CF1 Day 1 NYIF PA

All of the following are attractions of using the Payback (Payback Period) method in capital budgeting EXCEPT its:

• Ability to combine with other capital budgeting methodologies

• Ease of understanding

• Explicit adjustment for project risk

• Conservatism due to the relatively short-term focus

Given the cash flows projected over the life of an investment project, which of the following descriptions most accurately characterizes the Internal Rate of Return (IRR) calculated for the project?

• The annualized rate of return over the project’s life

• The annualized rate of return over the project’s life if all cash flows are reinvested at the risk-free rate from receipt until the end of the project’s forecasted useful life

• The annualized rate of return over the project’s life if all cash flows are reinvested at an appropriate opportunity cost of capital from receipt until the end of the project’s forecasted useful life

• The annualized rate of return over the project’s life if all cash flows are reinvested at a rate of return equal to the project’s IRR from receipt until the end of the project’s forecasted useful life

Given the cash flows projected over the life of an investment project, which of the following descriptions most accurately characterizes the Modified Internal Rate of Return (MIRR) calculated for the project?

• The annualized rate of return over the project’s life

• The annualized rate of return over the project’s life if all cash flows are reinvested at the risk-free rate from receipt until the end of the project’s forecasted useful life

• The annualized rate of return over the project’s life if all cash flows are reinvested at an appropriate opportunity cost of capital from receipt until the end of the project’s forecasted useful life

• The annualized rate of return over the project’s life if all cash flows are reinvested at a rate of return equal to the project’s IRR from receipt until the end of the project’s forecasted useful life

Which of the following statements best defines opportunity cost of capital as that concept is applied to a net present value (NPV) analysis when being used to evaluate investment projects?

• The risk-free rate

• The rate of return that could have been earned on an investment project of equivalent risk

• The forgone interest income that could have been earned if the cost of the project were invested in safe interest-bearing securities rather than in the fixed capital investment project

• The hurdle rate determined by management that specifies the minimum Internal Rate of Return that must be projected for any investment project for it to be undertaken by the firm

• 8.00% paid annually

• 7.90% paid semiannually

• 7.80% paid quarterly

• 7.70% paid monthly

• $529,701

• $533,877

• $552,562

• $566,780

An annuity company needs to fund the payouts on a contract it is selling to a professional

athlete. The athlete wants to buy a 20-year period certain annuity that will pay him

$1,000,000 annually, with the first payment to be made in exactly 12 years. The annuity

company wants to fund the future payments by setting aside equal dollar amount until the

first payment is due.

Assuming a 6.50% annual return on investment, what is the annual

amount the annuity company must set aside to be able to fund the payments over the life

of the annuity? (Assume first set aside to fund annuity to be made in one year and last

funding contribution to be made at time of first annuity payment.)

• $339,010

• $388,123

• $634,315

• $675,546

An analyst is evaluating a potential investment in open-pit gold mining venture. The projected production from the mine is 170,000 ounces of gold per year for 10 years. To reflect the uncertainty over gold price the analyst has decided to use three different scenarios:

Best case (20% probability): $1800/oz.

Base case (50% probability): $1350/oz.

Worst case (30% probability): $1000/oz.

Assuming a 3% risk-free rate and a 12% opportunity cost of capital, the present value of revenues from gold sales based on projected open-pit mine production and price scenarios is closest to:

• $1.281 billion

• $1.328 billion

• $1.945 billion

• $1.987 billion

• 7.34%

• 9.38%

• 11.48%

• 13.75%

• -$631,174

• -$312,543

• $1,828,805

• $3,529,073