Financial Economics-May 2010
UNIVERSITY CARLOS III OF MADRID
FINANCIAL ECONOMICS, YEAR 2009/10
FINAL EXAM
DEGREE……………………………………………………………………………..
GROUP……………………………………………………………………………………
NAME…………………………………………………………………………………
TIME: 2 HOURS
A CORRECT ANSWER IS WORTH 1, AN INCORRECT ANSWER SUBTRACTS 0.25
CHOOSE THE CORRECT ANSWER IN THE ANSWER SHEET. RETURN THE EXAM AND THE ANSWER
SHEET BOTH CORRECTLY IDENTIFIED WITH YOUR NAME.
YOU SHOULD ANSWER TO AT LEAST EIGHT QUESTIONS.
1. Compute the NPV and the IRR for the following project if the discount rate adjusted for
the level of risk is equal to 5%.
Time
t=0
t=1
t=2
Cash
-
flow
7
-
10
4
a. The NPV is 1.1 and the IRR does not exist.
b. The NPV is -1.1 and the IRR does not exist.
c. The NPV is 1.1 and the IRR is 7%.
d. The NPV is -1.1 and the IRR is 3%.
2. Which of the following is NOT a reason for which firms use the payback method to
evaluate investment projects?
a. The existence of mutually exclusive projects.
b. It is difficult to estimate cash-flows that occur in a distant future, in particular in
environments that are suffering constant changes.
c. The existence of capital restrictions implies that cash-flows need to be generated
quickly for the firm to be able to start new projects.
d. It is on the interest of managers to use this method as they are assessed based on
short-term results.
C
