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Finance for Non-Finance Professionals - Week 2 Quiz 1
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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