Business Finance 3

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1. Which of the following should be assumed about a project that requires a £100,000 investment at time-period zero, then returns £20,000 annually for 5 years?

  • The NPV is negative
  • The IRR is negative
  • The NPV is zero
  • The profitability index is 1.0
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2. A firm’s WACC:

  • Is the proper discount rate for every project the firm undertakes
  • Is an informational value only and should never be used as a discount rate
  • Is a benchmark discount rate that is adjusted for the riskiness of each project
  • Is used to value all of the firm's existing projects

3. The statement ‘We’ve got too much invested in that project to pull out now’ possibly illustrates the need to:

  • Reduce discount rates to improve NPV
  • Be reacquainted with the concept of sunk costs
  • Reduce net working capital assigned to the project
  • Switch to an accelerated method of depreciation

4. What level of management is responsible for originating capital budgeting proposals?

  • All levels of management
  • Senior management
  • Divisional management
  • Lower management

5. WACC can be used to determine the value of a firm by discounting the firm's:

  • Free cash flows
  • After-tax net profits
  • Pre-tax profits
  • Cash inflows
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