CTP Long-Term Capital Investments 4

Question 1

A company's WACC is 10%. It evaluates a project with IRR of 9%. The project should be:

Accepted Answer

Rejected because IRR is below the cost of capital

Answer

When IRR is below the WACC (hurdle rate), the project does not generate sufficient returns to cover the cost of capital and should be rejected.

Question 2

The crossover rate between two projects is the discount rate at which:

Accepted Answer

Both projects have equal NPV

Answer

The crossover rate is where the NPV profiles of two projects intersect, meaning both yield the same NPV at that discount rate.

Question 3

Which of the following BEST describes the incremental approach to analyzing a replacement decision?

Accepted Answer

Compare cash flows of the new machine versus continuing with the old machine

Answer

Replacement decisions require incremental analysis comparing the differential cash flows between keeping the old and adopting the new asset.

Question 4

In a lease-versus-buy analysis for a long-term capital asset, the treasury professional should compare:

Accepted Answer

PV of after-tax lease payments versus after-tax cost of debt financing

Answer

The correct comparison is the present value of after-tax costs of leasing versus borrowing to buy, discounted at the after-tax cost of debt.

Question 5

Scenario analysis in capital budgeting differs from sensitivity analysis because scenario analysis:

Accepted Answer

Evaluates NPV under multiple simultaneous changes in key assumptions

Answer

Scenario analysis evaluates NPV under optimistic, base, and pessimistic scenarios where multiple variables change simultaneously.

Certified Treasury Professional Exam Practice Test