Question 1

Unlike the net present value criteria, the internal rate of return approach assumes an interest rateequal to

Accepted Answer

A)  the project's opportunity cost. 
B)  the project's internal rate of return. 
C)  the relevant cost of capital. 
D)  the market's interest rate. 
A)  the project's opportunity cost. 
B)  the project's internal rate of return. 
C)  the relevant cost of capital. 
D)  the market's interest rate.

Question 2

A project that just breaks even on a financial basis has an IRR equal to its required rate of return.

Accepted Answer

A) True 
 B)False

Question 3

When making replacement decisions, the development of relevant cash flows is complicated whencompared to expansion decisions, due to the need to calculate __________cash inflows.

Accepted Answer

A)  non-conventional 
B)  conventional 
C)  initial 
D)  incremental 
A)  non-conventional 
B)  conventional 
C)  initial 
D)  incremental

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 1, the annual incremental after-tax cash flow from operations for year 1 is__________

Accepted Answer

A)  $160,000 
B)  $180,000 
C)  $210,000 
D)  $100,000 
A)  $160,000 
B)  $180,000 
C)  $210,000 
D)  $100,000

Question 5

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 tax effect on the sale of the existing asset results in

Accepted Answer

A)  a $4,400 recapture creating a tax liability. 
B)  a $2,200 capital loss that can be written off against future capital gains. 
C)  a $4,400 terminal loss being claimed. 
D)  no tax liability since the assets are pooled. 
A)  a $4,400 recapture creating a tax liability. 
B)  a $2,200 capital loss that can be written off against future capital gains. 
C)  a $4,400 terminal loss being claimed. 
D)  no tax liability since the assets are pooled.

Question 6

The internal rate of return (IRR) is defined as the discount rate that equates the net present value with the initial investment associated with a project.

Accepted Answer

A) True 
 B)False

Question 7

The IRR is the discount rate that equates the NPV of an investment opportunity with $0.

Accepted Answer

A) True 
 B)False

Question 8

A project must be rejected if its payback period is less than the maximum acceptable paybackperiod.

Accepted Answer

A) True 
 B)False

Question 9

___________is the process of evaluating and selecting long-term investments consistent with the firm's goal of owner wealth maximization.

Accepted Answer

A)  Ratio analysis 
B)  Recapitalizing assets 
C)  Restructuring debt 
D)  Capital budgeting 
A)  Ratio analysis 
B)  Recapitalizing assets 
C)  Restructuring debt 
D)  Capital budgeting

Question 10

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 book value (UCC) of the existing asset is__________

Accepted Answer

A)  $15,000 
B)  $12,800 
C)  $25,000 
D)  $14,400 
A)  $15,000 
B)  $12,800 
C)  $25,000 
D)  $14,400

Question 11

The__________ is the discount rate that equates the present value of the cash inflows with the initial investment.

Accepted Answer

A)  average rate of return 
B)  internal rate of return 
C)  cost of capital 
D)  payback period 
A)  average rate of return 
B)  internal rate of return 
C)  cost of capital 
D)  payback period

Question 12

A firm is evaluating three capital projects. The net present values for the projects are as follows:$\begin{array}{rr}\text { Project }&NPV\
1 & \$ 100 \
2 & \$ 0 \
3 & -\$ 100
\end{array}$ The firm should___________ .

Accepted Answer

A)  accept Project 1 and reject Projects 2 and 3 
B)  accept Projects 1 and 3 and reject Project 2 
C)  accept Projects 1 and 2 and reject Project 3 
D)  reject all projects 
A)  accept Project 1 and reject Projects 2 and 3 
B)  accept Projects 1 and 3 and reject Project 2 
C)  accept Projects 1 and 2 and reject Project 3 
D)  reject all projects

Question 13

The book value of an asset is equal to the

Accepted Answer

A)  original purchase price minus an annual amortization expense. 
B)  depreciated value plus recaptured amortization. 
C)  original purchase price minus the accumulated amortization. 
D)  fair market value minus the accounting value. 
A)  original purchase price minus an annual amortization expense. 
B)  depreciated value plus recaptured amortization. 
C)  original purchase price minus the accumulated amortization. 
D)  fair market value minus the accounting value.

Question 14

In developing the cash flows for an expansion project, the analysis is the same as the analysis forreplacement projects where

Accepted Answer

A)  all cash flows from the old assets are equal. 
B)  all cash flows from the old asset are zero. 
C)  prior cash flows are irrelevant. 
D)  cash inflows equal cash outflows. 
A)  all cash flows from the old assets are equal. 
B)  all cash flows from the old asset are zero. 
C)  prior cash flows are irrelevant. 
D)  cash inflows equal cash outflows.

Question 15

The cash flows of any project having a conventional pattern include all of the basic components except

Accepted Answer

A)  operating cash inflows. 
B)  operating cash outflows. 
C)  terminal cash flow. 
D)  initial investment. 
A)  operating cash inflows. 
B)  operating cash outflows. 
C)  terminal cash flow. 
D)  initial investment.

Question 16

Comparing net present value and internal rate of return analysis

Accepted Answer

A)  is only necessary on mutually exclusive projects. 
B)  may give different accept/reject decisions. 
C)  always results in the same accept/reject decision. 
D)  always results in the same ranking of projects. 
A)  is only necessary on mutually exclusive projects. 
B)  may give different accept/reject decisions. 
C)  always results in the same accept/reject decision. 
D)  always results in the same ranking of projects.

Question 17

Some firms use the payback period as a decision criterion or as a supplement to sophisticated decision techniques, because

Accepted Answer

A)  it explicitly considers the time value of money. 
B)  it can take the place of the net present value approach. 
C)  the determination of payback is an objectively determined criteria. 
D)  it can be viewed as a measure of risk exposure. 
A)  it explicitly considers the time value of money. 
B)  it can take the place of the net present value approach. 
C)  the determination of payback is an objectively determined criteria. 
D)  it can be viewed as a measure of risk exposure.

Question 18

Certain mathematical properties may cause a project with a nonconventional cash flow pattern to have zero or more than one IRR; this problem does not occur with the NPV approach.

Accepted Answer

A) True 
 B)False

Question 19

All benefits expected from a proposed project must be measured on a cash flow basis which may be found by adding any noncash charges deducted as expense on the firm's income statement back to net income.

Accepted Answer

A) True 
 B)False

Question 20

A fixed asset costing $250,000 is a Class 10 asset with a CCA rate of 30%. would be $52,500 in year 2.

Accepted Answer

A) True 
 B)False

Unlike the net present value criteria, the internal rate of return approach assumes an interest rateequal to

A project that just breaks even on a financial basis has an IRR equal to its required rate of return.

When making replacement decisions, the development of relevant cash flows is complicated whencompared to expansion decisions, due to the need to calculate __________cash inflows.

The internal rate of return (IRR) is defined as the discount rate that equates the net present value with the initial investment associated with a project.

The IRR is the discount rate that equates the NPV of an investment opportunity with $0.

A project must be rejected if its payback period is less than the maximum acceptable paybackperiod.

___________is the process of evaluating and selecting long-term investments consistent with the firm's goal of owner wealth maximization.

The__________ is the discount rate that equates the present value of the cash inflows with the initial investment.

A firm is evaluating three capital projects. The net present values for the projects are as follows: Project NPV 1 \ 100 2 \ 0 3 -\ 100 The firm should___________ .

The book value of an asset is equal to the

In developing the cash flows for an expansion project, the analysis is the same as the analysis forreplacement projects where

The cash flows of any project having a conventional pattern include all of the basic components except

Comparing net present value and internal rate of return analysis

Some firms use the payback period as a decision criterion or as a supplement to sophisticated decision techniques, because

Certain mathematical properties may cause a project with a nonconventional cash flow pattern to have zero or more than one IRR; this problem does not occur with the NPV approach.

All benefits expected from a proposed project must be measured on a cash flow basis which may be found by adding any noncash charges deducted as expense on the firm's income statement back to net income.

A fixed asset costing $250,000 is a Class 10 asset with a CCA rate of 30%. would be $52,500 in year 2.

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

Unlike the net present value criteria, the internal rate of return approach assumes an interest rateequal to

A project that just breaks even on a financial basis has an IRR equal to its required rate of return.

When making replacement decisions, the development of relevant cash flows is complicated whencompared to expansion decisions, due to the need to calculate __________cash inflows.

The internal rate of return (IRR) is defined as the discount rate that equates the net present value with the initial investment associated with a project.

The IRR is the discount rate that equates the NPV of an investment opportunity with $0.

A project must be rejected if its payback period is less than the maximum acceptable paybackperiod.

___________is the process of evaluating and selecting long-term investments consistent with the firm's goal of owner wealth maximization.

The__________ is the discount rate that equates the present value of the cash inflows with the initial investment.

A firm is evaluating three capital projects. The net present values for the projects are as follows: Project NPV 1 \ 100 2 \ 0 3 -\ 100 The firm should___________ .

The book value of an asset is equal to the

In developing the cash flows for an expansion project, the analysis is the same as the analysis forreplacement projects where

The cash flows of any project having a conventional pattern include all of the basic components except

Comparing net present value and internal rate of return analysis

Some firms use the payback period as a decision criterion or as a supplement to sophisticated decision techniques, because

Certain mathematical properties may cause a project with a nonconventional cash flow pattern to have zero or more than one IRR; this problem does not occur with the NPV approach.

All benefits expected from a proposed project must be measured on a cash flow basis which may be found by adding any noncash charges deducted as expense on the firm's income statement back to net income.

A fixed asset costing $250,000 is a Class 10 asset with a CCA rate of 30%. would be $52,500 in year 2.

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