FIN 303 Samples of Possible Exam Questions (for Chapter 11)
1.)
Thomson Electric Systems is considering a project that has the
following cash flow and WACC data. What is the project's NPV? Note
that a project's projected NPV can be negative, in which case it
will be rejected.
WACC = 10%
Year:
Cash flows:
a.
b.
c.
d.
e.
0
-$1,000
1
$500
2
$500
3
$500
$243.43
$251.23
$268.91
$272.46
$289.53
Correct answer: a.
2.)
Blanchford Enterprises is considering a project that has the
following cash flow data. What is the project's IRR? Note that a
project's projected IRR can be less than the WACC (and even
negative), in which case it will be rejected.
Year:
Cash flows:
a.
b.
c.
d.
e.
0
-$1,000
1
$450
2
$450
3
$450
16.20%
16.65%
17.10%
17.55%
18.00%
Correct answer: b.
3.)
Tapley Dental Associates is considering a project that has the
following cash flow data. What is the project's payback?
Year:
Cash flows:
a.
b.
c.
d.
e.
2.11
2.50
2.71
3.05
3.21
0
-$1,000
years
years
years
years
years
Correct answer: e.
1
$300
2
$310
3
$320
4
$330
5
$340
4.)
Edison Electric Systems is considering a project that has the
following cash flow and WACC data. What is the project's NPV? Note
that a project's projected NPV can be negative, in which case it
will be rejected.
WACC = 10%
Year:
Cash flows:
a.
b.
c.
d.
e.
0
-$1,000
1
$450
2
$460
3
$470
$142.37
$151.59
$166.51
$173.26
$189.94
Correct answer: a.
5.)
Edison Electric Systems is considering a project that has the
following cash flow data. What is the project's IRR? Note that a
project's projected IRR can be less than the WACC (and even
negative), in which case it will be rejected.
Year:
Cash flows:
a.
b.
c.
d.
e.
0
-$1,000
1
$450
2
$470
3
$490
16.73%
17.44%
18.89%
19.05%
20.37%
Correct answer: d.
6.) Blanchford Enterprises is considering a project that has the
following cash flow and WACC data. What is the project's discounted
payback?
WACC = 10%
Year:
Cash flows:
a.
b.
c.
d.
e.
2.01
2.35
2.65
2.84
3.17
0
-$1,000
years
years
years
years
years
Correct answer: b.
1
$500
2
$500
3
$500
7.)
Two mutually exclusive projects have the following projected cash
flows:
Year
0
1
2
3
4
5
Project A
Cash Flow
-$50,000
15,625
15,625
15,625
15,625
15,625
Project B
Cash Flow
-$50,000
0
0
0
0
99,500
If the required rate of return on these projects is 10%, which would
be chosen and why?
a.
b.
c.
d.
e.
f.
Project B because it has the higher NPV.
Project B because it has the higher IRR.
Project A because it has the higher NPV.
Project A because it has the higher IRR.
Neither, because both have IRRs less than the cost of capital.
Both, because each has an NPV greater than 0.
Correct answer: a.
8.)
Two independent projects have the following projected cash flows:
Year
0
1
2
3
4
5
Project A
Cash Flow
-$50,000
15,625
15,625
15,625
15,625
15,625
Project B
Cash Flow
-$50,000
0
0
0
0
99,500
If the required rate of return on these projects is 10%, which would
be chosen and why?
a.
b.
c.
d.
e.
f.
Project B because it has the higher NPV.
Project B because it has the higher IRR.
Project A because it has the higher NPV.
Project A because it has the higher IRR.
Neither, because both have IRRs less than the cost of capital.
Both, because each has an NPV greater than 0.
Correct answer: f.