Question

6. You require a 14 percent rate of return from an investment. The investment costs $58,000 and will produce cash inflows of $25,000 for 3 years. Should you accept this project based on its internal rate of return? Why or why not?
A. Yes; because the IRR is 14.04 percent
B. Yes; because the IRR is 14.65 percent
C. Yes; because the IRR is 14.67 percent
D. No; because the IRR is 13.04 percent
E. None of the above

7.  The dividend on T-Motors’ common stock will be $2 in 1 year, $4.25 in 2 

years, and $6.00 in 3 years. You can sell the stock for $100 in 3 years. If you 

require a 11% return on your investment, how much would you be willing to pay 

for a share of this stock today?

A.  $75.45

B.  $77.24

C.  $81.52

D.  $82.76

E.  None of the above

8.	The net present value (NPV) rule can be best stated as:
A)	An investment should be accepted if, and only if, the NPV is exactly equal to zero.
B)	An investment should be rejected if the NPV is positive and accepted if it is negative.
C)	An investment should be accepted if the NPV is positive or zero and rejected if it is negative.
D)	An investment with greater cash inflows than cash outflows, regardless of when the cash flows occur, will always have a positive NPV and therefore should always be accepted.

9.	The length of time required for an investment to generate cash flows sufficient to recover its initial cost is the:
A)	Net present value.
B)	Internal rate of return.
C)	Pay as you go
D)	Profitability index.
E)	None of the above

10.	The payback rule can be best stated as:
A)	An investment is acceptable if its calculated payback period is less than or equal to some pre-specified number of years.
B)	An investment should be accepted if the payback is positive and rejected if it is negative.
C)	An investment should be rejected if the payback is positive and accepted if it is negative.
D)	An investment is acceptable if its calculated payback period is greater than some pre-specified number of years.

Answer 1

Question 6:

Question 7:

Option D is correct

D1 = $2

D2 = $4.25

D3 = $6.00

Sale Price = P = $100

r = required return = 11%

Current price of stock = [D1 / (1+r)^1] + [D2 / (1+r)^2] + [D3 / (1+r)^3] + [P / (1+r)^3]

= [$2 / (1+11%)^1] + [$4.25 / (1+11%)^2] + [$6.00 / (1+11%)^3] + [$100 / (1+11%)^3]

= [$2 / 1.11] + [$4.25 / 1.2321] + [$6.00 / 1.367631] + [$100 / 1.367631]

= $1.8018018 + 3.44939534 + $4.38714829 + $73.1191381

= $82.7574835

Therefore, amount willing to pay for stock is $82.76

Question 8:

Option D is correct

The net present value (NPV) rule can be stated as

D: An investment with greater cash inflows than cash outflows, regardless of when the cash flows occur, will always have a positive NPV and therefore should always be accepted.

Question 9:

Option E is correct

The length of time required for an investment to generate cash flows sufficient to recover its initial cost is the Payback Period of the investment

Question 10:

Option A is correct

A: An investment is acceptable if its calculated payback period is less than or equal to some pre-specified number of years.