Question 1

Sophisticated capital budgeting techniques do not

Accepted Answer

A)  take into account an unconventional cash flow pattern. 
B)  examine the size of the initial outlay. 
C)  use net profits as a measure of return. 
D)  explicitly consider the time value of money. 
A)  take into account an unconventional cash flow pattern. 
B)  examine the size of the initial outlay. 
C)  use net profits as a measure of return. 
D)  explicitly consider the time value of money. C

Question 2

Computer Disk Duplicators, Inc. has been considering several capital investment proposals for the year beginning in 2004. For each investment proposal, the relevant cash flows and other relevant financial data are summarized in the table below. In the case of a replacement decision, the total installed cost of the equipment will be partially offset by the sale of existing equipment. The firm is subject to a 40 percent tax rate. The firm's cost of capital is 15 percent.
\(\begin{array}{llll}&&\text { Proposal }\
\text { Type of Capital } & 1 & 2 & 3 \
\text { Budgeting Decision } & \text { Expansion } & \text { Replacement } & \text { Replacement }\\hline
&& \text { Mut Excl } & \text { Mut Excl } \
\text { Type of Project }&\text { Independent } & \text { with 3 } & \text { with 2 }\\hline
\text { Cost of new asset } & \$ 1,500,000 & \$ 200,000 & \$ 300,000 \
\text { Installation costs } & \$ 0 & \$ 0 & \$ 15,000 \
\text { CCA rate (new asset) } & 10 \% & 20 \% & 20 \%\
\text { Original cost of old asset } & \text { N/A* } & \$ 80,000 & \$ 100,000 \
\text { Purchase date (old asset) } & \text { N/A } & 1 / 1 / 1997 & 1 / 1 / 2000 \
\text { Sale proceeds (old asset) } & \text { N/A } & \$ 50,000 & \$ 120,000 \
\text { CCA rate (old asset) } & \text { N/A } & 20 \% & 20 \%\
\text { Annual net profits before }\\text { depreciation \& taxes (old) }&N/A&\$30,000&\$25,000\
\text { Annual net profits before }\\text { depreciation \& taxes (new) }&\$250,000&\$100,000&\$175,000\
\end{array}\)
$\text { "Not applicable }$
-For Proposal 2, the initial outlay equals (See Figure 12.3)

Accepted Answer

A)  $164,560 cash outflow. 
B)  $120,720 cash outflow. 
C)  $150,000 cash outflow. 
D)  $167,520 cash outflow. 
A)  $164,560 cash outflow. 
B)  $120,720 cash outflow. 
C)  $150,000 cash outflow. 
D)  $167,520 cash outflow. C

Question 3

A fixed asset costing $100,000 is a Class 10 asset with a CCA rate of 30%. would be $30,000 in year 1.

Accepted Answer

A) True 
 B)False  False

Question 4

Fixed assets that provide the basis for the firm's profit and value are often called

Accepted Answer

A)  earning assets. 
B)  book assets. 
C)  tangible assets. 
D)  non-current assets. 
A)  earning assets. 
B)  book assets. 
C)  tangible assets. 
D)  non-current assets.

Question 5

An outlay for advertising and management consulting is considered to be a current expenditure.

Accepted Answer

A) True 
 B)False

Question 6

A corporation is considering expanding operations to meet growing demand. With the capitalexpansion, the current accounts are expected to change. Management expects cash to increase by$20,000, accounts receivable by $40,000, and inventories by $60,000. At the same time accounts payable will increase by $50,000, accruals by $10,000, and long-term debt by $100,000. The change in net working capital is __________.

Accepted Answer

A)  an increase of $120,000 
B)  a decrease of $120,000 
C)  an increase of $60,000 
D)  a decrease of $40,000 
A)  an increase of $120,000 
B)  a decrease of $120,000 
C)  an increase of $60,000 
D)  a decrease of $40,000

Question 7

Benefits expected from proposed capital expenditures must be on an after-tax basis because

Accepted Answer

A)  it is common, accepted practice to do so. 
B)  taxes are cash outflows. 
C)  there may also be tax benefits to be evaluated. 
D)  no benefits may be used by the firm until tax claims are satisfied. 
A)  it is common, accepted practice to do so. 
B)  taxes are cash outflows. 
C)  there may also be tax benefits to be evaluated. 
D)  no benefits may be used by the firm until tax claims are satisfied.

Question 8

By measuring how quickly the firm recovers its initial investment, the payback period gives some implicit consideration to the timing of cash flows and therefore to the time value of money.

Accepted Answer

A) True 
 B)False

Question 9

Recaptured depreciation is the portion of the sale price that is below book value and has not been depreciated.

Accepted Answer

A) True 
 B)False

Question 10

Travel Limited currently sells 12,500 motor homes per year at $40,000 each and 6,000 luxury motorcoaches per year at $60,000 each. The company wants to introduce a new portable camper to fillout its product line; it hopes to sell 15,000 of these campers per year at $20,000 each. An independent consultant has determined that if Travel introduces the new campers, it should boost the sales of its existing motor homes to 13,500 units per year and reduce the sales of its motor coaches to 5,500 units per year. What is the amount to use as the annual sales figure when evaluating the project?

Accepted Answer

A)  $300,000,000 
B)  $320,000,000 
C)  $285,000,000 
D)  $310,000,000 
A)  $300,000,000 
B)  $320,000,000 
C)  $285,000,000 
D)  $310,000,000

Question 11

Nuff Folding Box Company, Inc. is considering purchasing a new glueing machine. The glueing machine costs $50,000 and requires installation costs of $2,500. This outlay would be partially offset by the sale of an existing gluer. The existing gluer originally cost $10,000 and is four years old. It is being depreciated using the Class 10 CCA rate of 30% and can currently be sold for $15,000. The existing gluer has a remaining useful life of five years. If held until year 5, the existing machine's market value would be zero. Over its five-year life, the new machine should reduce operating costs (excluding depreciation) by
$17,000 per year. The new machine will be depreciated using the Class 10 CCA rate of 30%. The firm has a 12 percent cost of
capital and a 40 percent tax on ordinary income and capital gains.
-The initial outlay for this project is __________

Accepted Answer

A)  $42,820 
B)  $35,140 
C)  $43,500 
D)  $38,500 
A)  $42,820 
B)  $35,140 
C)  $43,500 
D)  $38,500

Question 12

purchasing a new computer system

Accepted Answer

A) True 
 B)False

Question 13

For conventional projects, both NPV and IRR techniques will always generate the sameaccept-reject decision, but differences in their underlying assumptions can cause them to rank projects differently.

Accepted Answer

A) True 
 B)False

Question 14

Recaptured depreciation is the portion of the sale price that is in excess of the initial purchase price.

Accepted Answer

A) True 
 B)False

Question 15

A capital expenditure is all of the following except

Accepted Answer

A)  expected to produce benefits over a period of time greater than one year. 
B)  an outlay for current asset expansion. 
C)  commonly used to expand the level of operations. 
D)  an outlay made for the earning assets of the firm. 
A)  expected to produce benefits over a period of time greater than one year. 
B)  an outlay for current asset expansion. 
C)  commonly used to expand the level of operations. 
D)  an outlay made for the earning assets of the firm.

Question 16

Mutually exclusive projects are projects whose cash flows are unrelated to one another; the acceptance of one does not eliminate the others from further consideration.

Accepted Answer

A) True 
 B)False

Question 17

Unsophisticated capital budgeting techniques do not

Accepted Answer

A)  examine the size of the initial outlay. 
B)  explicitly consider the time value of money. 
C)  use net profits as a measure of return. 
D)  take into account an unconventional cash flow pattern. 
A)  examine the size of the initial outlay. 
B)  explicitly consider the time value of money. 
C)  use net profits as a measure of return. 
D)  take into account an unconventional cash flow pattern.

Question 18

A firm is evaluating a proposal which has an initial investment of $35,000 and has cash flows of$10,000 in year 1, $20,000 in year 2, and $10,000 in year 3. The payback period of the project is

Accepted Answer

A)  between 2 and 3 years. 
B)  1 year. 
C)  between 1 and 2 years. 
D)  2 years. 
A)  between 2 and 3 years. 
B)  1 year. 
C)  between 1 and 2 years. 
D)  2 years.

Question 19

The first step in the capital budgeting process is

Accepted Answer

A)  decision-making. 
B)  review and analysis. 
C)  implementation. 
D)  proposal generation. 
A)  decision-making. 
B)  review and analysis. 
C)  implementation. 
D)  proposal generation.

Question 20

Since the calculation of CCA is based on the declining balance of UCC, the UCC never reaches zero.

Accepted Answer

A) True 
 B)False

Sophisticated capital budgeting techniques do not

A fixed asset costing $100,000 is a Class 10 asset with a CCA rate of 30%. would be $30,000 in year 1.

Fixed assets that provide the basis for the firm's profit and value are often called

An outlay for advertising and management consulting is considered to be a current expenditure.

Benefits expected from proposed capital expenditures must be on an after-tax basis because

By measuring how quickly the firm recovers its initial investment, the payback period gives some implicit consideration to the timing of cash flows and therefore to the time value of money.

Recaptured depreciation is the portion of the sale price that is below book value and has not been depreciated.

purchasing a new computer system

For conventional projects, both NPV and IRR techniques will always generate the sameaccept-reject decision, but differences in their underlying assumptions can cause them to rank projects differently.

Recaptured depreciation is the portion of the sale price that is in excess of the initial purchase price.

A capital expenditure is all of the following except

Mutually exclusive projects are projects whose cash flows are unrelated to one another; the acceptance of one does not eliminate the others from further consideration.

Unsophisticated capital budgeting techniques do not

A firm is evaluating a proposal which has an initial investment of $35,000 and has cash flows of$10,000 in year 1, $20,000 in year 2, and $10,000 in year 3. The payback period of the project is

The first step in the capital budgeting process is

Since the calculation of CCA is based on the declining balance of UCC, the UCC never reaches zero.

Overview of Corporate Finance

Financial Statements, Cash Flows, and Taxes

Financial Statement Analysis

Financial Planning and Forecasting

Financial Markets, Institutions, and Securities

Time Value of Money

Risk and Return

Valuation of Financial Securities

The Cost of Capital

Leverage and Capital Structure

Dividend Policy

Dealing With Project Risk and Other Topics in Capital Budgeting

Working Capital and Management of Current Assets

Management of Current Liabilities

Lease Financing: Concepts and Techniques

Corporate Securities, Derivatives, and Swaps

Mergers and Acquisitions, and Business Failure

International Corporate Finance

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Exam 12: Capital Budgeting: Principles and Techniques

Sophisticated capital budgeting techniques do not

A fixed asset costing $100,000 is a Class 10 asset with a CCA rate of 30%. would be $30,000 in year 1.

Fixed assets that provide the basis for the firm's profit and value are often called

An outlay for advertising and management consulting is considered to be a current expenditure.

Benefits expected from proposed capital expenditures must be on an after-tax basis because

By measuring how quickly the firm recovers its initial investment, the payback period gives some implicit consideration to the timing of cash flows and therefore to the time value of money.

Recaptured depreciation is the portion of the sale price that is below book value and has not been depreciated.

purchasing a new computer system

For conventional projects, both NPV and IRR techniques will always generate the sameaccept-reject decision, but differences in their underlying assumptions can cause them to rank projects differently.

Recaptured depreciation is the portion of the sale price that is in excess of the initial purchase price.

A capital expenditure is all of the following except

Mutually exclusive projects are projects whose cash flows are unrelated to one another; the acceptance of one does not eliminate the others from further consideration.

Unsophisticated capital budgeting techniques do not

A firm is evaluating a proposal which has an initial investment of $35,000 and has cash flows of$10,000 in year 1, $20,000 in year 2, and $10,000 in year 3. The payback period of the project is

The first step in the capital budgeting process is

Since the calculation of CCA is based on the declining balance of UCC, the UCC never reaches zero.

Overview of Corporate Finance

Financial Statements, Cash Flows, and Taxes

Financial Statement Analysis

Financial Planning and Forecasting

Financial Markets, Institutions, and Securities

Time Value of Money

Risk and Return

Valuation of Financial Securities

The Cost of Capital

Leverage and Capital Structure

Dividend Policy

Dealing With Project Risk and Other Topics in Capital Budgeting

Working Capital and Management of Current Assets

Management of Current Liabilities

Lease Financing: Concepts and Techniques

Corporate Securities, Derivatives, and Swaps

Mergers and Acquisitions, and Business Failure

International Corporate Finance

Filters