# Net Present Value and Question

SESSION 2 EXAMINATIONS NOVEMBER 2012

Unit Code and Name: AFIN252, Applied Financial Analysis and Management Time Allowed: 3 hours plus 10 minutes reading time. Total Number of Questions: 50 Multiple Choice Questions plus 8 full response questions. Instructions: 1. PART A (30 marks): There are 50 multiple choice questions. Answers to these must be recorded on a red-coloured General Purpose Answer Sheet which will be marked by a computer. Please make sure your name is on this sheet.

2. PART B (60 marks): There are 8 questions. Attempt all questions. Show all working. Write answers in the spaces provided.

Materials Allowed:

No dictionaries are permitted. A non-programmable calculator (no text retrieval capacity) is permitted. Financial calculators may be used. This is a closed book examination. No books, notes or formulae sheets are allowed.

Part B Question Out of Mark

1 6

2 6

3 7

4 11

5 9

6 6

7 6

8 9

Total 60

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PARTF1.20 A (30 Marks)

There are fifty (50) multiple choice questions, worth 0.6 marks each. Select the most correct answer for each question. Record your answers on the red-coloured computer sheet. Question 1 Which of the following statements is FALSE? A) In general, the difference between the cost of capital and the internal rate of return (IRR) is the maximum amount of estimation error in the cost of capital estimate that can exist without altering the original decision. B) The internal rate of return (IRR) can provide information on how sensitive your analysis is to errors in the estimate of your cost of capital. C) If you are unsure of your cost of capital estimate, it is important to determine how sensitive your analysis is to errors in this estimate. D) If the cost of capital estimate is more than the internal rate of return (IRR), the net present value (NPV) will be positive.

Question 2 If it is feasible to undertake a project irrespective of the decision concerning the acceptance of another, the two projects are said to be: A) independent. B) dependent. C) mutually exclusive. D) none of the above.

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Question 3 A lottery winner can take $6 million now or be paid $600,000 at the end of each of the next 16 years. The winner calculates the internal rate of return (IRR) of taking the money at the end of each year and, estimating that the discount rate across this period will be 6%, decides to take the money at the end of each year. Was her decision correct? A) Yes, because it agrees with the Net Present Value rule. B) Yes, because it agrees with the payback rule. C) Yes, because it agrees with both the Net Present Value rule and the payback rule. D) No, because it disagrees with the Net Present Value rule.

Question 4 Two mutually exclusive investment opportunities require an initial investment of $5 million. Investment A then generates $1.5 million per year in perpetuity, while investment B pays $1 million in the first year, with cash flows increasing by 3% per year after that. At what cost of capital would an investor regard both opportunities as being equivalent? A) 3% B) 6% C) 9% D) 10% E) 11%

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Question 5 A lawn maintenance company compares two ride-on mowers: the Excelsior, which has an expected working-life of six years, and the Grassassinator, which has a working life of four years. After examining the equivalent annual annuities of each mower, the company decides to purchase the Excelsior. Which of the following, if true, would be most likely to make them change that decision? A) Fuel prices are expected to rise and raise the annual running costs of all mowers. B) The mower is only expected to be needed for three years. C) The prices of equivalent mowers are expected to grow...

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