Group 8

How many evaluation criteria are there for investment projects?

• 5

• 6

• 7

• 8

Which of the following is NOT one of the advantages of payback periods?

• 1. Need detailed analysis.

• 1. Simple to calculate and understand.

• 1. Adjusts for uncertainty of later cash flows.

• 1. Biased towards liquidity.

The developer indicates that net operating income will be $2,150,000 per year, and the lender notes that debt service will be $350,000 per year. The DSCR is:

• 6. 6.14

• 5.14

• 6.3

• 0.16

A business is considering a project that has an initial investment of $250,000 and forecasts it would generate revenue of $70,000 per year. The ARR is:

• 30%

• 28%

• 3.57

• 4.2

The debt-service coverage ratio (DSCR) is a measure of the cash flow available to pay current debt obligations.

• FALSE

• TRUE

What is the definition of IRR?

• The net monetary  gain (or loss)  from  a  project, computed  by  discounting all present and future cash inflows and outflows related to the project.

• A series of cash flows of equal amounts in  each period of the  total planning period.

• 1. The rate that leads to a NPV of zero when applied as the uniform discount rate.

• 1. The  period  after  which  the  capital  invested  has  been recovered by the discounted net cash inflows from the project.

Which of the following is correct about BCR (benefit-cost analysis)?

• 1. BCR indicates the project’s size or provides a specific value on what the asset / project will generate.

• 1. BCR exceeding one indicates that the asset / project is expected to generate incremental value.

• 1. BCR equal 1 indicates that the project is destroying value and should not be undertaken.

• 1. BCR = PV of benefit expected from the project * PV of the cost of the project

You have three mutually exclusive projects: A, B, and C. They have NPVs of +$50, -$20 and +$100, respectively. What should you do?

• Accept A

• Accept B

• Accept C

• Accept A & C

Werney Company is considering investing in a new project. The project will need an initial investment of $1,200,000 and will generate $600,000 (after-tax) cash flows for three years. Calculate the NPV for the project if the cost of capital is 15%.

• $169,935

• $292,110

• $600,000

• $258,460

What is the biggest problem of using IRR?

• 1. For non-isolated investment projects, several internal rates of return may exist.

• 1. Reinvestment Assumption.

• 1. For an isolated investment project, only one positive internal rate of return exists.

• 1. Multiple IRRs for non-conventional project.