Chapter 8
Strategy and Analysis in Using Net Present Value
Multiple Choice Questions
1. Theoretically, the NPV is the most appropriate method to determine he acceptability of a project. A
false sense of security can be overwhelm the decision-maker when the procedure is applied
properly and the positive NPV results are accepted blindly. Sensitivity and scenario analysis aid in the process by A) changing the underlying assumptions on which the decision is based. B) highlights the areas where more and better data are needed. C) providing a picture of how an event can affect the calculations. D) All of the above. E) None of the above.
Answer: D Difficulty: Medium Page: 213-216
2. In order to make a decision with a decision tree
A) one starts farthest out in time to make the first decision. B) one must begin at time 0.
C) any path can be taken to get to the end.
D) any path can be taken to get back to the beginning. E) None of the above.
Answer: A Difficulty: Medium Page: 213
3. At stage 2 of the decision tree it shows that if a project is successful, the payoff will be $53,000 with
a 2/3 chance of occurrence. There is also the 1/3 chance of a $-24,000 payoff. The cost of getting to stage 2 (1 year out) is $44,000. The cost of capital is 15%. What is the NPV of the project at stage 1? A) $-13,275 B) $-20,232 C) $ 2,087 D) $ 7,536
E) Can not be calculated without the exact timing of future cash flows. Answer: B Difficulty: Hard Page: 213 Rationale:
$-44,000 + [((2/3($53,000)) + (1/3($-24,000))) / 1.15] = $-20,232
86 Test Bank, Chapter 8
Use the following to answer questions 4-5:
The Quick-Start Company has the following pattern of potential cash flows with their planned investment in a new cold weather starting system for fuel injected cars.
t = 0 Success Test Cost $20,000,000 .6 t = 1 Invest $100,000,000 Cash Flow After Tax Years 2 – 5 $66,000,000/year Do Not Invest NPV = $ 0 .4 Failure NPV = $-20,000,000 Do not test
4. If the company has a discount rate of 17%, what is the value closest to time 1 net present value? A) $ 48.6 million B) $ 80.9 million C) $108.2 million D) $181.4 million E) None of the above.
Answer: A Difficulty: Medium Page: 213 Rationale:
NPV1 = Pr[COST + CFAT*A.17,4] = NPV1 = .6[$-100,000,000+$66,000,000(2.7432)] = $48,632,106 5. If the company has a discount rate of 17%, should they decide to invest? A) yes, NPV = $ 2.2 million B) yes, NPV = $ 21.6 million C) no, NPV = $-1.9 million D) yes, NPV = $ 8.6 million
E) No, since more than one branch is NPV = 0 or negative you must reject. Answer: B Difficulty: Hard Page: 213 Rationale:
NPV0 = NPV1/(1+r) C0 = ($48,632,106/1.17) $20,000,000) = $21,565,903
Ross/Westerfield/Jaffe, Corporate Finance, 7/e 87
6. In a decision tree, the NPV to make the yes/no decision is dependent on A) only the cash flows from successful path.
B) on the path where the probabilities add up to one. C) all cash flows and probabilities.
D) only the cash flows and probabilities of the successful path. E) None of the above.
Answer: C Difficulty: Medium Page: 211-213
7. In a decision tree, caution should be used in analysis because
A) early stage decisions are probably riskier and should not likely use the same discount rate. B) if a negative NPV is actually occurring, management should opt out of the project and
minimize their loss.
C) decision trees are only used for planning, not actually daily management. D) Both A and C. E) Both A and B.
Answer: E Difficulty: Medium Page: 212-213 8. Sensitivity analysis evaluates the NPV with respect to A) changes in the underlying assumptions.
B) one variable changing while holding the others constant. C) different economic conditions. D) All of the above. E) None of the above.
Answer: D Difficulty: Medium Page: 214-216
9. Sensitivity analysis provides information on
A) whether the NPV should be trusted, it may provide a false sense of security if all NPVs are
positive.
B) the need for additional information as it tests each variable in isolation. C) the degree of difficulty in changing multiple variables together. D) Both A and B. E) Both A and C.
Answer: D Difficulty: Medium Page: 216
10. Fixed production costs are A) directly related to labor costs. B) measured as cost per unit of time. C) measured as cost per unit of output. D) dependent on the amount of goods or services produced. E) None of the above.
Answer: B Difficulty: Medium Page: 214
88 Test Bank, Chapter 8
公司理财原版题库Chap008
