K2 Long-term decision making

An investment of $200,000 returns $80,000 a year for 4 years. The cost of capital is 12 percent. What is the NPV to the nearest dollar?

• 1 $120,000
• 2 $80,000
• 3 -$42,988
• 4 $42,988

An investment of $200,000 returns $80,000 a year. What is the payback period?

• 1 2.5 years
• 2 0.4 years
• 3 4 years
• 4 2 years

NPV at 20 percent is $7,099 and at 25 percent it is -$11,072. What is the approximate IRR using interpolation?

• 1 22.5%
• 2 25.0%
• 3 22.0%
• 4 20.0%

A nominal rate of 12 percent compounded monthly gives an effective annual rate of:

• 1 13.00%
• 2 12.00%
• 3 12.68%
• 4 1.00%

A project's total profit over 4 years is $120,000, an average of $30,000 a year, on an initial investment of $200,000. What is the ROCE based on the initial investment?

• 1 60%
• 2 30%
• 3 25%
• 4 15%

What is a limitation of the payback method?

• 1 It always rejects good projects
• 2 It ignores cash flows after the payback period
• 3 It cannot be calculated
• 4 It uses accounting profit

What does a positive NPV mean?

• 1 The payback is less than a year
• 2 The project is not worth doing
• 3 The IRR is lower than the cost of capital
• 4 The project is expected to increase wealth at the required rate of return

What is the present value of $10,000 received in 3 years at a discount rate of 8 percent?

• 1 $7,938
• 2 $7,600
• 3 $12,597
• 4 $8,000