Question 1

Costs incurred as a result of past irrevocable decisions and irrelevant to future decisions are called

Accepted Answer

A) opportunity costs. 
B) sunk costs. 
C) incremental costs. 
D) marginal costs. 
A) opportunity costs. 
B) sunk costs. 
C) incremental costs. 
D) marginal costs.

Question 2

Two machines, A and B, which perform the same functions, have the following costs and lives.
 
Which machine would you choose? The two machines are mutually exclusive and the cost of capital is 15 percent.

Accepted Answer

A) Machine A, because the EAC is $1,789.89 
B) Machine B, because the EAC is $1,922.88 
C) Machine A, because it has lower PV costs 
D) Machine B, because it has longer life 
A) Machine A, because the EAC is $1,789.89 
B) Machine B, because the EAC is $1,922.88 
C) Machine A, because it has lower PV costs 
D) Machine B, because it has longer life

Question 3

When Honda develops a new engine, the incidental effects might include the following:

Accepted Answer

A) demand for replacement parts only. 
B) demand for replacement parts and profits from the sale of repair services. 
C) demand for replacement parts, profits from the sale of repair services, and offer modified or improved versions of the new engine for other uses. 
D) demand for replacement parts and offer modified or improved versions of the new engine for other uses. 
A) demand for replacement parts only. 
B) demand for replacement parts and profits from the sale of repair services. 
C) demand for replacement parts, profits from the sale of repair services, and offer modified or improved versions of the new engine for other uses. 
D) demand for replacement parts and offer modified or improved versions of the new engine for other uses.

Question 4

A financial analyst should include interest and dividend payments when calculating a project's cash flows.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following countries allows firms to keep two separate sets of books, one for the stockholders and one for the tax authorities like the Internal Revenue Service?

Accepted Answer

A) United States only 
B) United States and Japan 
C) United States, Japan, and France 
D) None of these options are correct. 
A) United States only 
B) United States and Japan 
C) United States, Japan, and France 
D) None of these options are correct.

Question 6

If the discount rate is stated in real terms, then in order to calculate the NPV in a consistent manner, the project requires that

Accepted Answer

A) cash flows be estimated in nominal terms. 
B) cash flows be estimated in real terms. 
C) accounting income be used. 
D) cash flows be estimated including future inflation. 
A) cash flows be estimated in nominal terms. 
B) cash flows be estimated in real terms. 
C) accounting income be used. 
D) cash flows be estimated including future inflation.

Question 7

The real cash flow occurring in year 2 is $60,000. If the inflation rate is 5 percent per year and the real rate of interest is 2 percent per year, calculate the nominal cash flow for year 2.

Accepted Answer

A) $60,000 
B) $62,424 
C) $66,150 
D) $63,654 
A) $60,000 
B) $62,424 
C) $66,150 
D) $63,654

Question 8

When calculating cash flows, one should consider them on an incremental basis.

Accepted Answer

A) True 
 B)False

Question 9

Money that a firm has already spent, or committed to spend regardless of whether a project is taken, is called a(n)

Accepted Answer

A) fixed cost. 
B) opportunity cost. 
C) sunk cost. 
D) incremental cost. 
A) fixed cost. 
B) opportunity cost. 
C) sunk cost. 
D) incremental cost.

Question 10

For the case of an electric car project, the following costs should be treated as incremental costs when deciding whether to go ahead with the project except

Accepted Answer

A) the consequent reduction in sales of the company's existing gasoline models (i.e., incidental effects). 
B) interest payments on debt incurred to finance the project. 
C) the value of tools that will be transferred to the project from the company's existing plants instead of being sold. 
D) the expenditure on new plants and equipment. 
A) the consequent reduction in sales of the company's existing gasoline models (i.e., incidental effects). 
B) interest payments on debt incurred to finance the project. 
C) the value of tools that will be transferred to the project from the company's existing plants instead of being sold. 
D) the expenditure on new plants and equipment.

Question 11

The rule for comparing machines with different lives is to select the machine with the greatest equivalent annual cost (EAC).

Accepted Answer

A) True 
 B)False

Question 12

The real rate of interest is 3 percent and inflation is 4 percent. What is the nominal rate of interest?

Accepted Answer

A) 3.00 percent 
B) 1.00 percent 
C) 7.12 percent 
D) -1.00 percent 
A) 3.00 percent 
B) 1.00 percent 
C) 7.12 percent 
D) -1.00 percent

Question 13

If depreciation is $600,000 and the marginal tax rate is 21 percent, then the tax shield due to depreciation is

Accepted Answer

A) $126,000. 
B) $600,000. 
C) $390,000. 
D) The answer cannot be determined from the information given. 
A) $126,000. 
B) $600,000. 
C) $390,000. 
D) The answer cannot be determined from the information given.

Question 14

You should replace a machine when the EAC of continuing to operate it exceeds the EAC of the new machine.

Accepted Answer

A) True 
 B)False

Question 15

Accountants do not depreciate investment in net working capital because

Accepted Answer

A) it is not a cash flow. 
B) it is recovered during or at the end of the project; thus it is not a depreciating asset. 
C) it is a sunk cost. 
D) working capital appears on the balance sheet, not the income statement. 
A) it is not a cash flow. 
B) it is recovered during or at the end of the project; thus it is not a depreciating asset. 
C) it is a sunk cost. 
D) working capital appears on the balance sheet, not the income statement.

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

Costs incurred as a result of past irrevocable decisions and irrelevant to future decisions are called

Two machines, A and B, which perform the same functions, have the following costs and lives. Which machine would you choose? The two machines are mutually exclusive and the cost of capital is 15 percent.

When Honda develops a new engine, the incidental effects might include the following:

A financial analyst should include interest and dividend payments when calculating a project's cash flows.

Which of the following countries allows firms to keep two separate sets of books, one for the stockholders and one for the tax authorities like the Internal Revenue Service?

If the discount rate is stated in real terms, then in order to calculate the NPV in a consistent manner, the project requires that

The real cash flow occurring in year 2 is $60,000. If the inflation rate is 5 percent per year and the real rate of interest is 2 percent per year, calculate the nominal cash flow for year 2.

When calculating cash flows, one should consider them on an incremental basis.

Money that a firm has already spent, or committed to spend regardless of whether a project is taken, is called a(n)

For the case of an electric car project, the following costs should be treated as incremental costs when deciding whether to go ahead with the project except

The rule for comparing machines with different lives is to select the machine with the greatest equivalent annual cost (EAC).

The real rate of interest is 3 percent and inflation is 4 percent. What is the nominal rate of interest?

If depreciation is $600,000 and the marginal tax rate is 21 percent, then the tax shield due to depreciation is

You should replace a machine when the EAC of continuing to operate it exceeds the EAC of the new machine.

Accountants do not depreciate investment in net working capital because

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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