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Question;Corporate;Finance: The Core;(Berk/DeMarzo);Chapter 6- Investment;Decision Rules;Use the information for the question(s);below.;Boulderado has come up with a new;composite snowboard. Development will;take Boulderado four years and cost $250,000 per year, with the first of the;four equal investments payable today upon acceptance of the project. Once in production the snowboard is expected;to produce annual cash flows of $200,000 each year for 10 years. Boulderado's discount rate is 10%.;1);The NPV for Boulderado's snowboard project;is closest to;A);$228,900;B);$46,900;C);$51,600;D);$23,800;A;6.2 Alternative Decision Rules;2);Which of the following statements is;false?;A);It is possible that an IRR does not exist;for an investment opportunity.;B);If the payback period is less than a pre-specified length of time you accept the project;C);The internal rate of return (IRR);investment rule is based upon the notion that if the return on other;alternatives is greater than the return;on the investment opportunity you should undertake the investment opportunity.;D);It is possible that there is no discount;rate that will set the NPV equal to zero.;3);Which of the following statements is;false?;A);The payback investment rule is based on;the notion that an opportunity that pays back its initial investments quickly;is a good idea.;B);An IRR will always exist for an investment;opportunity.;C);A NPV will always exist for an investment;opportunity.;D);In general, there can be as many IRRs as;the number of times the project's cash flows change sign over time.;4);Which of the following statements is;false?;A);The IRR investment rule states you should;turn down any investment opportunity where the IRR is less than the opportunity;cost of capital.;B);The IRR investment rule states that you;should take any investment opportunity where the IRR exceeds the opportunity;cost of capital.;C);Since the IRR rule is based upon the rate;at which the NPV equals zero, like the NPV decision rule, the IRR decision rule;will always identify the correct investment decisions.;D);There are situations in which multiple;IRRs exist.;5);Which of the following statements is;false?;A);In general, the IRR rule works for a stand-alone project if all of the project's positive cash flows precede;its negative cash flows.;B);There is no easy fix for the IRR rule when;there are multiple IRRs.;C);The payback rule is primarily used because;of its simplicity.;D);No investment rule that ignores the set of;alternative investment alternatives can be optimal.;6);Which of the following statements is;false?;A);The payback rule is useful in cases where;the cost of making an incorrect decision might not be large enough to justify;the time required for calculating the NPV.;B);The payback rule is reliable because it;considers the time value of money and depends on the cost of capital.;C);For most investment opportunities expenses;occur initially and cash is received later.;D);Fifty percent of firms surveyed reported;using the payback rule for making decisions.;Use the table for the question(s);below.;Consider the following two projects;Project;Year 0;Cash Flow;Year 1;Cash Flow;Year 2;Cash Flow;Year 3;Cash Flow;Year 4;Cash Flow;Discount Rate;A;-100;40;50;60;N/A;.15;B;-73;30;30;30;30;.15;7);The payback period for project A is;closest to;A);2.0 years;B);2.4 years;C);2.5 years;D);2.2 years;8);The payback period for project B is;closest to;A);2.5 years;B);2.0 years;C);2.2 years;D);2.4 years;9);Which of the following statements is;correct?;A);You should accept project A since its IRR> 15%;B);You should reject project B since its NPV> 0;C);Your should accept project A since its NPV;< 0;D);You should accept project B since its IRR< 15%


Paper#62446 | Written in 18-Jul-2015

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