Webley Corp. is considering two expansion options, but does not have enough capital to undertake both,

Webley Corp. is considering two expansion options, but does not have enough capital to undertake both, Project W requires an investment of $100,000 and has an NPV of $10,000. Project D requires an investment of $80,000 and has an NPV of $8,200. If Webley uses the profitability index to decide, it would

A) choose D because it has a higher profitability index.

B) choose W because it has a higher profitability index.

C) choose D because it has a lower profitability index.

D) choose W because it has a lower profitability index.

If a project has a profitability index greater than 1

A) the npv will also be positive.

B) the irr will be higher than the required rate of return.

C) the present value of future cash flows will exceed the amount invested in the project.

D) all of the above.

A project has an initial outlay of $4,000. It has a single payoff at the end of Year 4 of $6,996.46. What is the IRR for the project (round to the nearest percent)?

A) 16%

B) 13%

C) 21%

D) 15%

Given the following annual net cash flows, determine the IRR to the nearest whole percent of a project with an initial outlay of $1,800.

Year               Net Cash Flow

    1                        $1,000

    2                        $750

    3                        $500

A) 14%

B) 12%

C) 8%

D) 25%

Initial Outlay                                         Cash Flow in Period

                                                       1                      2                      3                      4

  -$4,000                               $1,546.17      $1,546.17      $1,546.17      $1,546.17

The IRR (to the nearest whole percent) is

A) 10%.

B) 18%.

C) 20%.

D) 16%.

Your company is considering a project with the following cash flows:

Initial outlay = $1,748.80

Cash flows Years 1-6 = $500

Compute the IRR on the project.

A) 9%

B) 11%

C) 18%

D) 24%

Briefly discuss why financial decision makers must focus on incremental cash flows when evaluating new projects.

Briefly discuss why financial decision makers must focus on incremental cash flows when evaluating new projects.

Answer:  Incremental cash flows describe the total cash effect on the company, looking at the difference between total cash flow to the company with the cash flow, and without the cash flow. The company can then value these cash flows and see if the company is worth more with the project or without the project.

Discuss the risk/return tradeoff and how it relates to finance.

Answer:  As people are risk averse, they need a higher return as the risk gets higher. This means that investors will need a higher return on bonds that they do not consider to be as safe as other bonds, and they will need a higher return on stock when the company in question's stock seems to be riskier than the stock of other companies.

Why do you think many companies compensate executives with options based on long-term increases in the value of the company's stock?

Answer:  Tying executive compensation to long-term increases in the stock price makes sense because they are supposed to be working to maximize shareholder wealth.  Stock-based compensation plans imply that decisions made to benefit shareholders will also benefit themselves.