Question 1

What is the advantage of using the real options approach of evaluating a project?

Accepted Answer

The answer of What is the advantage of using the...

Question 2

NewDigger Inc.makes backhoes for digging ditches and trenches.It has developed an acid which when poured on the ground,digs trenches of various depths depending on how much is applied.The firm has recently started using this product commercially.This would probably be considered a(n) _____ project for NewDigger.

Accepted Answer

The development of a new product that revolutionizes the way the company operates and potentially changes the industry is considered a breakthrough project. In this case, the development of an acid that digs trenches is a breakthrough innovation for NewDigger. It is not a derivative project as it does not improve or modify an existing product, nor is it a platform or advanced R&D project, which typically involve the development of technology or processes that can be used for multiple products or applications.

Question 3

_____ refers to the allocation of a finite quantity of resources over different possible uses.

Accepted Answer

Capital rationing refers to the process of allocating a limited amount of financial resources over different potential uses, based on predetermined criteria that the company wants to achieve. It involves deciding to invest in certain projects while rejecting others.

Question 4

Which of the following is true of the internal rate of return of a project?

Accepted Answer

The internal rate of return (IRR) is a metric used to evaluate the profitability of potential investments. It is based on the concept of discounted cash flows, which means the future cash flows of a project are estimated and adjusted to their present value. The accuracy of the IRR calculation is directly dependent on the accuracy of these estimated cash flows. If the original profit estimates are inaccurate, the calculated IRR will also be inaccurate, making choice A correct. Choices B, C, and D are incorrect because the IRR does indeed consider the timing of cash flows (contrary to C), it does not maximize the net present value but rather finds the rate at which it is zero (contrary to B), and it can discriminate against long-term or risky projects due to its reliance on estimated cash flows and the reinvestment assumption (contrary to D).

Question 5

FaxWork Inc.wishes to start manufacturing compact and portable fax machines.Though the initial investments and the risks associated with the project are quite high,the anticipated future benefits are high too.With which of the following quantitative methods can FaxWork assess and evaluate the new project to justify the expenditure?

Accepted Answer

Discounted cash flow analysis is the most appropriate quantitative method for assessing and evaluating the new project to justify the expenditure. This method helps in estimating the future cash flows that the project is expected to generate and discounting them to the present value, considering the time value of money. This will help FaxWork Inc. to determine whether the project is financially feasible and profitable in the long run.

Question 6

Henry calculated that the net present value of his investment would be zero with a 15 percent internal rate of return.This means that:

Accepted Answer

The net present value of zero with a 15 percent internal rate of return means that the investment is earning a return equal to the required rate of return. Henry can compare the 15 percent internal rate of return to the required rate of return to determine if the investment should be made. A net present value of zero does not mean that the project has no value or requires an additional 15 percent investment by the company. Nor does it mean that the project will break even in 15 years.

Question 7

TechToTeach Co.developed and sold a product which can be used by students to take faster notes in a classroom as the teacher speaks.The device automatically records the teacher's voice and converts it into a text format.This new technology was widely accepted by various universities and has been appreciated by students,thus increasing the company's inflow.This technology can be called a(n) _____ project by TechToTeach.

Accepted Answer

The technology developed by TechToTeach is a breakthrough project as it introduces a new and innovative way of taking notes in a classroom. It has been widely accepted and appreciated, which has increased the company's inflow. Advanced R&D projects focus on technical research and development, platforms are usually technology frameworks, and derivative projects are based on existing products or technologies but with minor changes or improvements.

Question 8

Jupiter Systems is planning to develop a new telescope.The initial cost of the project is estimated to be $600,000 with an anticipated recovery of $300,000,till perpetuity.The payback period for this project is _____.

Accepted Answer

The payback period is the time it takes for the initial investment to be recovered. In this case, the initial investment is $600,000 and the anticipated recovery is $300,000 per year. Therefore, the payback period is 600,000 / 300,000 = 2 years.

Question 9

Which of the following is true of quantitative methods of analyzing new projects,particularly in rapidly changing environments?

Accepted Answer

Quantitative methods of analyzing new projects in rapidly changing environments enable managers to statistically compare projects, thus helping them make informed decisions about which projects to pursue. However, their accuracy may be influenced by the assumptions and data used in the analysis. Discounted cash flow methods and real options are commonly used quantitative methods, but their suitability depends on the specific circumstances of the project being analyzed. While such methods can provide valuable insights, their accuracy may be limited in highly uncertain or rapidly changing environments.

Question 10

What is the net present value (NPV) of a project if the present value of cash inflow is $10,000 and the present value of cash outflows is $5,000?

Accepted Answer

Net Present Value (NPV) is calculated as the difference between cash inflows and cash outflows, discounted to present value using a stated discount rate. 
NPV = Present value of cash inflows - Present value of cash outflows 
In this case, NPV = $10,000 - $5,000 = $5,000. 
Therefore, the correct answer is B) $5,000.

Question 11

The internal rate of return of a project is the discount rate that:

Accepted Answer

The internal rate of return (IRR) of a project is the discount rate at which the net present value (NPV) of the cash inflows equal the NPV of the cash outflows. In other words, it is the rate at which the investment breaks even, or has an NPV of zero. Therefore, the correct choice is D: makes the net present value of the investment zero.

Question 12

If a firm has the option of investing in R&D,the cost of commercializing a new technology that is developed can be considered the:

Accepted Answer

The cost of commercializing a new technology that is developed can be considered the exercise price in the context of real options. This is because it represents the cost that the firm must "pay" to exercise the option of implementing the new technology, similar to the exercise price in a financial call option.

Question 13

Which of the following is a disadvantage of using internal rate of return for assessing a project?

Accepted Answer

The internal rate of return (IRR) does not take into account the differences in the timing of cash inflows and outflows, which can result in unreliable results for long term projects. It also assumes reinvestment of cash flows at the same rate as the IRR, which may not be realistic. Additionally, IRR cannot differentiate between good and bad investments because it only considers the percentage return rather than the actual dollar value of the return. However, it does not fail to take into account the time value of money and risk and can be calculated by trial and error. It also provides concrete financial estimates in terms of a percentage return on investment.

Question 14

The discounted cash inflows of a project minus the discounted cash outflows is referred to as the _____.

Accepted Answer

The discounted cash inflows minus the discounted cash outflows is the net present value (NPV) of a project. The internal rate of return (IRR) is the discount rate at which the NPV of the project is zero. Real options and screening value are not relevant to this definition.

Question 15

According to the net present value (NPV) method of evaluation of projects,if there are cash outflows for multiple periods,then:

Accepted Answer

The NPV method of evaluation involves discounting all future cash inflows and outflows back to their present value using a discount rate. If there are cash outflows for multiple periods, then those cash flows will have to be discounted back to their present value, as well. This is necessary in order to properly calculate the net present value of the project. Therefore, (D) is the correct choice. The other choices are incorrect because they do not take into account the time value of money or the need to discount future cash flows back to their present value.

Question 16

With respect to research and development,which of the following can be considered the exercise price?

Accepted Answer

The exercise price is the cost that needs to be invested to capitalize on the R&D program, which is Option B. The cost of the R&D program (Option A), return on investment (Option C), and the returns minus the cost (Option D) are not exercise prices.

Question 17

A firm that invests heavily in derivative projects:

Accepted Answer

Investing heavily in derivative projects may result in short-term returns on R&D investment, as these projects can be high risk and high reward. However, it does not necessarily guarantee long-term strategic momentum, being on the leading edge of technology, or easy competition when the market shifts to newer technology.

Question 18

Which of the following is true of a project which has a present value of cash inflow of $20,000 and the present value of the cash outflows of $15,000 (given the assumptions made in calculating the costs and cash inflows)?

Accepted Answer

The net present value (NPV) is calculated as the present value of cash inflows minus the present value of cash outflows. Here, NPV = $20,000 - $15,000 = $5,000, which is positive, indicating that the project generates wealth.

Question 19

Coolers Inc.has developed a new generation of air conditioners.It upgraded the old technology by making the air conditioners work on voice sensors instead of remote controls.Though the technology is new,Coolers has decided to introduce the product in the market at a low cost.This project is a(n) _____ project for Coolers Inc.

Accepted Answer

The answer of Coolers Inc.has developed a new generation of...

Question 20

Screening questions are used mainly to:

Accepted Answer

Screening questions help to organize and structure discussions about project details like potential costs and benefits. They are used to evaluate the feasibility and viability of a project, which is important for making informed decisions. Screening questions are not primarily used to involve people in the decision, weed out illegal ideas, or choose the best consulting firm for project analysis.

Quiz 7: Choosing Innovation Projects