Corporate Finance Quiz

What is the advantage of using NPV as an investment appraisal method?

• Considers the time value of money

• Requires estimation of future cash flows

• Time consuming to compute

• Less understandable than a percentage measure

What is the disadvantage of using IRR as an investment appraisal method?

• IRR will not give the right answer for projects of different scale

• Considers the time value of money

• Shareholder wealth is maximised only if all projects with a yield higher than the cost of capital are accepted

• Compared to NPV it easier to interpret percentages

What is the advantage of using MIRR over IRR?

• MIRR gives a more accurate return for the project due to using a better reinvestment assumption

• It may be difficult to understand

• Time consuming to compute

• MIRR assumes that the cash flows are reinvested at the company's cost of capital

What is the advantage of using Profitability Index as an investment appraisal method?

• Considers the time value of money as it incorporates NPV

• It may be difficult to understand

• It selects the project that maximizes shareholders wealth given a condition of hard rationing

• It is not useful for indivisible projects

What is the formula for calculating the present value of an annuity?

• PV of Annuity = C × (1 + (1 - r)^n) / r

• PV of Annuity = C × (1 - (1 + r)^-n) / r

• PV of Annuity = C × (1 - (1 + r)^n) / r

• PV of Annuity = C × (1 - (1 - r)^-n) / r

What is the Modified Internal Rate of Return (MIRR) used for?

• To calculate the payback period of an investment

• To overcome the issues with IRR

• To estimate the company's cost of capital

• To calculate the net present value of a project

When is the Equivalent Annual Annuity (EAA) used in capital budgeting?

• To make replacement decisions for assets

• To select between options with different economic lives

• To calculate the profitability index of projects

• To calculate the net present value of an investment with uneven cash flows

What is the main purpose of the Profitability Index (PI) in capital budgeting?

• To choose the investment that pays back the initial investment the quickest

• To select the combination of projects with the highest NPV

• To calculate the payback period of an investment

• To make appropriate investment decisions when subject to capital rationing

According to the Mean-Variance Rule, when would Project X be preferred to Project Y?

• If the expected return of X is greater than the expected return of Y, and the variance is greater than that of Y

• If the expected return of X is at least equal to the expected return of Y, and the variance is less than that of Y

• If the expected return of X exceeds that of Y, and the variance is equal to that of Y

• If the expected return of X is less than the expected return of Y, and the variance is less than that of Y

What is the disadvantage of using Payback Period as an investment appraisal method?

• It does not consider the time value of money

• It is difficult to understand

• It is time consuming to compute

• It is not useful for indivisible projects