Question 1

Among the reasons many firms use the payback period as a guideline in capital investment decisions are all of the following EXCEPT

Accepted Answer

A)  it recognizes cash flows which occur after the payback period. 
B)  it gives an implicit consideration to the timing of cash flows. 
C)  it is easy to calculate. 
D)  it is a measure of risk exposure. 
A)  it recognizes cash flows which occur after the payback period. 
B)  it gives an implicit consideration to the timing of cash flows. 
C)  it is easy to calculate. 
D)  it is a measure of risk exposure.

Question 2

Capital expenditure proposals are reviewed to assess their appropriateness in light of the firm's overall objectives and plans, and to evaluate their economic validity.

Accepted Answer

A) True 
 B)False

Question 3

A corporation is evaluating the relevant cash flows for a capital budgeting decision and mustestimate the terminal cash flow. The proposed machine will be disposed of at the end of its usablelife of five years at an estimated sale price of $2,000. The machine has an original purchase price of$80,000, installation cost of $20,000, and will be depreciated using a 20% CCA rate. The firm has a40 percent tax rate on ordinary income. The terminal cash flow is ____________. Assume the asset pool is closed at the end of the project.

Accepted Answer

A)  $15,945.60 
B)  $5,887.20 
C)  $16,200.00 
D)  $17,801.10 
A)  $15,945.60 
B)  $5,887.20 
C)  $16,200.00 
D)  $17,801.10

Question 4

A fixed asset costing $1,000,000 is a Class 1 asset with a CCA rate of 4%. Using a 10% cost of capital and a 32% tax rate, the present value of the CCA tax shield is $87,273.

Accepted Answer

A) True 
 B)False

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 3, the initial outlay equals___________

Accepted Answer

A)  $211,000 
B)  $300,000 
C)  $195,000 
D)  $170,400 
A)  $211,000 
B)  $300,000 
C)  $195,000 
D)  $170,400

Question 6

Capital gain is the portion of the sale price that is in excess of the initial purchase price.

Accepted Answer

A) True 
 B)False

Question 7

The tax treatment regarding the sale of existing assets which are not depreciable or used in businessand are sold for less than the book value results in

Accepted Answer

A)  a capital gain and recaptured depreciation taxed as ordinary income. 
B)  recaptured depreciation taxed as ordinary income. 
C)  a capital loss. 
D)  an ordinary loss. 
A)  a capital gain and recaptured depreciation taxed as ordinary income. 
B)  recaptured depreciation taxed as ordinary income. 
C)  a capital loss. 
D)  an ordinary loss.

Question 8

A $60,000 outlay for a new machine with a usable life of 15 years is called

Accepted Answer

A)  capital expenditure. 
B)  replacement expenditure. 
C)  operating expenditure. 
D)  none of the above. 
A)  capital expenditure. 
B)  replacement expenditure. 
C)  operating expenditure. 
D)  none of the above.

Question 9

Consider an asset that costs $200,000 and has a CCA rate of 20% for tax purposes. The asset wasused for 5 years at which time it was sold for $150,000. If the relevant tax rate is 40%, what is theafter-tax cash flow from the sale of this asset? Assume the asset pool is closed upon sale of the asset.

Accepted Answer

A)  $171,876 
B)  $144,167 
C)  $162,167 
D)  $119,491 
A)  $171,876 
B)  $144,167 
C)  $162,167 
D)  $119,491

Question 10

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 3, the book value (UCC) of the existing asset is__________

Accepted Answer

A)  $21,000 
B)  $46,080 
C)  $80,000 
D)  $52,000 
A)  $21,000 
B)  $46,080 
C)  $80,000 
D)  $52,000

Question 11

In comparing the internal rate of return and net present value methods of evaluation,

Accepted Answer

A)  internal rate of return is theoretically superior, but financial managers prefer net present value. 
B)  financial managers prefer net present value, because it is presented as a rate of return. 
C)  net present value is theoretically superior, but financial managers prefer to use internal rate of return. 
D)  financial managers prefer net present value, because it measures benefits relative to the amount invested. 
A)  internal rate of return is theoretically superior, but financial managers prefer net present value. 
B)  financial managers prefer net present value, because it is presented as a rate of return. 
C)  net present value is theoretically superior, but financial managers prefer to use internal rate of return. 
D)  financial managers prefer net present value, because it measures benefits relative to the amount invested.

Question 12

Which pattern of cash flow stream is the most difficult to use when evaluating projects?

Accepted Answer

A)  annuity 
B)  nonconventional flow 
C)  conventional flow 
D)  mixed stream 
A)  annuity 
B)  nonconventional flow 
C)  conventional flow 
D)  mixed stream

Question 13

On a purely theoretical basis, NPV is a better approach to capital budgeting than IRR because IRR 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 net present value is found by subtracting a project's initial investment from the present value of its cash inflows discounted at a rate equal to the project's internal rate of return.

Accepted Answer

A) True 
 B)False

Question 15

A firm must choose from six capital budgeting proposals outlined below. The firm is subject to capital rationing and has a capital budget of $1,000,000; the firm's cost of capital is 15 percent.
$\begin{array}{rrrr}\text { Project }&\text { Initial Investment }&IRR&NPV\
1 & \$ 200,000 & 19 \% & \$ 100,000 \
2 & 400,000 & 17 & 20,000 \
3 & 250,000 & 16 & 60,000 \
4 & 200,000 & 12 & -5,000 \
5 & 150,000 & 20 & 50,000 \
6 & 400,000 & 15 & 150,000
\end{array}$
-Using the internal rate of return approach to ranking projects, which projects should the firm accept?

Accepted Answer

A)  2, 3, 4, and 6 
B)  1, 2, 3, 4, and 5 
C)  1, 2, 3, and 5 
D)  1, 3, 4, and 6 
A)  2, 3, 4, and 6 
B)  1, 2, 3, 4, and 5 
C)  1, 2, 3, and 5 
D)  1, 3, 4, and 6

Question 16

Net present value (NPV) assumes that intermediate cash inflows are reinvested at the cost of capital, whereas internal rate of return (IRR) assumes that intermediate cash inflows can be reinvested at a rate equal to the project's IRR.

Accepted Answer

A) True 
 B)False

Question 17

The tax treatment regarding the sale of existing assets which are sold for more than the book valuebut less than the original purchase price results in

Accepted Answer

A)  a capital gain and recaptured depreciation taxed as ordinary income. 
B)  recaptured depreciation taxed as ordinary income. 
C)  an ordinary tax benefit. 
D)  a capital gain tax liability. 
A)  a capital gain and recaptured depreciation taxed as ordinary income. 
B)  recaptured depreciation taxed as ordinary income. 
C)  an ordinary tax benefit. 
D)  a capital gain tax liability.

Question 18

A firm is evaluating an investment proposal which has an initial investment of $5,000 and cash flows presently valued at $4,000. The net present value of the investment is __________.

Accepted Answer

A)  $1.25 
B)  $0 
C)  -$1,000 
D)  $1,000 
A)  $1.25 
B)  $0 
C)  -$1,000 
D)  $1,000

Question 19

To calculate the initial investment, we subtract all cash inflows occurring at time zero from all cashoutflows occurring at time zero.

Accepted Answer

A) True 
 B)False

Question 20

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 initial outlay equals__________

Accepted Answer

A)  $1,380,000 
B)  $1,620,000 
C)  $1,500,000 
D)  $1,440,000 
A)  $1,380,000 
B)  $1,620,000 
C)  $1,500,000 
D)  $1,440,000

Among the reasons many firms use the payback period as a guideline in capital investment decisions are all of the following EXCEPT

Capital expenditure proposals are reviewed to assess their appropriateness in light of the firm's overall objectives and plans, and to evaluate their economic validity.

A fixed asset costing $1,000,000 is a Class 1 asset with a CCA rate of 4%. Using a 10% cost of capital and a 32% tax rate, the present value of the CCA tax shield is $87,273.

Capital gain is the portion of the sale price that is in excess of the initial purchase price.

The tax treatment regarding the sale of existing assets which are not depreciable or used in businessand are sold for less than the book value results in

A $60,000 outlay for a new machine with a usable life of 15 years is called

Consider an asset that costs $200,000 and has a CCA rate of 20% for tax purposes. The asset wasused for 5 years at which time it was sold for $150,000. If the relevant tax rate is 40%, what is theafter-tax cash flow from the sale of this asset? Assume the asset pool is closed upon sale of the asset.

In comparing the internal rate of return and net present value methods of evaluation,

Which pattern of cash flow stream is the most difficult to use when evaluating projects?

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

The net present value is found by subtracting a project's initial investment from the present value of its cash inflows discounted at a rate equal to the project's internal rate of return.

Net present value (NPV) assumes that intermediate cash inflows are reinvested at the cost of capital, whereas internal rate of return (IRR) assumes that intermediate cash inflows can be reinvested at a rate equal to the project's IRR.

The tax treatment regarding the sale of existing assets which are sold for more than the book valuebut less than the original purchase price results in

A firm is evaluating an investment proposal which has an initial investment of $5,000 and cash flows presently valued at $4,000. The net present value of the investment is __________.

To calculate the initial investment, we subtract all cash inflows occurring at time zero from all cashoutflows occurring at time 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

Among the reasons many firms use the payback period as a guideline in capital investment decisions are all of the following EXCEPT

Capital expenditure proposals are reviewed to assess their appropriateness in light of the firm's overall objectives and plans, and to evaluate their economic validity.

A fixed asset costing $1,000,000 is a Class 1 asset with a CCA rate of 4%. Using a 10% cost of capital and a 32% tax rate, the present value of the CCA tax shield is $87,273.

Capital gain is the portion of the sale price that is in excess of the initial purchase price.

The tax treatment regarding the sale of existing assets which are not depreciable or used in businessand are sold for less than the book value results in

A $60,000 outlay for a new machine with a usable life of 15 years is called

In comparing the internal rate of return and net present value methods of evaluation,

Which pattern of cash flow stream is the most difficult to use when evaluating projects?

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

The net present value is found by subtracting a project's initial investment from the present value of its cash inflows discounted at a rate equal to the project's internal rate of return.

Net present value (NPV) assumes that intermediate cash inflows are reinvested at the cost of capital, whereas internal rate of return (IRR) assumes that intermediate cash inflows can be reinvested at a rate equal to the project's IRR.

The tax treatment regarding the sale of existing assets which are sold for more than the book valuebut less than the original purchase price results in

A firm is evaluating an investment proposal which has an initial investment of $5,000 and cash flows presently valued at $4,000. The net present value of the investment is __________.

To calculate the initial investment, we subtract all cash inflows occurring at time zero from all cashoutflows occurring at time 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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