# FIN/571 Wk 3 – Practice: Wk 3 Practice Questions

FIN/571 Wk 3 – Practice: Wk 3 Practice Questions
FIN/571 Wk 3 – Practice: Wk 3 Practice Questions
FIN/571 Wk 3 – Practice: Wk 3 Practice Questions
A car dealer offers payments of \$522.59 per month for 48 months on a \$25,000 car after making a \$4,000 down payment. What is the loan’s APR?

Multiple Choice

6%
9%
11%
12%

You are considering the purchase of a home that would require a mortgage of \$150,000. How much more in total interest will you pay if you select a 30-year mortgage at 5.65% rather than a 15-year mortgage at 4.9%? (Round the monthly payment amount to 2 decimal places.)

Multiple Choice

\$86,311.18
\$78,487.92
\$99,595.80
\$102,486.68

If a borrower promises to pay you \$1,900 nine years from now in return for a loan of \$1,000 today, what effective annual interest rate is being offered if interest is compounded annually?

Multiple Choice

5.26%
7.39%
9.00%
10.00%

How much must be saved at the end of each year for the next 10 years in order to accumulate \$50,000, if you can earn 9% annually? Assume you contribute the same amount to your savings every year.

Multiple Choice

\$3,291.00
\$3,587.87
\$4,500.33
\$4,587.79

A credit card account that charges interest at the rate of 1.25% per month would have an annually compounded rate of _____ and an APR of ____.

Multiple Choice

16.08%; 15.00%
14.55%; 16.08%
12.68%; 15.00%
15.00%; 14.55%

On the day you retire you have \$1,000,000 saved. You expect to live another 25 years during which time you expect to earn 6.19% on your savings while inflation averages 2.5% annually. Assume you want to spend the same amount each year in real terms and die on the day you spend your last dime. What real amount will you be able to spend each year?

Multiple Choice

\$61,334.36
\$79,644.58
\$79,211.09
\$61,931.78

The opportunity cost of capital is equal to:

Multiple Choice

the discount rate that makes the project NPV equal zero.
the return that shareholders could expect by investing their money in the financial markets.
a project’s internal rate of return.
the average rate of return for a firm’s projects.

Given a particular set of project cash flows, which one of the following statements must be correct?

Multiple Choice

There can be only one NPV for the project.
There can be only one IRR for the project.
There can be more than one IRR for the project.
There can be up to two profitability indexes for any project.

A polisher costs \$10,000 and will cost \$20,000 a year to operate and maintain. If the discount rate is 10% and the polisher will last for 5 years, what is the equivalent annual cost of the tool?

Multiple Choice

\$17,163.04
\$22,187.84
\$22,637.98
\$19,411.15

If a project’s NPV is calculated to be negative what should a project manager do?

Multiple Choice

The discount rate should be decreased.
The profitability index should be calculated.
The present value of the project cost should be determined.
The project should be rejected.

To justify postponing a project for one year, the NPV needs to increase over that year by a rate that is equal to or greater than:

Multiple Choice

the project’s IRR.
the risk-free rate.
the cost of capital.
zero.

Which of the following investment decision rules tends to improperly reject long-lived projects?

Multiple Choice

Net present value
Internal rate of return
Payback period
Profitability index

Using the “gold standard” of investment criteria, which project should be selected?

Project NPV Investment
A \$ 2.3 mil \$ 5.2 mil
B \$ 1.2 mil \$ 2.8 mil
C \$ 3.5 mil \$ 6.9 mil
D \$ 4.4 mil \$ 8.9 mil

Multiple Choice

Project A
Project B
Project C
Project D

If the adoption of a new product will reduce the sales of an existing product, then the project cash flows should:

Multiple Choice

reflect only the sales of the new product.
include only the reduction amount.
be reduced by the cash that would have been generated by those sales.
be adjusted upward by the reduction amount.

Allocations of overheads should not affect a project’s incremental cash flows unless the:

Multiple Choice

project actually changes the total amount of overhead expenses.
overhead will not be recovered at the end of the project.
overhead is not currently fully allocated to existing projects.
accountant is required to allocate costs to this project.

When a depreciable asset is ultimately sold, the sales price is:

Multiple Choice

fully taxable.
nontaxable.
nontaxable only if accelerated depreciation was used.
taxable to the extent that the sales price exceeds book value

At a 13% cost of capital, a project’s NPV is \$100,000 if you invest today. By what amount must the initial cost of the project decrease before you would wish to wait 2 years before investing? Assume all else is held constant.

Multiple Choice

\$21,685
\$26,000
\$27,690
\$29,380

What rate of nominal growth is expected in sales if they are currently \$1,000,000 and are expected to reach \$1,600,000 in 5 years? Assume an inflation rate of 3.5%.

Multiple Choice

3.20%
9.86%
12.00%
26.49%

Why is bonus depreciation often favored for the corporation’s set of tax books?

Multiple Choice

It increases the total depreciation tax shield over the project’s life.
It reduces the total amount of taxes paid over the project’s life.
It increases net accounting profits over the project’s life.
It allows the depreciation tax savings to be realized earlier.

The correct method to handle overhead costs in capital budgeting is to:

Multiple Choice

allocate a portion to each project.
allocate them to projects with the highest NPVs.
ignore all except incremental amounts.
ignore them in all cases.
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FIN/571 Wk 3 – Practice: Wk 3 Practice Questions