CF D1 Revision

Assuming a risk free rate of 4% and expected average long-run inflation rate of 3%, what is the present value of a fixed perpetuity that pays $10,000/year, assuming the first payment is due in exactly one year and a discount rate of 8%?

• $100,000

• $125,000

• $333,333

• $250,000

How is the internal rate of return (IRR) of a project defined when it is used in capital budgeting decisions?

• The total rate of return on an investment project based on the projected net cash flows

• The dollar amount by which the project's total cash flows exceed the initial investment in the project

• The net present value of an investment project's projected cash flows

• The discount rate that equated the present value of the project's projected cash flows to the amount initially invested in the project 

when using Payback Period to assess the attractiveness of different investment projects, aside from projects' cash flow projections, the relative risk is only measured by

• discount rate that reflects the projects opportunity cost of capital.

• amount of time it takes to receive net cash flows equal to the initial investment

• equity risk premium added to the risk-free rate used to discount project cash flows

• amount of time it takes to receive cash flow with a present value equal the initial investment.

You own a portfolio of composed (by market value) of 60% stocks and 40% bonds. The expected return on your stocks is 15%. The expected return on your bonds is 5%.

What is the expected return portfolio?

• 9%

• 10%

• 11%

• 12%

Calculate the internal rate of return (IRR) for a project that requires a one-time immediate investment of $500,000, is expected to generate annual net revenues of $90,000 annually for the nest ten years (assume the cash flow are realized at each year' end), and its materials will be sold for a scrap value of $50,000 at the end of the project's 10-year life.

• 8.57%

• 12.41%

• 13.15%

• 18%

To evaluate the relative attractiveness of different potential investment projects, which of the following factors are advantages of using Net Present Value (NPV) over internal Rate of Return (IRR)?

i) Ability to effectively incorporate future periods with negative cash flows   

ii) accuracy of cash flow projections

iii) adjusts for the time value of money   

iv) explicit adjustment for riskiness of project

• II only

• I and IV only

• III and IV only

• I, II, III, and IV

You can conclude that the long term growth is the same as the rate of discount in a perpetuity whenever:

(hint : PV perp = CF1 / ( k - g) )

• Perpetuity has an infinite value

• Perpetuity is equal to zero

• Perpetuity has a bigger value that the in the frontal years

• ROE is higher than the retention ratio

Calculate the net present value of a project that requires a one time immediate investment of $1,000,000, is expected to generate annual net revenues of $150,000 for the next ten years (assume the cash flows are realized at each year's end) and its material will be sold for a scrap value of $100,000 at the end of the project life. Assume the discount rate of 10.30%.

• ($39,796)

• $4,890

• ($52,832)

• $104,372

The Modified Internal Rate of Return (MIRR) for a project is 

• The annualized rate of return over the project's life

• The annualized rate of return over the project's life if all cash flows are reinvestment at an appropriate cost of capital from receipt until the end of the project's forecasted useful life

• The annualized rate of return over the project's life if all cash flows are reinvestment at the risk free rate  from receipt until the end of the project's forecasted useful life

• The annualized rate of return over the project's life if all cash flows are reinvestment at a rate of return equal to the project's IRR from receipt until the end of the project's forecasted useful life

Which of the following are weakness of using Payback (payback period) method in capital budgeting

• a. Difficult to understand

• b. lack of explicit adjustment for project risk

• c. Riskier due to the relatively short term focus

• B and C