Question 1

What are some of the important points to remember while estimating the cash flows of a project?

Accepted Answer

• Estimate after-tax cash flows on an in

Question 2

You are considering the purchase of one of two machines required in your production process. Machine A has a life of two years. Machine A costs $50 initially and then $70 per year in maintenance. Machine B has an initial cost of $90. It requires $40 in maintenance for each year of its three-year life. Either machine must be replaced at the end of its life. Which is the better machine for the firm? The discount rate is 15 percent and the tax rate is zero.

Accepted Answer

A) Machine A, because EAC for machine A is $100.76 
B) Machine B, because EAC for machine B is $79.42 
C) Machine A, because PV of costs for machine A is $163.80 
D) Machine B, because PV of costs for machine B is $181.33 
A) Machine A, because EAC for machine A is $100.76 
B) Machine B, because EAC for machine B is $79.42 
C) Machine A, because PV of costs for machine A is $163.80 
D) Machine B, because PV of costs for machine B is $181.33

Question 3

The important point(s)to remember while estimating the cash flows of a project

Accepted Answer

A) is that only cash flow is relevant. 
B) are cash flow is relevant and always estimate cash flows on an incremental basis. 
C) are to always estimate cash flows on an incremental basis and to be consistent in the treatment of inflation. 
D) are cash flow is relevant, always estimate cash flows on an incremental basis, and be consistent in the treatment of inflation. 
A) is that only cash flow is relevant. 
B) are cash flow is relevant and always estimate cash flows on an incremental basis. 
C) are to always estimate cash flows on an incremental basis and to be consistent in the treatment of inflation. 
D) are cash flow is relevant, always estimate cash flows on an incremental basis, and be consistent in the treatment of inflation.

Question 4

Define the term cash flow for a project.

Accepted Answer

Cash flow for a project is the

Question 5

Briefly explain how inflation is treated consistently while estimating a project's NPV.

Accepted Answer

There are two ways to treat inflation co

Question 6

Suppose that a project has a depreciable investment of $600,000 and falls under the following MACRS year 5 class depreciation schedule:
Year 1: 20 percent; year 2: 32 percent; year 3: 19.2 percent; year 4: 11.5 percent; year 5: 11.5 percent; and year 6: 5.8 percent.
Calculate depreciation for year 2.

Accepted Answer

A) $120,000 
B) $192,000 
C) $96,000 
D) $115,200 
A) $120,000 
B) $192,000 
C) $96,000 
D) $115,200

Question 7

What are some of the additional factors that an analyst should consider while estimating cash flows in foreign countries and currencies?

Accepted Answer

• Currency of the cash flow should be re

Question 8

The NPV value obtained by discounting nominal cash flows using the nominal discount rate is the same as the NPV value obtained by discounting

Accepted Answer

A) real cash flows using the real discount rate only. 
B) real cash flows using the nominal discount rate only. 
C) nominal cash flows using the real discount rate only. 
D) real cash flows using the nominal discount rate and nominal cash flows using the real discount rate. 
A) real cash flows using the real discount rate only. 
B) real cash flows using the nominal discount rate only. 
C) nominal cash flows using the real discount rate only. 
D) real cash flows using the nominal discount rate and nominal cash flows using the real discount rate.

Question 9

Net working capital is best represented as

Accepted Answer

A) short-term assets only. 
B) short-term assets and short-term liabilities. 
C) long-term assets and short-term assets. 
D) long-term assets and long-term liabilities. 
A) short-term assets only. 
B) short-term assets and short-term liabilities. 
C) long-term assets and short-term assets. 
D) long-term assets and long-term liabilities.

Question 10

Most large U.S. corporations keep two separate sets of books, one for stockholders and one for the Internal Revenue Service.

Accepted Answer

A) True 
 B)False

Question 11

The cost of a resource that may be relevant to an investment decision even when no cash changes hand is called a(n)

Accepted Answer

A) sunk cost. 
B) opportunity cost. 
C) depreciation cost. 
D) average cost. 
A) sunk cost. 
B) opportunity cost. 
C) depreciation cost. 
D) average cost.

Question 12

For project A in year 2, inventories increase by $12,000 and accounts payable increase by $2,000. Accounts receivable remain the same. Calculate the increase or decrease in net working capital for year 2.

Accepted Answer

A) Decreases by $14,000 
B) Increases by $14,000 
C) Decreases by $10,000 
D) Increases by $10,000 
A) Decreases by $14,000 
B) Increases by $14,000 
C) Decreases by $10,000 
D) Increases by $10,000

Question 13

Working capital is one of the most common sources of mistakes in estimating project cash flows.

Accepted Answer

A) True 
 B)False

Question 14

Proper treatment of inflation in NPV calculations involves

Accepted Answer

A) discounting nominal cash flows by the nominal discount rate. 
B) discounting real cash flows by the real discount rate. 
C) discounting nominal cash flows by the real discount rate. 
D) discounting nominal cash flows by the nominal discount rate and discounting real cash flows by the real discount rate. 
A) discounting nominal cash flows by the nominal discount rate. 
B) discounting real cash flows by the real discount rate. 
C) discounting nominal cash flows by the real discount rate. 
D) discounting nominal cash flows by the nominal discount rate and discounting real cash flows by the real discount rate.

Question 15

How do you compare projects with different lives?

Accepted Answer

One can compare projects with

Question 16

Capital equipment costing $250,000 today has $50,000 salvage value at the end of five years. If the straight-line depreciation method is used, what is the book value of the equipment at the end of two years?

Accepted Answer

A) $200,000 
B) $170,000 
C) $140,000 
D) $150,000 
A) $200,000 
B) $170,000 
C) $140,000 
D) $150,000

Question 17

Suppose that a project has a depreciable investment of $1,000,000 and falls under the following MACRS year 5 class depreciation schedule:
Year 1: 20 percent; year 2: 32 percent; year 3: 19.2 percent; year 4: 11.5 percent; year 5: 11.5 percent; and year 6: 5.8 percent.
Calculate the depreciation tax shield for year 2 using a tax rate of 30 percent.

Accepted Answer

A) $224,000 
B) $60,000 
C) $96,000 
D) $300,000 
A) $224,000 
B) $60,000 
C) $96,000 
D) $300,000

Question 18

For project Z, year 5 inventories increase by $6,000; accounts receivable by $4,000; and accounts payable by $3,000. Calculate the increase or decrease in working capital for year 5.

Accepted Answer

A) Increases by $5,000 
B) Decreases by $1,000 
C) Increases by $7,000 
D) Decreases by $7,000 
A) Increases by $5,000 
B) Decreases by $1,000 
C) Increases by $7,000 
D) Decreases by $7,000

Question 19

Investment in inventories includes investment in

Accepted Answer

A) raw material only. 
B) raw material and work-in-progress. 
C) raw material, work-in-progress, and finished goods. 
D) finished goods only. 
A) raw material only. 
B) raw material and work-in-progress. 
C) raw material, work-in-progress, and finished goods. 
D) finished goods only.

Question 20

An analyst wishes to determine the value of resources used by a proposed project. Which values should the analyst use to approximate opportunity costs?

Accepted Answer

A) Book values 
B) Market values 
C) Historical values 
D) Accounting values plus an inflation adjustment 
A) Book values 
B) Market values 
C) Historical values 
D) Accounting values plus an inflation adjustment

Exam 6: Making Investment Decisions With the Net Present Value Rule

What are some of the important points to remember while estimating the cash flows of a project?

The important point(s)to remember while estimating the cash flows of a project

Define the term cash flow for a project.

Briefly explain how inflation is treated consistently while estimating a project's NPV.

What are some of the additional factors that an analyst should consider while estimating cash flows in foreign countries and currencies?

The NPV value obtained by discounting nominal cash flows using the nominal discount rate is the same as the NPV value obtained by discounting

Net working capital is best represented as

Most large U.S. corporations keep two separate sets of books, one for stockholders and one for the Internal Revenue Service.

The cost of a resource that may be relevant to an investment decision even when no cash changes hand is called a(n)

For project A in year 2, inventories increase by $12,000 and accounts payable increase by $2,000. Accounts receivable remain the same. Calculate the increase or decrease in net working capital for year 2.

Working capital is one of the most common sources of mistakes in estimating project cash flows.

Proper treatment of inflation in NPV calculations involves

How do you compare projects with different lives?

Capital equipment costing $250,000 today has $50,000 salvage value at the end of five years. If the straight-line depreciation method is used, what is the book value of the equipment at the end of two years?

For project Z, year 5 inventories increase by $6,000; accounts receivable by $4,000; and accounts payable by $3,000. Calculate the increase or decrease in working capital for year 5.

Investment in inventories includes investment in

An analyst wishes to determine the value of resources used by a proposed project. Which values should the analyst use to approximate opportunity costs?

Introduction to Corporate Finance

How to Calculate Present Values

Valuing Bonds

The Value of Common Stocks

Net Present Value and Other Investment Criteria

Introduction to Risk and Return

Portfolio Theory and the Capital Asset Pricing Model

Risk and the Cost of Capital

Project Analysis

How to Ensure That Projects Truly Have Positive Npvs

Agency Problems and Investment

Efficient Markets and Behavioral Finance

An Overview of Corporate Financing

How Corporations Issue Securities

Payout Policy

Does Debt Policy Matter

How Much Should a Corporation Borrow

Financing and Valuation

Understanding Options

Valuing Options

Real Options

Credit Risk and the Value of Corporate Debt

The Many Different Kinds of Debt

Leasing

Managing Risk

Managing International Risks

Financial Analysis

Financial Planning

Working Capital Management

Mergers

Corporate Restructuring

Governance and Corporate Control Around the World

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