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Investment Decisions Chapter Exam

Exam Instructions:

Choose your answers to the questions and click 'Next' to see the next set of questions. You can skip questions if you would like and come back to them later with the yellow "Go To First Skipped Question" button. When you have completed the practice exam, a green submit button will appear. Click it to see your results. Good luck!

Page 1

Question 1 1. Which one of the following is NOT a mathematical term in the payback formula?

Question 2 2. Which one the following is the correct payback formula?

Question 3 3. You are a real estate investor, and you're considering buying property A or property B. Property A costs $200,000 and will generate an annual net cash flow of $12,000 per year. Property B costs $220,000 but generates a net annual cash flow of $14,000. You want to recoup your initial investment as quickly as possible. What is the payback period for each property, and which property should you buy?

Question 4 4. Which of the following is the BEST explanation of payback analysis?

Question 5 5. Which investment analysis tool calculates a rate of return based on a net present value of zero?

Page 2

Question 6 6. In investment analysis, what is the minimum payback period that should be accepted for an investment to be considered a good investment?

Question 7 7. In the formula to calculate net present value, what information do you need to have?

Question 8 8. In investment analysis, which of the following is TRUE regarding NPV, IRR, and payback period?

Question 9 9. The internal rate of return method is only one of several different approaches to help managers determine which long-term _____ should be considered.

Question 10 10. The IRR for an investment is the company-required return that results in _____ NPV when it is used as the discount rate.

Page 3

Question 11 11. A company is considering an investment with an IRR of 10%. The company rate of return required is 8%. The company _____ the investment.

Question 12 12. Financial managers make major decisions concerning _____.

Question 13 13. Which of the following is a benefit of capital budgeting?

Question 14 14. Which of the following is a capital asset?

Question 15 15. Which of the following is a component of incremental cash flow?

Page 4

Question 16 16. What is a capital asset?

Question 17 17. Investing money in a savings account or other investment opportunity instead of burying it in a hole in your backyard is consistent with which wealth building concept?

Question 18 18. What calculation is used to evaluate the profitability of viable investment opportunities?

Question 19 19. When you select an investment opportunity with the highest project profitability index exceeding 1.0, it has which of the following?

Question 20 20. How does the discount rate impact the value of future cash flows when calculating net present value?

Page 5

Question 21 21. What would cause a business to do a sensitivity analysis?

Question 22 22. What is considered when doing a sensitivity analysis?

Question 23 23. What is a sensitivity analysis?

Question 24 24. What is a potential outcome of a sensitivity analysis?

Question 25 25. The weighted average cost of capital is defined as _____.

Page 6

Question 26 26. If there are multiple projects with a positive NPV, and limited resources, which project should be selected?

Question 27 27. When resources are unlimited, multiple _____ projects with a positive NPV can be accepted.

Question 28 28. Why is capital budgeting important for companies?

Question 29 29. What is the payback period for an investment that costs $250,000 and generates cash flow of $85,000 with annual expenses of $10,000?

Question 30 30. Why is net present value an important investment analysis tool?

Investment Decisions Chapter Exam Instructions

Choose your answers to the questions and click 'Next' to see the next set of questions. You can skip questions if you would like and come back to them later with the yellow "Go To First Skipped Question" button. When you have completed the practice exam, a green submit button will appear. Click it to see your results. Good luck!

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