. 3.05 years e. 3.21 years Chapter 11: The Basics of Capital Budgeting Page 109
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NPV (uneven cash flows; 3 years) Answer: a EASY/MEDIUM 9 . Edison Electric Systems is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that a project's projected NPV can be negative, in which case it will be rejected.
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