W1 - Online Quiz

Question 1

Multiple Choice

Conceptual (Real vs Nominal): You forecast a project’s free cash flows in *real terms* (i.e., today’s prices with no inflation built in). You then discount them using a *nominal* WACC of 10% (which embeds expected inflation). Which statement is correct?

A. This is consistent as long as you subtract expected inflation from 10% to get the real WACC (real = nominal − inflation).

B. This is fine because inflation affects both cash flows and discount rates, so it cancels out automatically.

C. This is inconsistent. Either (i) convert real cash flows to nominal (inflate them) and discount at 10%, or (ii) discount real cash flows at a real WACC.

D. Use whichever (real or nominal) gives the lower NPV to be conservative.

Question 2

Multiple Choice

NPV (with NWC + after‑tax salvage): Project Orion requires: • t0: Equipment purchase = $8.0m; plus NWC investment = $0.9m (fully recovered at end of Year 4) • Years 1–4: After‑tax operating cash flow = $3.0m per year • End of Year 4: Equipment can be sold for $1.5m. It is fully depreciated for tax (book value = $0). Tax rate = 25%; discount rate (WACC) = 11%. What is the project’s NPV (in $m)?

A. −0.31

B. +0.92

C. +1.74

D. +2.45

Question 3

Multiple Choice

IRR pitfall (scale) + incremental IRR: Two *mutually exclusive* projects (cash flows in $): Project S: C0 = −4,000; C1 = +2,600; C2 = +2,600 Project L: C0 = −8,000; C1 = +4,500; C2 = +4,500 Cost of capital = 10%. Which choice maximizes value, and what is the IRR on the incremental cash flows (L − S)?

A. Accept S; incremental IRR ≈ −3.4%

B. Accept L; incremental IRR ≈ +16.2%

C. Accept both; incremental IRR ≈ +19.4%

D. Reject both; incremental IRR ≈ +8.2%

Question 4

Multiple Choice

MIRR (handles multiple sign changes): Cash flows ($): C0 = −1,000; C1 = +700; C2 = +600; C3 = −100. Assume finance rate = reinvestment rate = 8%. What is the MIRR?

A. 14.7%

B. 10.7%

C. 8.0%

D. −1.2%

Question 5

Multiple Choice

Payback vs Discounted Payback: A project costs $5,000 today (t0). Cash inflows: Year 1 = 1,800; Year 2 = 2,200; Year 3 = 2,400; Year 4 = 1,000. Discount rate = 12%. What are (i) the simple payback period and (ii) the discounted payback period?

A. Payback = 3.00 yrs; Discounted payback = 3.00 yrs

B. Payback = 2.00 yrs; Discounted payback ≈ 2.42 yrs

C. Payback ≈ 2.42 yrs; Discounted payback ≈ 3.41 yrs

D. Payback ≈ 2.42 yrs; Discounted payback ≈ 2.96 yrs

Question 6

Multiple Choice

Profitability Index (capital rationing trap): You have a capital budget of $9.0m and three *independent* projects. The PV of each project’s future cash inflows (already discounted at the correct WACC) and the required initial outlay are: • Project A: Outlay 9.0m; PV(inflows) 11.7m • Project B: Outlay 5.0m; PV(inflows) 7.0m • Project C: Outlay 5.0m; PV(inflows) 6.9m Using PI = PV(inflows)/Outlay, which portfolio maximizes total NPV within the $9.0m budget?

A. Take A only (NPV=2.7m; PI=1.30)

B. Take B only because it has the highest PI (PI=1.40)

C. Take C only (NPV=1.9m; PI=1.38)

D. Take B and C (PI≈1.39; total NPV=3.9m)