Question

Question 36

In a corporate structure with shareholders, managers, and a board of directors:

Select one:

a. shareholders are agents

b. directors are agents

c. in principle, the board of directors works on behalf of the shareholders

d. managers are principals

e. shareholders are generally both principals and agents

Question 37

A project costs $525 and has cash flows of $110 for the first three years and $75 in each of the project's last five years. What is the payback period of the project?

Select one:

a. The project never pays back

b. 5.00 years

c. 5.60 years

d. 5.33 years

e. 5.67 years

Question 38

Suppose a project costs $440 and produces cash flows of $100 over each of the following seven years. What is the IRR of the project?

Select one or more:

a. There is not enough information; a discount rate is required

b. 18.6%

c. 13.2%

d. 24.3%

e. 10.0%

Question 39

Your company purchased a piece of land five years ago for $150,000 and subsequently added $175,000 in improvements. The current book value of the property is $225,000. There are two options for future use of the land: 1) the land can be sold today for $375,000 on a net after-tax basis; 2) your company can destroy the past improvements and build a factory on the land. In consideration of the factory project, what amount (if any) should the land be valued at?

Select one:

a. The present book value of $225,000.

b. The property should be valued at zero since it is a sunk cost.

c. The sales price of $375,000 less the book value of the improvements.

d. The original $150,000 purchase price of the land itself.

e. The after-tax sales value of $375,000.

Question 40

A new project will cause accounts payable to increase by $70,000, accounts receivable to increase by $70,000 and inventory to increase by $10,000. Which one of the following statements is true?

Select one:

a. Net working capital will decrease.

b. Net working capital will increase.

c. The project will not affect net working capital.

d. The change in accounts payable is a use of cash.

e. The change in inventory is a use of cash.

Answer 1

Question 36

In a corporate structure with shareholders, managers, and a board of directors:

Select one:

a. shareholders are agents

b. directors are agents

c. in principle, the board of directors works on behalf of the shareholders

d. managers are principals

e. shareholders are generally both principals and agents

Answer: Option C

Explanation: The board of directors’ work on behalf of shareholders of the firm.

Question 37

A project costs $525 and has cash flows of $110 for the first three years and $75 in each of the project's last five years. What is the payback period of the project?

Select one:

a. The project never pays back

b. 5.00 years

c. 5.60 years

d. 5.33 years

e. 5.67 years

The first five years’ cumulative cash flow is

= -525+110+110+110+75+75 = -45

Time duration to recover the capital from sixth year = (45/75) = 0.6 year

Total payback period = 5+0.6 = 5.6 years

Question 38

Suppose a project costs $440 and produces cash flows of $100 over each of the following seven years. What is the IRR of the project?

Select one or more:

a. There is not enough information; a discount rate is required

b. 18.6%

c. 13.2%

d. 24.3%

e. 10.0%

Answer: We’ll make use of MS Excel here with the Function IRR