07-credit-quiz-7

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Studocu is not sponsored or endorsed by any college or university 07 Credit Quiz 7 Overview of Corporate Finance (Athabasca University) Studocu is not sponsored or endorsed by any college or university 07 Credit Quiz 7 Overview of Corporate Finance (Athabasca University) Downloaded by Umaima Usman (umaimausman2k@gmail.com) lOMoARcPSD|3866758

Correct Mark 1.00 out of 1.00 Using a payback period rule tends to bias investors toward Reference: textbook page 303 The correct answer is: shorter-term investments. Select one: a. riskier investments. b. less risky investments. c. longer-term investments. d. shorter-term investments. e. lower return investments. Downloaded by Umaima Usman (umaimausman2k@gmail.com) lOMoARcPSD|3866758

Correct Mark 1.00 out of 1.00 Project Phoenix costs $1.25 million and yields annual cost savings of $300,000 for seven years. The assets involved in the project can be salvaged for $100,000 at the end of the project. Ignoring taxes, what is the payback period for Project Phoenix? Your answer is correct. CF0 = –$1,250,000 CF1 = $300,000 Ending Balance at time 1 = –$1,250,000 +$300,000 = –$950,000 CF2 = $300,000 Ending Balance at time 2 = –$950,000 + $300,000 = –$650,000 CF3 = $300,000 Ending Balance at time 3 = –$650,000 + $300,000 = –$350,000 CF4 = $300,000 Ending Balance at time 4 = –$350,000 + $300,000 = –$50,000 CF5 = $300,000 Ending Balance at time 5 = –$50,000 + $300,000 = $250,000 Payback occurs between time 4 and time 5. The fraction of year is 50,000 / 300,000 = 0.166666667 year x 12 months/year = 2 months Select one: a. 4 years b. 4 years and 1.7 months c. 4 years and 2 months d. 4 years and 3 months e. 5 years Downloaded by Umaima Usman (umaimausman2k@gmail.com) lOMoARcPSD|3866758

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Therefore, payback period = 4 years + 2 months. The correct answer is: 4 years and 2 months Downloaded by Umaima Usman (umaimausman2k@gmail.com) lOMoARcPSD|3866758

Correct Mark 1.00 out of 1.00 Fargo Inc. is considering a project that will require an initial investment of $1.5 million. The project will provide incremental cash inflows of $600,000 for the next five years. If the required return on the project is 15%, what is its discounted payback? If the company’s investment cutoff threshold is three years, should the project be given the go-ahead? CF0 = $1,500,000 CF1 = $600,000 PV(CF1) = $600,000 / 1.15 = $521,739.1304 Ending PV balance at time 1 = –$1,500,000 + $521,739.1304 = –$978,260.87 CF2 = $600,000 PV(CF2) = $600,000 / 1.15^2 = $453,686.2004 Ending PV balance at time 2 = –$978,260.87 + $453,686.2004 = –$524,574.669 CF3 = $600,000 PV(CF3) = $600,000 / 1.15^3 = $394,509.7395 Ending PV balance at time 3 = –$524,574.669 + $394,509.7395 = –$130,064.9297 CF4 = $600,000 PV(CF4) = $600,000 / 1.15^4 = $343,051.9474 Ending PV balance at time 4 = –$130,064.9297 + $343,051.9474 = $212,987.0177 Discounted payback occurs between time 3 and time 4. The fraction of year is calculated as $130,064.9297 / $343,051.9474 = 0.379140625 years x 12 months/year = 4.549687 months Select one: a. 3 years and 4.55 months; yes b. 3 years and 4.55 months; no c. 4 years and 11.55 months; yes d. 4 years and 11.55 months; no e. 5 years and 1 month; no Downloaded by Umaima Usman (umaimausman2k@gmail.com) lOMoARcPSD|3866758

Therefore, discounted payback period is 3 years + 4.55 months. Since the discounted payback is greater than the cutoff of 3 years, we would not go ahead with the project. The correct answer is: 3 years and 4.55 months; no Downloaded by Umaima Usman (umaimausman2k@gmail.com) lOMoARcPSD|3866758

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Correct Mark 1.00 out of 1.00 A project will generate the following cash flows. If the required rate of return is 15%, what is the project’s net present value? PV(CF1) = $15,000 / 1.15 = $13,043.47826 PV(CF2) = $16,000 / 1.15^2 = $12,098.29868 PV(CF3) = $17,000 / 1.15^3 = $11,177.77595 PV(CF4) = $18,000 / 1.15^4 = $10,291.55842 PV(CF5) = $19,000 / 1.15^5 = $9.446.357971 NPV = –$50,000 + $13,043.47826 + $12,098.29868 + $11,177.77595 + $10,291.55842 + Select one: a. $16,790.47 b. $6,057.47 c. $3,460.47 d. $1,487.21 e. –$3,072.47 Downloaded by Umaima Usman (umaimausman2k@gmail.com) lOMoARcPSD|3866758

$9,446.357971 = –$50,000 + $56,057.46928 = $6,057.46928 The correct answer is: $6,057.47 Downloaded by Umaima Usman (umaimausman2k@gmail.com) lOMoARcPSD|3866758

Incorrect Mark 0.00 out of 1.00 A project will generate the following cash flows. The required rate of return is 15%. If the profitability index is 1.7, what is the initial investment for this project? PV(All future cash flows) = ($15,000 / 1.15) + ($16,000 / 1.15^2) + ($17,000 / 1.15^3) + ($18,000 / 1.15^4) + ($19,000 / 1.15^5) = $13,043.47826 + $12,098.29868 + $11,177.77595 + $10,291.55842 + $9,446.357971 = $56,057.46928 PI = PV(All future cash flows) / Initial cash outflow => 1.7 = $56,057.46928 / Initial cash outflow Select one: a. $26,217.06 b. $31,460.47 c. $32,974.98 d. $37,752.57 e. $95,297.70 Downloaded by Umaima Usman (umaimausman2k@gmail.com) lOMoARcPSD|3866758

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=> Initial cash outflow = $56,057.46928 / 1.7 = $32,974.98193 The correct answer is: $32,974.98 Correct Mark 1.00 out of 1.00 Mr. Gallagher is considering replacing his five-year-old car with a new one. The new car will cost $30,000, taking into consideration the trade-in value of the old car. The new car will save Mr. Gallagher $5,000 per year in terms of gasoline, repairs, and maintenance. Mr. Gallagher plans to keep this new car for five years. At the end of five years, the car can be sold for $8,000. What is the internal rate of return on the new car? PV = –$30,000 PMT = $5,000 FV = $8,000 N = 5 Using financial calculator, solve for I/Y = 2.798145349% The correct answer is: 2.80% Select one: a. 1.40% b. 2.80% c. 5.00% d. 8.14% e. 9.43% Downloaded by Umaima Usman (umaimausman2k@gmail.com) lOMoARcPSD|3866758

Correct Mark 1.00 out of 1.00 A project will cost $20,000 today and yield cash inflows of $15,000 and $25,000 at the end of Year 1 and Year 2, respectively. At the end of Year 3, the project will require an additional clean-up cost of $5,000. The required rate of return for similar projects is 10%. What is the MIRR of this project if we use the discounting approach? CF0 = –$20,000 CF1 = $15,000 CF2 = $25,000 CF3 = –$5,000 r = 0.1 Discounting Approach: Modified Cash Flows: CF0 = –$20,000 – ($5,000 / 1.1^3) = –$23,756.574 CF1 = $15,000 CF2 = $25,000 CF3 = 0 Using a financial calculator, enter the modified cash flows, and compute the IRR. IRR = 38.90184893% The correct answer is: 38.90% Select one: a. 61.80% b. 48.03% c. 38.90% d. 26.67% e. 24.32% Downloaded by Umaima Usman (umaimausman2k@gmail.com) lOMoARcPSD|3866758

Correct Mark 1.00 out of 1.00 Which of the following is a disadvantage of the internal rate of return criterion? Reference: textbook page 322 The correct answer is: It may lead to incorrect decisions when comparing mutually exclusive investments . Correct Mark 1.00 out of 1.00 Which of the following investment criteria are commonly used by Canadian firms in their capital budgeting decisions? Reference: textbook page 321 The correct answer is: a, b, and c Select one: a. It is not a true rate of return. b. It uses an arbitrary benchmark cutoff rate. c. It ignores time value of money, cash flows, and market values. d. It cannot be used to rank independent projects. e. It may lead to incorrect decisions when comparing mutually exclusive investments . Select one: a. net present value b. internal rate of return c. payback period d. a and b only e. a, b, and c Downloaded by Umaima Usman (umaimausman2k@gmail.com) lOMoARcPSD|3866758

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Correct Mark 1.00 out of 1.00 refers to the situation in which different units in a company are allocated fixed amounts of money each year for capital spending. Reference: textbook page 323 The correct answer is: [Soft rationing] refers to the situation in which different units in a company are allocated fixed amounts of money each year for capital spending. ◄ Practice Quiz 7 L esson 8: Operating Cash Flows and Capital Investment Decisions ► Downloaded by Umaima Usman (umaimausman2k@gmail.com) lOMoARcPSD|3866758