Capital Investments and Capital Allocation practice questions

What to know

Identify the rule, formula, or decision criterion before reading the answer choices. CFA Level I distractors often use the right vocabulary with the wrong condition.

How to practice

Work each item under time pressure, then compare your reasoning with the step-by-step explanation and key takeaway.

Review signal

Missed questions should become scheduled reviews when the error comes from a concept gap, formula setup, or answer-choice trap.

Corporate Issuers

Capital Investments and Capital Allocation

A company plans to build a distribution hub on land it already owns. The land was purchased years ago for 1 million and could be sold today for 4 million. In the project's NPV analysis, the land is most appropriately:

Corporate Issuers

Capital Investments and Capital Allocation

Lucia Ferreira, CFO of Andean Beverages, evaluates a bottling line costing 250,000 that is expected to produce after-tax operating cash flows of 90,000 at the end of each of the next four years, with no salvage value. At a 12% required rate of return, the NPV of the bottling line is closest to:

Corporate Issuers

Capital Investments and Capital Allocation

Two mutually exclusive projects have conventional cash flows, and each has a positive NPV at the firm's 10% required return. Project X has the higher NPV, while Project Y has the higher IRR. The most appropriate decision is to accept:

Corporate Issuers

Capital Investments and Capital Allocation

Hassan Idris evaluates a project for Sahel Agro that requires an initial outlay of 160,000 and is expected to return after-tax cash flows of 88,000 at the end of year 1 and 96,800 at the end of year 2. The project's IRR is closest to:

Corporate Issuers

Capital Investments and Capital Allocation

Meridian Power can invest in a wind project today with an NPV of 60,000. Alternatively, it can wait one year for a regulatory ruling: with 60% probability the ruling is favorable and the project's NPV at that time will be 200,000; with 40% probability it is unfavorable and the NPV at that time would be -150,000, in which case the company will NOT invest. Using a 10% discount rate, the value of waiting relative to investing today is closest to:

Corporate Issuers

Capital Investments and Capital Allocation

For an independent project, the most appropriate decision rule using net present value is to accept the project when NPV is:

Corporate Issuers

Capital Investments and Capital Allocation

The internal rate of return is best described as the discount rate that:

Corporate Issuers

Capital Investments and Capital Allocation

A project requires an initial outlay of 100,000 and is expected to generate 40,000 at the end of each of the next three years. Using a 9% discount rate, the NPV is closest to:

Corporate Issuers

Capital Investments and Capital Allocation

A feasibility study completed last year for 60,000 should most appropriately be treated in current project analysis as:

Corporate Issuers

Capital Investments and Capital Allocation

A project will generate annual revenue of 500,000 and cash operating costs of 310,000. Annual depreciation is 80,000 and the tax rate is 25%. Annual after-tax operating cash flow is closest to:

Corporate Issuers

Capital Investments and Capital Allocation

A project has an outflow of 500,000 today and inflows of 175,000 at the end of each of the next four years. The IRR is closest to:

Corporate Issuers

Capital Investments and Capital Allocation

A company will replace old equipment that can be sold today for 70,000 and has a book value of 50,000. New equipment costs 260,000 and requires 30,000 of additional net working capital. The tax rate is 25%. The initial outlay is closest to:

Corporate Issuers

Capital Investments and Capital Allocation

A project requires equipment costing 400,000 and an immediate net working capital investment of 50,000. It will generate annual after-tax operating cash flow of 140,000 for four years. At the end of year 4, equipment with zero book value will be sold for 40,000 and NWC will be recovered. The tax rate is 25% and the required return is 10%. The NPV is closest to:

Corporate Issuers

Capital Investments and Capital Allocation

A project has an NPV of -2 million without flexibility. Management can pay 0.5 million today for an option to abandon the project if demand is weak, and this option is valued at 3 million. The most appropriate investment conclusion is: