FNAN 301
Test bank problems – capital budgeting criteria
1. What is the NPV of project A if it has the following expected cash flows and the cost of capital for project A is
11%?
Years from today
0
1
2
3
4
Expected cash flow (in $)
-50,000
40,000
30,000
-10,000
20,000
2. Which assertion is true if a project has the following expected cash flows and the cost of capital for the project is
3.7%?
Years from today
0
1
2
3
Expected cash flow (in $)
-9,000
4,000
-7,000
6,500
A.
The NPV of the project is -$5,823.34 (plus or minus $10)
B.
The NPV of the project is -$5,500.00 (plus or minus $10)
C.
The NPV of the project is -$5,303.76 (plus or minus $10)
D.
The NPV of the project is not within $10 of any of the numbers cited in answers A, B, and C
E.
The NPV of the project can not be computed because the cash flows are not conventional
(Fall 2009, quiz 3, question 6)
(Summer C 2010, quiz 3, question 3)
3. The managers of Green Lizard Incorporated have evaluated 5 potential projects.
Based on the information
presented in the table, what is the maximum amount of value that the managers can create for the firm if they can
choose to undertake none, one, some, or all of the projects?
Project
Initial investment
(in $ millions)
Net present value
(in $ millions)
Payback
period
(in years)
Discounted
payback period
(in years)
Internal rate
of return
(in %)
Average
accounting
return
(in
%)
A
1.0
0.5
2.5
3.3
12.2
22.2
B
2.0
32.5
5.4
6.8
13.4
13.8
C
3.0
15.5
2.4
3.7
15.6
25.3
D
4.0
-2.5
4.2
∞
18.5
32.3
E
5.0
6.5
14.9
19.4
7.3
3.4
(Fall 2009, quiz 3, question 9)
4. The managers of Holey Donut Incorporated are evaluating 5 potential projects (A, B, C, D, and E).
Based on the
information presented in the 2 tables, what is the maximum amount of value that the managers can create for the
firm if they can choose to undertake none, one, some, or all of the 5 potential projects?
Project
Initial investment
(in $ millions)
Net present value
(in $ millions)
Payback
period
(in years)
Discounted
payback period
(in years)
Internal rate
of return
(in %)
Average
accounting
return
(in
%)
A
1.0
0.8
3.3
3.8
17.4
-3.5
B
3.0
26.4
2.7
5.7
11.4
16.2
C
4.0
12.2
1.2
3.7
21.2
37.2
D
6.0
-1.5
2.2
∞
8.3
19.1
Expected cash flows (number of years from today) in millions of dollars
Project
Cost of capital
0
1
2
3
4
E
10.0%
-5.0
1.1
2.2
3.3
4.4
(Spring 2010, quiz 4, question 1)
(Fall 2010, quiz 3, question 7)
5. Gonzaga Corporation is currently looking at an opportunity with conventional cash flows that would last for 3
years and have a discount rate of 10 percent.
The project would require an initial investment of $50,000, produce
expected cash flows of $18,000 in the first year, and produce expected cash flows of $26,000 in the second year.
What expected cash flow would need to be produced in the third year for this project to destroy $2,873.78 in value?
1