Question

1. Fantastic Frog Ponds is considering a new product designed especially to provide a breeding ground for the endangered Creek Frog.

- Net cash flows are in the table

- The required return is 12%

Year	Net Cash Flow
0	-100,000
1	21,000
2	21,000
3	21,000
4	21,000
5	21,000
6	21,000
7	21,000

What is the NPV?

a. 13660.45

b. -13660.45

c. -4161.11

d. 4161.11

2. Jambaz is a start-up that is looking for capital to launch it's a new product and is estimating the following net cash flows:  

Year 0: -520,000

Year 1: 53,000

Year 2: 172,000

Year 3: 250,000

Year 4: 334,000

Year 5: 425,000

The opportunity cost for the project is 12%. If potential investors require a payback period of 3 years, would they be interested in investing based on these criteria?

a. No, because the payback period is smaller than required by investors. Even though if based on NPV they would accept the project.

b. No, because the payback period is greater than required by investors. Even though if based on NPV they would accept the project.

c. Yes, because the payback period is higher than required by investors. Even though if based on NPV they would reject the project.

d. Yes, because the payback period is lower than required by investors. Even though if based on NPV they would reject the project.

3. Georgeos Churros is considering buying another shop to expand their chain. The shop costs $150,000 up-front and is expected to generate the following net cash flows:

Year 1: 25,000

Year 2: 35,000

Year 3: 45,000

Year 4: 35,000

Year 5: 25,000

What is the expected internal rate of return?

a. 11.14%

b. Can't calculate

c. 3.26%

d. 4.98%

4. The payback period can be defined as…

a. The amount of time it takes for the revenue to exceed the costs.

b. The amount of time it takes for the profits to exceed the costs.

c. The amount of time required for an investment to generate net cash flows sufficient to recover the initial investment.

d. The amount of time it takes for the present value of the revenue to exceed the present value of the costs.

5. Which of the following statement is FALSE?

a. When NPV and IRR give conflicting evaluations, we should always rely on IRR since it is the most popular method.

b. If IRR is greater than the required rate of return, we should proceed with the project.

c. The payback period method is easy to understand but ignores the time value of money and payments after the payback period.

d. As IRR sometimes has multiple rates, using this method may not maximize shareholder’s wealth.

Answer 1

Question 2:

Payback period of project (3.13 years ) is greater than required by investors (3 years)

NPV of the project is $295,803.29

No, because the payback period is greater than required by investors. Even though if based on NPV they would accept the project

Option b is correct

Question 3:

Question 4:

The payback period can be defined as The amount of time required for an investment to generate net cash flows sufficient to recover the initial investment.

Option c is correct

Question 5:

The below statement is FALSE

When NPV and IRR give conflicting evaluations, we should always rely on IRR since it is the most popular method.

True: When NPV and IRR give conflicting evaluations, we should always rely on NPV since it is most popular method

Option a is correct