Midterm 2 - Winter 2008

Midterm 2 - Winter 2008 - VERSION 1 MIME 310 ENGINEERING...

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VERSION 1 1 M I M E 3 1 0 E N G I N E E R I N G E C O N O M Y Class Test #2 – Wednesday, 26 March, 2008 – 90 minutes PRINT your family name / initial and record your student ID number in the spaces provided below. FAMILY NAME / INITIAL STUDENT ID # S O L U T I O N S This test consists of 22 multiple-choice questions. There are no penalties for in- correct answers. Circle the correct answers on this test paper and record them on the computer answer sheet. Multiple-choice Statements – Circle the correct answer on this paper and record it on the computer answer sheet. (3 points each for a total of 15) 1. Which one of the following statements is true? A) The NPV criterion assumes that cash flows are reinvested at the internal rate of return. B) The IRR criterion assumes that cash flows are reinvested at the NPV rate of return. C) The NPV criterion assumes that cash flows are reinvested at the discount rate used to determine the NPV. D) The IRR criterion assumes that cash flows are reinvested at the cost of capital. E) None of the statements given above is true. 2. The present value ratio (PVR) rule can be stated as: A) A project is acceptable if its PVR is greater than zero. B) A project is acceptable if its PVR is greater than one. C) A project is acceptable if its PVR is greater than the internal rate of return. D) A project is acceptable if its PVR is less than the net present value. E) None of the choices given above is acceptable. 3. When projects are mutually exclusive, A) they can only be accepted if capital funds are limited. B) the selection of one project excludes the selection of all others. C) the selection of one project is not affected by either the selection or rejection of another. D) the present value ratio should be used to rank the projects in order of acceptance. E) the firm can decide to proceed with as many projects as possible.
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VERSION 1 2 4. Project A has a higher IRR than that of project B. Both projects have normal cash flows (i.e. preproduction capital expenditures followed by positive production period cash flows). Given a cost of capital that is above the crossover rate (i.e. the discount rate at which the NPVs of the projects are equal), A) project A has the higher NPV. B) both projects have the same NPV. C) project B has the higher NPV. D) both projects have the same IRR at the crossover rate. E) None of the statements above is correct. 5. Which one of the following statements is true about the differences between long-term debt and common equity? A) Long-term debt is ownership in a firm but common equity is not. B) Creditors have voting power while stockholders do not. C) Periodic payments associated with either class of security are tax deductible for the is- suer. D) Interest payments on long-term debt are promised while dividend payments on com-
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Midterm 2 - Winter 2008 - VERSION 1 MIME 310 ENGINEERING...

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