NPV (Constant Cash Flows; 3 Years)

FIN 303 Samples of Possible Exam Questions (for Chapter 11)

1.) Thomson Electric Systems is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that a project's projected NPV can be negative, in which case it will be rejected.

WACC = 10%

Year: 0 1 2 3 Cash flows: -$1,000 $500 $500 $500

a. $243.43 b. $251.23 c. $268.91 d. $272.46 e. $289.53

Correct answer: a.

2.) Blanchford Enterprises is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's projected IRR can be less than the WACC (and even negative), in which case it will be rejected.

Year: 0 1 2 3 Cash flows: -$1,000 $450 $450 $450

a. 16.20% b. 16.65% c. 17.10% d. 17.55% e. 18.00%

Correct answer: b.

3.) Tapley Dental Associates is considering a project that has the following cash flow data. What is the project's payback?

Year: 0 1 2 3 4 5 Cash flows: -$1,000 $300 $310 $320 $330 $340

a. 2.11 years b. 2.50 years c. 2.71 years d. 3.05 years e. 3.21 years

Correct answer: e. 4.) Edison Electric Systems is considering a project that has the following cash flow and WACC data. What is the project's NPV? Note that a project's projected NPV can be negative, in which case it will be rejected.

WACC = 10%

Year: 0 1 2 3 Cash flows: -$1,000 $450 $460 $470

a. $142.37 b. $151.59 c. $166.51 d. $173.26 e. $189.94

Correct answer: a.

5.) Edison Electric Systems is considering a project that has the following cash flow data. What is the project's IRR? Note that a project's projected IRR can be less than the WACC (and even negative), in which case it will be rejected.

Year: 0 1 2 3 Cash flows: -$1,000 $450 $470 $490

a. 16.73% b. 17.44% c. 18.89% d. 19.05% e. 20.37%

Correct answer: d.

6.)Blanchford Enterprises is considering a project that has the following cash flow and WACC data. What is the project's discounted payback?

WACC = 10%

Year: 0 1 2 3 Cash flows: -$1,000 $500 $500 $500

a. 2.01 years b. 2.35 years c. 2.65 years d. 2.84 years e. 3.17 years

Correct answer: b. 7.) Two mutually exclusive projects have the following projected cash flows:

Project A Project B Year Cash Flow Cash Flow 0 -$50,000 -$50,000 1 15,625 0 2 15,625 0 3 15,625 0 4 15,625 0 5 15,625 99,500

If the required rate of return on these projects is 10%, which would be chosen and why?

a. Project B because it has the higher NPV. b. Project B because it has the higher IRR. c. Project A because it has the higher NPV. d. Project A because it has the higher IRR. e. Neither, because both have IRRs less than the cost of capital. f. Both, because each has an NPV greater than 0.

Correct answer: a.

8.) Two independent projects have the following projected cash flows:

Project A Project B Year Cash Flow Cash Flow 0 -$50,000 -$50,000 1 15,625 0 2 15,625 0 3 15,625 0 4 15,625 0 5 15,625 99,500

If the required rate of return on these projects is 10%, which would be chosen and why?

a. Project B because it has the higher NPV. b. Project B because it has the higher IRR. c. Project A because it has the higher NPV. d. Project A because it has the higher IRR. e. Neither, because both have IRRs less than the cost of capital. f. Both, because each has an NPV greater than 0.

Correct answer: f.