Question

1. If the United State government has to pay a slightly higher rate on its debt the risk free rate will?

A. Rise greatly

c. increase at risk coefficient

B. Stay the same

D. decrease slightly

E. none of the above

2. If the IRR is 4.20% and NPV =0 and the discounted cash flows are as follows year 1) 100,000 year 2) 135,000 and year 3) 175,000.00 what are the initial costs?

A. 410,000.00

C. 1

E. none of the above

B. 4.20%

D. cannot calculate

3. If your project choices are limited by available resources. You have a budget of 750,000.00 and can chose from the following projects:

Project A: Cost 200,000.00 NPV $30,000 IRR 8%

Project B: Cost 690,000.00 NPV $90,000 IRR13%

Project C: Cost 535,000.00 NPV $73,000 IRR 14%

Project D: Cost 55,000.00 NPV $13,500 IRR 40%

Which do you choose?

A. B&D

C. A,B, & C

E. All of the above

B. C &D

D. A& C

4. The way we deal with systematic risk is:

A. Diversify

C. Raise the risk free rate

E. None of the above

B. Receive a risk premium

D. Lower the risk free rate

Answer 1

1) Ans. C

2) NPV is zero when the value of discounted future cash flows (at IRR) is equal to the initial cost. Let X be the initial cost. Here discounted cash flows are given. Value of discounted cash flows = 100000 + 135000 + 175000 = $410,000. So, the initial cost is 410,000. Ans: Option A

3) We should choose projects such that the NPV is maximized and the budget is maintained. The combination which fulfills the above criteria is B&D. Total NPV is $103,500. Ans: Option A

4) option B. Receive a risk premium