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March 25, 2021 00:51
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Finance for Non-Finance Professionals - Week 2 Quiz 1
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Which project would you select based on NPVs assuming the same 7% discount rate for both? Project A requires an initial outlay of $500 and provides an annual income of $600 for 3 years. Project B requires an initial outlay of $400 and yields an annual income of $700 for 3 years. | |
1 / 1 point | |
Project A | |
#### Project B | |
Correct | |
Project A NPV = 600/(1+7%) + 600/(1+7%)^2 + 600/(1+7%)^3 -500 = 1,075 | |
Project B NPV = 700/(1+7%) + 700/(1+7%)^2 + 700/(1+7%)^3 -400 = 1,437 | |
2. | |
Question 2 | |
Compare the two projects described directly above. Which one would you pick based on their payback periods? | |
1 / 1 point | |
Project A | |
#### Project B | |
Correct | |
Project A has a payback period of 500/600 = 0.83 years (10 months) | |
Project B has a payback period of 400/700 = 0.57 years (7 months) | |
3. | |
Question 3 | |
What would happen to a project’s NPV with a decrease in initial | |
investment? | |
1 / 1 point | |
#### NPV increases | |
NPV decreases | |
NPV remains constant | |
Correct | |
Initial investment is subtracted from the NPV. | |
4. | |
Question 4 | |
What would happen to a project’s NPV if the estimated cash inflows are expected sooner? | |
1 / 1 point | |
#### NPV increases | |
NPV decreases | |
NPV remains constant | |
Correct | |
Cash flows further in the future are slammed down more by discounting. | |
5. | |
Question 5 | |
You are evaluating an investment that requires $5,000 upfront and pays $80 at the end of each of the first 4 years and an additional lump-sum of $12,000 at the end of year 4. What would happen to the IRR if the annual payments at the end of each of the first 4 years go up from $80 to $90? | |
1 / 1 point | |
#### IRR increases | |
IRR decreases | |
IRR remains constant | |
Correct | |
IRR has to increase to account for the rise in annual payments so that the NPV is still 0. | |
6. | |
Question 6 | |
Assuming everything else remains the same in the prior question, what would happen to the IRR if the initial investment decreases from $5,000 to $4,000? | |
1 / 1 point | |
#### IRR increases | |
IRR decreases | |
IRR remains the constant | |
Correct | |
IRR increases because a decrease in the initial investment means the project is more attractive. | |
7. | |
Question 7 | |
You are using ROI to evaluate a project that requires investments of $800 in each of the first 4 years, and yields annual income of $200, $150, $100, and $75 in each of the first 4 years. What would happen to ROI if the annual incomes are halved? | |
1 / 1 point | |
#### ROI halves | |
ROI remains constant | |
ROI doubles | |
Correct | |
Average profit halves, therefore ROI halves. | |
8. | |
Question 8 | |
An initial investment of $1,500 has cash flows of $900 in year 1 and $750 in year 2. Using NPV, do you invest in this project with a discount rate of 10%? | |
1 / 1 point | |
yes | |
#### no | |
Correct | |
-1500+(900/1.1) + (750/1.1^2) = -62 => NPV less than zero, don’t do project | |
9. | |
Question 9 | |
An initial investment of $20,000 has a cash inflow of $50,000 in year 1 and a cash outflow of $10,000 in year 2. The firm has a cost of capital of 15%. Calculate the IRR for this project. Should the firm accept or reject the project? | |
1 / 1 point | |
#### Accept | |
Reject | |
Correct | |
-20,000 + (50,000/(1+IRR) | |
1 | |
1 | |
) – (10,000/(1+IRR) | |
2 | |
2 | |
) = 0 | |
Solving for IRR => -78%, 128% | |
Since only non-negative discount rates are possible, IRR = 128% | |
Since the firm’s cost of capital is below 128%, the firm should take the project. | |
10. | |
Question 10 | |
Assume an investment costing $24,869 will earn $10,000 a year for ten years. If the discount rate is 10%, what is the NPV of this project? | |
1 / 1 point | |
$13,685 | |
#### $36,577 | |
$61,446 | |
Correct | |
-24869+(10000/0.1)*(1-(1/1.1 | |
10 | |
10 | |
)) = $36,577 |
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