IBH 2BB3
SAMPLE FINAL EXAM (Chapters 9 & 10 only)
FINAL EXAM will cover Chapters 1, 5, 6, 7, 9, 10, 13.
For sample Questions from Chapter 1 ,5, 6 see TERM TEST #1 sample exam
For sample Questions from Chapter 7 & 13 see TERM TEST #2 sample exam
CHAPTER 9
1) A project will produce cash inflows of $3,650 a year for four years. The start-up costs are
$15,000. In year five, the project will be closed and as a result should produce a cash inflow
of $7,500. What is the net present value of this project if the required rate of return is 11.5%?
A) $487.82
B) $501.09
C) $533.23
D) $556.07
E) $608.18
2) You are considering a project with an initial cost of $27,900. What is the payback period for
this project if the cash inflows are $14,650, $16,190, $12,480, and $9,500 a year over the
next four years, respectively?
A) 0.82 year
B) 0.90 year
C) 1.11 years
D) 1.82 years
E) 1.90 years
3) Generally, the most difficult part of utilizing the net present value concept is:
A) Determining the initial cash outflow required to start a project.
B) Computing the net present value once the discount rate and cash flows are
determined.
C) Determining whether the discount rate used is higher or lower than the internal rate of
return.
D) Estimating the future cash flows given the initial investment in the project.
E) Making the accept/reject decision once the net present value is computed.
Page 1 of 7
IBH 2BB3
SAMPLE FINAL EXAM (Chapters 9 & 10 only)
4) Which of the following is a correct statement?
A) The IRR is considered to be the most important project analysis technique.
B) The AAR is considered preferable to the PI.
C) Discounted payback analysis requires use of a discount rate.
D) It is reasonable to use IRR to analyze mutually exclusive investments.
E) Regular payback analysis is preferable to discounted payback analysis.
CHAPTER 10
5) Bi-Lo Traders is considering a project that will produce sales of $43,650 and have costs of
$25,100. Taxes will be $4,400 and the depreciation expense will be $2,575. An initial cash
outlay of $2,050 is required for net working capital. What is the project's operating cash
flow?
A) $9,525
B) $14,150
C) $16,725
D) $12,100
E) $11,575
6) Which of the following is the best definition for opportunity cost?
A) Depreciation method under Canadian tax law allowing for the accelerated write-off of
property under various classifications.
B) A cost that has already been incurred and cannot be removed and therefore should not
be considered in an investment decision.
C) Evaluation of a project based on the project's incremental cash flows.
D) Financial statements projecting future years' operations.
E) The most valuable alternative that is given up if a particular investment is undertaken.
Page 2 of 7
IBH 2BB3
SAMPLE FINAL EXAM (Chapters 9 & 10 only)
7) Which of the following is the best definition for stand-alone principle?
A) Depreciation method under Canadian tax law allowing for the accelerated write-off of
property under various classifications.
B) A cost that has already been incurred and cannot be removed and therefore should not
be considered in an investment decision.
C) Evaluation of a project based on the project's incremental cash flows.
D) Financial statements projecting future years' operations.
E) The most valuable alternative that is given up if a particular investment is undertaken.
8) Which of the following is NOT considered when estimating incremental cash flows of a
project?
A) Changes in variable costs of continuing projects
B) Changes in revenues of continuing projects
C) Revenues of proposed project
D) Changes in net working capital requirement
E) Interest expenses from debt issued to finance proposed project
Page 3 of 7
IBH 2BB3
SAMPLE FINAL EXAM (Chapters 9 & 10 only)
SOLUTIONS:
CHAPTER 9
1) A project will produce cash inflows of $3,650 a year for four years. The start-up costs are
$15,000. In year five, the project will be closed and as a result should produce a cash inflow
of $7,500. What is the net present value of this project if the required rate of return is 11.5%?
A) $487.82
B) $501.09
C) $533.23
D) $556.07**
E) $608.18
Step 1: PV of 4-year Annuity
PV of Annuity Formula
1
1−
(1 + r)t
PV = C [
]
r
Where C = 3650, t = 4, r = 0.115
PV = 11,204.09
Step 2: PV of year-5 cash flow
7500
PV =
= 4351.98
(1+0.115)5
Step 3: Net Present Value
NPV = -15000 + 11,204.09 + 4351.98 = 556.07
Page 4 of 7
IBH 2BB3
SAMPLE FINAL EXAM (Chapters 9 & 10 only)
2) You are considering a project with an initial cost of $27,900. What is the payback period for
this project if the cash inflows are $14,650, $16,190, $12,480, and $9,500 a year over the
next four years, respectively?
A) 0.82 year
B) 0.90 year
C) 1.11 years
D) 1.82 years**
E) 1.90 years
Initial Cost: $27,900
Cash Inflows:
Year 1: 14,650
Year 2: 16,190
Year 3: 12,480
Year 4: 9,500
Remaining Amount after year 1:
27900 – 14650 = 13250
Fraction of year 2:
13250/16190 = 0.818 = 0.82
Total payback period:
1+ 0.82 = 1.82 years
3) Generally, the most difficult part of utilizing the net present value concept is:
A) Determining the initial cash outflow required to start a project.
B) Computing the net present value once the discount rate and cash flows are
determined.
C) Determining whether the discount rate used is higher or lower than the internal rate of
return.
D) Estimating the future cash flows given the initial investment in the project.**
E) Making the accept/reject decision once the net present value is computed.
Page 5 of 7
IBH 2BB3
SAMPLE FINAL EXAM (Chapters 9 & 10 only)
4) Which of the following is a correct statement?
A) The IRR is considered to be the most important project analysis technique.
B) The AAR is considered preferable to the PI.
C) Discounted payback analysis requires use of a discount rate.**
D) It is reasonable to use IRR to analyze mutually exclusive investments.
E) Regular payback analysis is preferable to discounted payback analysis.
CHAPTER 10
5) Bi-Lo Traders is considering a project that will produce sales of $43,650 and have costs of
$25,100. Taxes will be $4,400 and the depreciation expense will be $2,575. An initial cash
outlay of $2,050 is required for net working capital. What is the project's operating cash
flow?
A) $9,525
B) $14,150**
C) $16,725
D) $12,100
E) $11,575
Top-Down Approach
OCF = Sales – Costs – Taxes
OCF = $43,650 − 25,100 − 4,400
OCF = $14,150
Page 6 of 7
IBH 2BB3
SAMPLE FINAL EXAM (Chapters 9 & 10 only)
6) Which of the following is the best definition for opportunity cost?
A) Depreciation method under Canadian tax law allowing for the accelerated write-off of
property under various classifications.
B) A cost that has already been incurred and cannot be removed and therefore should not
be considered in an investment decision.
C) Evaluation of a project based on the project's incremental cash flows.
D) Financial statements projecting future years' operations.
E) The most valuable alternative that is given up if a particular investment is
undertaken.**
7) Which of the following is the best definition for stand-alone principle?
A) Depreciation method under Canadian tax law allowing for the accelerated write-off of
property under various classifications.
B) A cost that has already been incurred and cannot be removed and therefore should not
be considered in an investment decision.
C) Evaluation of a project based on the project's incremental cash flows.**
D) Financial statements projecting future years' operations.
E) The most valuable alternative that is given up if a particular investment is undertaken.
8) Which of the following is NOT considered when estimating incremental cash flows of a
project?
A) Changes in variable costs of continuing projects
B) Changes in revenues of continuing projects
C) Revenues of proposed project
D) Changes in net working capital requirement
E) Interest expenses from debt issued to finance proposed project. **
Page 7 of 7