Finance Questions
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Solution Summary
This solution include responses to a set of multiple choice questions related to capital budgeting, NPV, IRR, Payback Method, expected value, risks and the European Monetary Union.
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In order to help you with this posting, I will first look at the 10 multiple choice questions, and then look at the two questions that follow.
As it relates to question 1, risk is usually measured as the variability of outcomes among or around a set of expected values - and it is also referred to as the standard deviation.
For question 2, the net present value assumes returns are reinvested at the cost of capital.
In question 3, if projects are mutually exclusive, the selection of one alternative precludes the selection of other alternatives.
For question 4, the European Monetary Union (EMU) which came into effect in January of 1999 includes the establishment of a new European Central Bank to coordinate monetary policy for the Euro-zone countries. Note that Britain has still not started to use the Euro currency.
As it relates to question 5, remember the internal rate of return usually equates to the discount rate which when used to discount the cash flows over the 8 years, and the total is subtracted from the initial investment, the net cash flow turns out to be zero. Hence, you may first try the discount factors for 10% and 11% and see which one give a net cash flow equal to zero.
By using 10% the following results are obtained:
Initial Investment $5,535
Year Discount Factor Cash flow Discounted Cash flow
1 0.909 $1,000 $909
2 0.826 1,000 826
3 0.751 ...
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