Exam 3

Question 1

The internal rate of return is the rate of interest that makes the rpesent value of a projects cash inflows

Answer 1

equal to the present value of its cash outflows

Question 2

Project A has a payback period of 8 years, while project b has a payback period of 7. The payback policy is 6 years. What proj should be accepted

Answer 2

Neither

Question 3

When the NPV and IRR rules produce conflicting investment decisions then how do you decide which to listen to?

Answer 3

NPV is superior

Question 4

Payback does not include the what in its analysis

Answer 4

-the time value of money
all of the projects cash flows
a measure of the change in shareholders wealth

Question 5

Which of the following capital budgeting techniques does not take into account the cost of capital?

Answer 5

payback period

Question 6

What technique ignores the time value of money

Answer 6

PBP

Question 7

The ___ the stand. dev, the ___ the investment

Answer 7

larger, risker

Question 8

The risk remaining after the extensive diversification is primarily

Answer 8

systematic risk

Question 9

the risk that diversification cannot eliminate are (4)

Answer 9

interest rate risk
risk due to recession
inflation risk
systematic risk

Question 10

The value in the best alternative use and its included in capital budgeting analysis

Answer 10

opportunity cost

Question 11

What are the basic principal for estimating a proj cash flows

Answer 11

1. Project cash flows are incremental
2. Sunk costs are irrelevant to decision making
3. Opportunity Costs are relevant
4. Consider/add back depretiation

Question 12

Truman University is thinking of opening an evening college. In figuring the cost of such a project, a figure is provided for the lighting of the parking lots. It’s pointed out by the university’s finance officer that a city ordinance requires that the parking lots be lighted whether there is an evening college in session or not. Lighting expenses are an ex of….

Answer 12

sunk costs

Question 13

Costs that have already been spent and are ignored

Answer 13

sunk costs

Question 14

What is a noncash expense that is not followed by cash outflows

Answer 14

depretiation

Question 15

What are the two steps in capital budgeting?

Answer 15

Estimating proj cash flows

Evaluating the proj using NPV, IRR, PBP

Question 16

how is return measured?

Answer 16

by expected return

Question 17

How is risk measured

Answer 17

by standard deviation

Question 18

General risk/market risk; common for everystock; equally affects all stocks

Answer 18

systematic risk

Question 19

What type of risk are the following

recession, war, inflation

Answer 19

systematic

Question 20

risk that is specific to a company

Answer 20

unsystematic risk

Question 21

What type of risk is the following
labor strike
corruption
death of a CEO

Answer 21

unsystematic

Question 22

A diversified investor can eliminate what kind of risk?

Answer 22

unsystematic risk but not systematic

Question 23

What does beta measure

Answer 23

market risk

Question 24

The minimum rate you require on investing for the level of risk you take

Answer 24

REQUIRED RATE OF RETURN; USE CAPM

Question 25

The rate you expect to earn from investing

Answer 25

expected rate of return

Question 26

You should buy a stock when

Answer 26

if ex return > required----- stock is underpriced

Question 27

What is the easiest capital budgeting technique to use and understand; this method measures the # of years and months it takes to get back ur investment

Answer 27

pbp

Question 28

When do u acct PBP?

Answer 28

st: accep if calculated PBP is less than policy PBP me: accept the lower PBP

Question 29

What is the capital budgeting technique that takes the diff b/w the pv of cash inflows and pv of cash outflows; measures how much value is created by proj

Answer 29

NPV

Question 30

When do u accept NPV

Answer 30

st: accept if positive NPV me: chose higher NPV

Question 31

When do you accept IRR

Answer 31

st: accpt if IRR>cost of capital me: the higher the IRR the better

Question 32

What is the capital budgeting technique that shows the ratios of pv of inflows to pv of outflows

Answer 32

PI

Question 33

When do u accept PI

Answer 33

st: accept if PI>1 me: higher the PI the better

Question 34

What are discounted cash flow techniques?

Answer 34

NPV. IRR, PI

Question 35

If NPV is pos, PI will be

Answer 35

PI>1

Question 36

If NPV is =0, PI will be

Answer 36

PI=1

Question 37

If NPV pos, IRR will be

Answer 37

IRR> cost of capital

Question 38

Two steps of capital budgeting

Answer 38

estimating proj cash flows | evaluating the proj- IRR, NPV, PBP