What is the net present value’s assumption about how cash flows are re-invested?

Finance/Math questions



66) Northwest Industries is considering a project with the following cash flows:

Initial Outlay = $2,800,000

After-tax operating cash flows for years 1-4 = $850,000 per year

Additional after-tax terminal cash flow at end of Year 4 = $125,000

Compute the net present value of this project if the company’s discount rate

is 14%.

a. $239,209

b. $725,000

c. -$138,561

d. -$249,335

67) Compute the payback period for a project with the following cash flows re

ceived uniformly within each year:

Initial Outlay = $100

Cash Flows: Year 1 = $40

Year 2 = $50

Year 3 = $60

a. 2.17 years

b. 3 years

c. 4 years

d. 3.17 years


Final Examination

Introduction to Financial Management

68) What is the net present value’s assumption about how cash flows are re-invested?

a. They are reinvested at the IRR.

b. They are reinvested only at the end of the project.

c. They are reinvested at the APR.

d. They are reinvested at the firm’s discount rate.

69) Your firm is considering an investment that will cost $750,000 today. The

investment will produce cash flows of $250,000 in year 1, $300,000 in

years 2 through 4, and $100,000 in year 5. The discount rate that your firm

uses for projects of this type is 13.25%. What is the investment’s profitability


a. 1.4

b. 1.6

c. 1.2

d. .2

70) If the NPV (Net Present Value) of a project with multiple sign reversals is

positive, then the project’s required rate of return ________ its calculated IRR

(Internal Rate of Return).

a. must be greater than

b. could be greater or less than

c. must be less than

d. Cannot be determined without actual cash flows.

71) Determine the five-year equivalent annual annuity of the following project if

the appropriate discount rate is 16%:

Initial Outflow = $150,000

Cash Flow Year 1 = $40,000

Cash Flow Year 2 = $90,000

Cash Flow Year 3 = $60,000

Cash Flow Year 4 = $0

Cash Flow Year 5 = $80,000

a. $8,520

b. $7,058

c. $9,872

d. $9,454

Final Examination


Introduction to Financial Management

72) Your company is considering the replacement of an old delivery van with a

new one that is more efficient. The old van cost $30,000 when it was

purchased 5 years ago. The old van is being depreciated using the simplified straight-line method over a useful life of 10 years. The old van could be

sold today for $5,000. The new van has an invoice price of $75,000, and it

will cost $5,000 to modify the van to carry the company’s products. Cost

savings from use of the new van are expected to be $22,000 per year for

5 years, at which time the van will be sold for its estimated salvage value

of $15,000. The new van will be depreciated using the simplified straightline method over its 5-year useful life. The company’s tax rate is 35%. Working capital is expected to increase by $3,000 at the inception of the project,

but this amount will be recaptured at the end of year five. What is the incremental free cash flow for year one?

a. $22,250

b. $18,850

c. $21,305

d. $19,900

73) The recapture of net working capital at the end of a project will

a. increase terminal year free cash flow by the change in net working capital

times the corporate tax rate.

b. increase terminal year free cash flow.

c. decrease terminal year free cash flow by the change in net working capital

times the corporate tax rate.

d. have no effect on the terminal year free cash flow because the net working

capital change has already been included in a prior year.

74) A new machine can be purchased for $1,000,000. It will cost $65,000 to

ship and $35,000 to modify the machine. A $30,000 recently completed

feasibility study indicated that the firm can employ an existing factory owned

by the firm, which would have otherwise been sold for $150,000. The firm

will borrow $750,000 to finance the acquisition. Total interest expense for

5-years is expected to approximate $250,000. What is the investment cost of

the machine for capital budgeting purposes?

a. $2,030,000

b. $1,530,000

c. $1,100,000

d. $1,250,000

e. $1,280,000


Final Examination

Introduction to Financial Management

75) PDF Corp. needs to replace an old lathe with a new, more efficient model.

The old lathe was purchased for $50,000 nine years ago and has a current

book value of $5,000. (The old machine is being depreciated on a straightline basis over a ten-year useful life.) The new lathe costs $100,000. It will

cost the company $10,000 to get the new lathe to the factory and get it

installed. The old machine will be sold as scrap metal for $2,000. The new

machine is also being depreciated on a straight-line basis over ten years.

Sales are expected to increase by $8,000 per year while operating expenses

are expected to decrease by $12,000 per year. PDF’s marginal tax rate is

40%. Additional working capital of $3,000 is required to maintain the new

machine and higher sales level. The new lathe is expected to be sold for

$5,000 at the end of the project’s ten-year life. What is the project’s terminal

cash flow?

a. $8,000

b. $6,000

c. $5,000

d. $3,000

76) Advantages of using simulation include:

a. a range of possible outcomes presented.

b. is good only for single period investments since discounting is not possible.

c. adjustment for risk in the resulting distribution of net present values.

d. graphically displays all possible outcomes of the investment.

77) A company has preferred stock that can be sold for $28 per share. The preferred stock pays an annual dividend of 5% based on a par value of $100.

Flotation costs associated with the sale of preferred stock equal $1.50 per

share. The company’s marginal tax rate is 35%. Therefore, the cost of preferred stock is:

a. 18.87%

b. 17.86%

c. 11.61%

d. 12.26%

78) Which of the following differentiates the cost of retained earnings from the

cost of newly-issued common stock?

a. The flotation costs incurred when issuing new securities.

b. The greater marginal tax rate faced by the now-larger firm.

c. The larger dividends paid to the new common stockholders.

d. The cost of the pre-emptive rights held by existing shareholders.

Final Examination


Introduction to Financial Management

79) General Bill’s will issue preferred stock to finance a new artillery line. The

firm’s existing preferred stock pays a dividend of $4.00 per share and is selling for $40 per share. Investment bankers have advised General Bill that

flotation costs on the new preferred issue would be 5% of the selling price.

The General’s marginal tax rate is 30%. What is the relevant cost of new

preferred stock?

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