Multiple Choice

1. You have just purchased vacant lot for $8,000. After clearing it, you expect sell it for $12,000 two years from today. What is the net present value of this investment if you expected to earn a 12% return
a. $9,917.36
b. $2,909.09
c. $10,909.09
d. $1,566.33

2. What is the net present value of a project that required an initial investment of $11,600 and starting a year from now produce four annual payments of $3,000 each, followed by two annual payments of $2,600 each. When the periodic discount rate is 10%?
a. $992
b. $12,592
c. $15,636
d. $4,036

3. If the net present value of a project is positive, then which is following is true?
a. The present value of investment return exceeds the amount of the investment.
b. The present value of investment return is equal to amount of the investment.
c. The present value of the investment return is less than the amount of the investment.
d. More information is needed to solve the problem.

4. A firm should consider investing in a project. When its cost of capital is which of the following?
A. Greater than the IRR for the project.
B. Less than the IRR for the project.
C. Zero, but the net present value is positive.
D. This decision depends on the project itself.

5. What is the IRR on a project that cost $21,000 initially, and is followed by 12% cash flow of $3,000?
a. 9.00%
b. 6.75%
c. 22.29%
d. 10.25%

6. Which of the following items is not part of the capital budgeting process?
a. Forecasting cash flow
b. Developing an advertising campaign
c. Determining the present value of cash flow.
d. Estimating the cost of a project.

7. Which of the following items can significantly affect the project's evaluated in a company's capital project?
a. The timing of future cash flows.
b. Sales projections for the project.
c. The estimate for the total cost of the project
d. All of the above.

8. In making capital budgeting decisions for a corporation, you should look for projects with the highest profit to benefit which of the following?
a. You and your colleagues.
b. The accounting department
c. The CEO
d. The shareholders of the corporation.

9. Assume that you have an asset that requires an initial investment of $26,700. At the end of the first three years, it has cash inflow of $7,000. This is followed by cash outflow of $8,000 at the end of the fourth year for maintenance. Finally, there are cash inflows of $7,500 at the end of year 5 trough 8. Assuming a cost of capital of 8%, what is the net present value of this asset?
a. $29,832
b. $3,718
c. $14,678
d. $41,378

10. As a firm's cost of capital increases, which of the following is true of the net present value of the projects the firm evaluates?
a. It should decrease.
b. It should increase.
c. It should remain the same.
d. It depends on the payback period.

11. If the net present value of a project is negative, then which is following is true?
a. The present value of the investment return exceeds the amount of the investment.
b. The future value of the investment return is equal to the amount of the investment
c. The present value of the investment return is less than the amount of the investment
d. More information is needed to solve this problem.

12. Diversification provides no benefit when the two assets have which of the following correlation coefficients?
a. 1
b. 0
c. -1
d. None of the above.

13. Which of the following is a type of systematic, or nondiversitiable risk?
a. Increase in the cost of wheat
b. Union walkouts
c. Increase inflation
d. New product introduction to competitors.

14. Bet is a measure of which type of risk?
a. Non-systematic
b. Firm-specific
c. Diversifiable
d. Systematic

15. Which of the following statements correctly describes the benefit of diversifying your portfolio by owning more than one type of assets?
a. The expected return of the portfolio will be higher
b. Depending on the correlation between assets, the expected return will be higher.
c. Depending on the correlation between assets, the trade off of expected return to risk will be improved.

16. When does most of the effect of diversification happen?
a. when you buy both stock and bonds
b. when you have 100 or more securities
c. when going from one to five investments
d. When you invest in real estate.

17. what are the mean and the variance in the following series of numbers: 7,12,8,9,10,8
a. M=9,V=1.78
b. M=8 V=3.20
c. M=9, V=3.20
d. M=8, V=1.78

18. When diversifying investments, what should you strive for?
a. Mix of assets
b. To own investments that react differently to economic changes
c. To project yourself against future uncertainly.
d. All of the above.

19. Consider an asset that has an expected return of 12%, and the standard deviation of the expected return is 12%. What is the range of likely outcomes for the return 68% of the time?
a. 10-14%
b. 8-16%
c. 10-16%
d. 8-14%