.
1. Given the following cash flows for project A: C
0
= -2000, C
1
= +2000 , C
2
= +1500 and
C
3
= +5000, calculate the payback period.
A) One year
B) 2 years
C) 3 years
Answer : A
D) None of the above
2. The IRR is defined as:
A) The single discount rate that makes the NPV equal to zero
B) The difference between the cost of capital and the present value of the cash flows
C) The discount rate used in the NPV method
D) The discount rate used in the discounted payback period method
Answer: A
3. Given the following cash flows for Project M: C
0
= -2,000, C
1
= +500, C
2
= +1,500, C
3
=
+1455, calculate the IRR for the project.
A) 10%
B) 28%
C) 18%
D) None of the above
E) Any of the above
Answer : B
4. Project A has the following cash flows: C
0
= +100, C
1
= -120. The cost of capital is 18%.
Which of the following choices is right?
A) We should reject project A since its IRR is less than the cost of capital.
B) We should take project A since its IRR is larger than the cost of capital.
C) There is no enough information to make a decision about whether to take project A or not.
D) We should reject the project since its NPV is negative.
E) None of the above
Answer: D
It is a borrowing project.
5.
In the lecture, how many approaches are discussed to calculate the cash flows from operations?
A) one
B) two

C) three
D) None of the above
Answer: C
6. In Finance, depreciation is not actual cash flows but affects actual cash flows by
A) reducing a firm’s tax payment
B) increasing a firm’s tax payment
C) not changing a firm’s tax payment
D) None of the above
Answer: A
7. Net Working Capital (simply referred to as working capital) is the:
A) Difference between short-term assets and short term liabilities
B) Difference between long-term assets and long term liabilities
C) Difference between long-term assets and short term liabilities
D) None of the above
Answer: A
8. Net Working Capital should be considered in project cash flows because:
A) They are sunk costs
B) Firms must invest cash in short-term assets to produce finished goods
C) Firms need positive NPV projects for investment
D) None of the above
Answer: B
9. The principal short-term assets are:
A) Cash
B) Accounts receivable
C) Inventories
D) All of the above
E) None of the above
Answer: D
10 . Proper treatment of inflation in the NPV calculation involves:
A) Discounting nominal cash flows using the nominal discount rate
B) Discounting real cash flows using the real discount rate
C) Discounting nominal cash flows using the real discount rates
D) A and B
E) None of the above
Answer: D

Use the following to answer questions 11-13.
A new project will generate sales of $100 million, costs of $50 million, and depreciation expense of $30 million in the coming year. The firm’s tax rate is 50%.
11. What is the tax payment in the coming year?
A) $10 million
B) $20 million
C) $30 million
D) None of the above
Answer: A
12. What is the net profit (or net income or accounting profit) in the coming year ?
A) $10 million
B) $20 million
C) $30 million
D) None of the above
Answer: A
13. What is the cash flow (from operations) in the coming year?
A) $40 million
B) $30 million
C) $20 million
D) None of the above
Answer: A
Use the following to answer questions 14-20
Revenues generated by a new product are forecasted as follows:
1
2
3
Year Revenues
______________________________
$40,000
30,000
20,000

4 10,000 thereafter 0
_____________________________
Expenses are expected to be 20 percent of revenues in that year, and working capital required in each year is expected to be 10 percent of revenues in the following year. The product requires an immediate investment of $50,000 in plant and equipment. Suppose the plant and equipment are depreciated over-four years to a salvage value of zero using straight-line depreciation. The tax rate is 40%.
14. What is the initial (year 0) investment in working capital ?
A) 0
B) $4,000
C) $8,000
D) None of the above
Answer: B
15. What is the initial (year 0) total investment in product ?
A) $48,000
B) $58,000
C) $54,000
D) None of the above
Answer: C
16. What is depreciation in each year ?
A) $8,000
B) $10,000
C) $12,500
D) None of the above
Answer: C
17. What is the cash flow in year 1?
A) $28,000
B) $25,200
C) $21,400
D) None of the above
Answer: B
18. What is the cash flow in year 4 ?

A) $18,000
B) $10,600
C) $10,800
D) None of the above
Answer: C
19. What is the cash flow in year 5 ?
A) $800
B) 0
C) $1,000
D) None of the above
Answer: B
20. What is the cash flow in year 2 ?
A) $22,800
B) $20,400
C) $25,600
D) None of the above
Answer: B