Question 1

Payback is considered an unsophisticated capital budgeting technique, and as such

Accepted Answer

A)  gives no consideration to risk exposure. 
B)  gives no consideration to the timing of cash flows and therefore the time value of money. 
C)  gives some implicit consideration to the timing of cash flows and therefore the time value of money. 
D)  does consider the timing of cash flows and therefore gives explicit consideration to the time value of money. 
A)  gives no consideration to risk exposure. 
B)  gives no consideration to the timing of cash flows and therefore the time value of money. 
C)  gives some implicit consideration to the timing of cash flows and therefore the time value of money. 
D)  does consider the timing of cash flows and therefore gives explicit consideration to the time value of money.

Question 2

Cuda Marine Engines, Inc. must develop the relevant cash flows for a replacement capital investment proposal. The proposed asset costs $50,000 and has installation costs of $3,000. The asset is from the same CCA pool as the existing asset and will be depreciated using a 20% CCA rate. The existing equipment, which originally cost $25,000 and will be sold for
$10,000, has been depreciated for three years. The new equipment is expected to result in incremental before-tax net profits of $15,000 per year. The firm has a 40 percent tax rate.
-The incremental after-tax cash inflow for year 1 is___________

Accepted Answer

A)  $15,600 
B)  $9,000 
C)  $13,300 
D)  $11,950 
A)  $15,600 
B)  $9,000 
C)  $13,300 
D)  $11,950

Question 3

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 1, the depreciation expense (CCA) for year 1 is___________

Accepted Answer

A)  $112,500 
B)  $300,000 
C)  $150,000 
D)  $75,000 
A)  $112,500 
B)  $300,000 
C)  $150,000 
D)  $75,000

Question 4

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 cash flow pattern for the replacement project is

Accepted Answer

A)  a mixed stream and conventional. 
B)  an annuity and non-conventional. 
C)  a mixed stream and non-conventional. 
D)  an annuity and conventional. 
A)  a mixed stream and conventional. 
B)  an annuity and non-conventional. 
C)  a mixed stream and non-conventional. 
D)  an annuity and conventional.

Question 5

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 book value (UCC) of the existing asset is____________

Accepted Answer

A)  $16,777 
B)  $18,875 
C)  $50,000 
D)  $10,000 
A)  $16,777 
B)  $18,875 
C)  $50,000 
D)  $10,000

Question 6

If a firm has unlimited funds to invest, all the independent projects that meet its minimum investment criteria can be implemented.

Accepted Answer

A) True 
 B)False

Question 7

A $60,000 outlay for a new machine with a usable life of 15 years is an operating expenditure thatwould appear as a fixed asset on the firm's balance sheet.

Accepted Answer

A) True 
 B)False

Question 8

A firm with limited dollars available for capital expenditures is subject to

Accepted Answer

A)  mutually exclusive projects. 
B)  capital rationing. 
C)  working capital constraints. 
D)  capital dependency. 
A)  mutually exclusive projects. 
B)  capital rationing. 
C)  working capital constraints. 
D)  capital dependency.

Question 9

The payback period is generally viewed as an unsophisticated capital budgeting technique, because it does not explicitly consider the time value of money by discounting cash flows to find present value.

Accepted Answer

A) True 
 B)False

Question 10

In case of an existing asset which is depreciable and is used in business and is sold for a price equal to its initial purchase price, the difference between the sales price and its book value is considered as recaptured depreciation and will be taxed as ordinary income.

Accepted Answer

A) True 
 B)False

Question 11

The basic variables that must be considered in determining the initial investment associated with a capital expenditure are all of the following EXCEPT

Accepted Answer

A)  proceeds from the sale of the existing asset. 
B)  taxes on the sale of an existing asset. 
C)  incremental annual savings produced by the new asset. 
D)  cost of the new asset. 
A)  proceeds from the sale of the existing asset. 
B)  taxes on the sale of an existing asset. 
C)  incremental annual savings produced by the new asset. 
D)  cost of the new asset.

Question 12

When the net present value is negative, the internal rate of return is___________the cost of capital.

Accepted Answer

A)  less than 
B)  equal to 
C)  greater than or equal to 
D)  greater than 
A)  less than 
B)  equal to 
C)  greater than or equal to 
D)  greater than

Question 13

On a purely theoretical basis, NPV is a better approach to capital budgeting than IRR because NPV implicitly assumes that any intermediate cash inflows generated by an investment are reinvested at the firm's cost of capital.

Accepted Answer

A) True 
 B)False

Question 14

The tax treatment regarding the sale of existing assets which are sold for their book value results in

Accepted Answer

A)  recaptured depreciation taxed as ordinary income. 
B)  an ordinary tax benefit. 
C)  a capital gain and recaptured depreciation taxed as ordinary income. 
D)  no tax benefit or liability. 
A)  recaptured depreciation taxed as ordinary income. 
B)  an ordinary tax benefit. 
C)  a capital gain and recaptured depreciation taxed as ordinary income. 
D)  no tax benefit or liability.

Question 15

The depreciable value of an asset is equal to its purchase price minus installation costs, if any.

Accepted Answer

A) True 
 B)False

Question 16

A firm is evaluating a proposal which has an initial investment of $50,000 and has cash flows of$15,000 per year for five years. The payback period of the project is

Accepted Answer

A)  1.5 years. 
B)  2 years. 
C)  4 years. 
D)  3.3 years. 
A)  1.5 years. 
B)  2 years. 
C)  4 years. 
D)  3.3 years.

Question 17

In general, the greater the difference between the magnitude and timing of cash inflows, the greaterthe likelihood of conflicting ranking between NPV and IRR.

Accepted Answer

A) True 
 B)False

Question 18

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 annual incremental after-tax operating income is___________

Accepted Answer

A)  $48,000 
B)  $42,000 
C)  $70,000 
D)  $89,000 
A)  $48,000 
B)  $42,000 
C)  $70,000 
D)  $89,000

Question 19

On a purely theoretical basis, the NPV is the better approach to capital budgeting due to all thefollowing reasons EXCEPT

Accepted Answer

A)  that it measures the benefits relative to the amount invested. 
B)  that it maximizes shareholder wealth. 
C)  that there may be multiple solutions for an IRR computation. 
D)  for the reasonableness of the reinvestment rate assumption. 
A)  that it measures the benefits relative to the amount invested. 
B)  that it maximizes shareholder wealth. 
C)  that there may be multiple solutions for an IRR computation. 
D)  for the reasonableness of the reinvestment rate assumption.

Question 20

The final step in the capital budgeting process is

Accepted Answer

A)  follow-up monitoring. 
B)  implementation. 
C)  re-evaluation. 
D)  education. 
A)  follow-up monitoring. 
B)  implementation. 
C)  re-evaluation. 
D)  education.

Payback is considered an unsophisticated capital budgeting technique, and as such

If a firm has unlimited funds to invest, all the independent projects that meet its minimum investment criteria can be implemented.

A $60,000 outlay for a new machine with a usable life of 15 years is an operating expenditure thatwould appear as a fixed asset on the firm's balance sheet.

A firm with limited dollars available for capital expenditures is subject to

The payback period is generally viewed as an unsophisticated capital budgeting technique, because it does not explicitly consider the time value of money by discounting cash flows to find present value.

In case of an existing asset which is depreciable and is used in business and is sold for a price equal to its initial purchase price, the difference between the sales price and its book value is considered as recaptured depreciation and will be taxed as ordinary income.

The basic variables that must be considered in determining the initial investment associated with a capital expenditure are all of the following EXCEPT

When the net present value is negative, the internal rate of return is___________the cost of capital.

On a purely theoretical basis, NPV is a better approach to capital budgeting than IRR because NPV implicitly assumes that any intermediate cash inflows generated by an investment are reinvested at the firm's cost of capital.

The tax treatment regarding the sale of existing assets which are sold for their book value results in

The depreciable value of an asset is equal to its purchase price minus installation costs, if any.

A firm is evaluating a proposal which has an initial investment of $50,000 and has cash flows of$15,000 per year for five years. The payback period of the project is

In general, the greater the difference between the magnitude and timing of cash inflows, the greaterthe likelihood of conflicting ranking between NPV and IRR.

On a purely theoretical basis, the NPV is the better approach to capital budgeting due to all thefollowing reasons EXCEPT

The final step in the capital budgeting process is

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

Exam 12: Capital Budgeting: Principles and Techniques

Payback is considered an unsophisticated capital budgeting technique, and as such

If a firm has unlimited funds to invest, all the independent projects that meet its minimum investment criteria can be implemented.

A $60,000 outlay for a new machine with a usable life of 15 years is an operating expenditure thatwould appear as a fixed asset on the firm's balance sheet.

A firm with limited dollars available for capital expenditures is subject to

The payback period is generally viewed as an unsophisticated capital budgeting technique, because it does not explicitly consider the time value of money by discounting cash flows to find present value.

In case of an existing asset which is depreciable and is used in business and is sold for a price equal to its initial purchase price, the difference between the sales price and its book value is considered as recaptured depreciation and will be taxed as ordinary income.

The basic variables that must be considered in determining the initial investment associated with a capital expenditure are all of the following EXCEPT

When the net present value is negative, the internal rate of return is___________the cost of capital.

On a purely theoretical basis, NPV is a better approach to capital budgeting than IRR because NPV implicitly assumes that any intermediate cash inflows generated by an investment are reinvested at the firm's cost of capital.

The tax treatment regarding the sale of existing assets which are sold for their book value results in

The depreciable value of an asset is equal to its purchase price minus installation costs, if any.

A firm is evaluating a proposal which has an initial investment of $50,000 and has cash flows of$15,000 per year for five years. The payback period of the project is

In general, the greater the difference between the magnitude and timing of cash inflows, the greaterthe likelihood of conflicting ranking between NPV and IRR.

On a purely theoretical basis, the NPV is the better approach to capital budgeting due to all thefollowing reasons EXCEPT

The final step in the capital budgeting process is

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