Financial Valuation & Modelling - Final Exam

S1: The payback period equals the cost of the capital investment divided by the annual net cash inflow

S2: The shorter the payback period, the greater the liquidity and the less risky the project

• Only S1 is correct

• Only S2 is correct

• Both S1 and S2 are correct

• Both S1 and S2 are incorrect

is the weighted minimum desired average rate that a company must pay for long-term capital

S1: The Net Present Value (NPV) is an example concept of capital budgeting.

S2: The present value of a future cash flow is always less than the future amount.

• Only S1 is correct

• Only S2 is correct

• Both S1 and S2 are correct

• Both S1 and S2 are incorrect

Answer explanation

S1 explains that the Net Present Value (NPV) is a concept used in capital budgeting, which is the process of evaluating potential investments and determining which ones are worth pursuing. S2 explains that the present value of a future cash flow is always less than the future amount. This is because the value of money decreases over time due to inflation, so the same amount of money will be worth less in the future than it is today.

Match the following

• determines the minimum length of time to recover the initial investment

• Present Value Method

• discounts all net inflows to the present

• capital budgeting

• the process of identifying a facility need, analyzing alternative, and rationing funds

• economic life

• period within which returns are expected

• payback period

• divides a proposed project's net income by the average investment cost

• Accounting Rate of Return

Which of the following is necessary in order to calculate the payback period for a project?

• useful life

• minimum desired of return

• net present value

• annual cash flow

The advantage of using the payback method of evaluating capital budgeting alternatives is that payback is

• precise in estimates of profitability

• easy to apply

• base on flow data

• insensitive to the life of the project considered

The minimum return that a project must earn for a company in order to leave the value of the company unchanged is the

• current borrowing rate

• discount rate

• cost of capital

• capitalization rate

Which of the following is not a measure of cost of capital?

• cost of sales

• cost of retained earnings

• cost of debt

• cost of equity capital

Which of the following does not affect the net present value of investment proposal?

• the timing of the future cash flows

• the cost of the investment

• the method of depreciation used for tax purposes

• the method of depreciation used for accounting purposes

S1: The Internal Rate of Return (IRR) and the Net Present Value (NPV) always produce identical ranking

S2: The most desirable investment is the one with the lowest net present value

• Only S1 is correct

• Only S2 is correct

• Both S1 and S2 are correct

• Both S1 and S2 are incorrect