Question 1

A company is considering a proposed new plant that would increase productive capacity. Which of the following statements is CORRECT?

Accepted Answer

A)  In calculating the project's operating cash flows, the firm should not deduct financing costs such as interest expense, because financing costs are accounted for by discounting at the WACC. If interest were deducted when estimating cash flows, this would, in effect, "double count" it. 
B)  Since depreciation is a non-cash expense, the firm does not need to deal with depreciation when calculating the operating cash flows. 
C)  When estimating the project's operating cash flows, it is important to include both opportunity costs and sunk costs, but the firm should ignore the cash flow effects of externalities since they are accounted for in the discounting process. 
D)  Capital budgeting decisions should be based on before-tax cash flows. 
E)  The WACC used to discount cash flows in a capital budgeting analysis should be calculated on a before-tax basis. 
A)  In calculating the project's operating cash flows, the firm should not deduct financing costs such as interest expense, because financing costs are accounted for by discounting at the WACC. If interest were deducted when estimating cash flows, this would, in effect, "double count" it. 
B)  Since depreciation is a non-cash expense, the firm does not need to deal with depreciation when calculating the operating cash flows. 
C)  When estimating the project's operating cash flows, it is important to include both opportunity costs and sunk costs, but the firm should ignore the cash flow effects of externalities since they are accounted for in the discounting process. 
D)  Capital budgeting decisions should be based on before-tax cash flows. 
E)  The WACC used to discount cash flows in a capital budgeting analysis should be calculated on a before-tax basis.

Question 2

Typically, a project will have a higher NPV if the firm uses accelerated rather than straight-line depreciation. This is because the total cash flows over the project's life will be higher if accelerated depreciation is used, other things held constant.

Accepted Answer

A) True 
 B)False

Question 3

Which of the following statements is CORRECT?

Accepted Answer

A)  Sensitivity analysis as it is generally employed is incomplete in that it fails to consider the probability of occurrence of the key input variables. 
B)  In comparing two projects using sensitivity analysis, the one with the steeper lines would be considered less risky, because a small error in estimating a variable such as unit sales would produce only a small error in the project's NPV. 
C)  The primary advantage of simulation analysis over scenario analysis is that scenario analysis requires a relatively powerful computer, coupled with an efficient financial planning software package, whereas simulation analysis can be done efficiently using a PC with a spreadsheet program or even with just a calculator. 
D)  Sensitivity analysis is a type of risk analysis that considers both the sensitivity of NPV to changes in key input variables and the probability of occurrence of these variables' values. 
E)  As computer technology advances, simulation analysis becomes increasingly obsolete and thus less likely to be used than sensitivity analysis. 
A)  Sensitivity analysis as it is generally employed is incomplete in that it fails to consider the probability of occurrence of the key input variables. 
B)  In comparing two projects using sensitivity analysis, the one with the steeper lines would be considered less risky, because a small error in estimating a variable such as unit sales would produce only a small error in the project's NPV. 
C)  The primary advantage of simulation analysis over scenario analysis is that scenario analysis requires a relatively powerful computer, coupled with an efficient financial planning software package, whereas simulation analysis can be done efficiently using a PC with a spreadsheet program or even with just a calculator. 
D)  Sensitivity analysis is a type of risk analysis that considers both the sensitivity of NPV to changes in key input variables and the probability of occurrence of these variables' values. 
E)  As computer technology advances, simulation analysis becomes increasingly obsolete and thus less likely to be used than sensitivity analysis.

Question 4

Which of the following statements is CORRECT?

Accepted Answer

A)  An externality is a situation where a project would have an adverse effect on some other part of the firm's overall operations. If the project would have a favorable effect on other operations, then this is not an externality. 
B)  An example of an externality is a situation where a bank opens a new office, and that new office causes deposits in the bank's other offices to increase. 
C)  The NPV method automatically deals correctly with externalities, even if the externalities are not specifically identified, but the IRR method does not. This is another reason to favor the NPV. 
D)  Both the NPV and IRR methods deal correctly with externalities, even if the externalities are not specifically identified. However, the payback method does not. 
E)  Identifying an externality can never lead to an increase in the calculated NPV. 
A)  An externality is a situation where a project would have an adverse effect on some other part of the firm's overall operations. If the project would have a favorable effect on other operations, then this is not an externality. 
B)  An example of an externality is a situation where a bank opens a new office, and that new office causes deposits in the bank's other offices to increase. 
C)  The NPV method automatically deals correctly with externalities, even if the externalities are not specifically identified, but the IRR method does not. This is another reason to favor the NPV. 
D)  Both the NPV and IRR methods deal correctly with externalities, even if the externalities are not specifically identified. However, the payback method does not. 
E)  Identifying an externality can never lead to an increase in the calculated NPV.

Question 5

Any cash flows that can be classified as incremental to a particular project--i.e., results directly from the decision to undertake the project--should be reflected in the capital budgeting analysis.

Accepted Answer

A) True 
 B)False

Question 6

Dalrymple Inc. is considering production of a new product. In evaluating whether to go ahead with the project, which of the following items should NOT be explicitly considered when cash flows are estimated?

Accepted Answer

A)  The company will produce the new product in a vacant building that was used to produce another product until last year. The building could be sold, leased to another company, or used in the future to produce another of the firm's products. 
B)  The project will utilize some equipment the company currently owns but is not now using. A used equipment dealer has offered to buy the equipment. 
C)  The company has spent and expensed for tax purposes $3 million on research related to the new detergent. These funds cannot be recovered, but the research may benefit other projects that might be proposed in the future. 
D)  The new product will cut into sales of some of the firm's other products. 
E)  If the project is accepted, the company must invest $2 million in working capital. However, all of these funds will be recovered at the end of the project's life. 
A)  The company will produce the new product in a vacant building that was used to produce another product until last year. The building could be sold, leased to another company, or used in the future to produce another of the firm's products. 
B)  The project will utilize some equipment the company currently owns but is not now using. A used equipment dealer has offered to buy the equipment. 
C)  The company has spent and expensed for tax purposes $3 million on research related to the new detergent. These funds cannot be recovered, but the research may benefit other projects that might be proposed in the future. 
D)  The new product will cut into sales of some of the firm's other products. 
E)  If the project is accepted, the company must invest $2 million in working capital. However, all of these funds will be recovered at the end of the project's life.

Question 7

If debt is to be used to finance a project, then when cash flows for a project are estimated, interest payments should be included in the analysis.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following is NOT a relevant cash flow and thus should not be reflected in the analysis of a capital budgeting project?

Accepted Answer

A)  Changes in net working capital. 
B)  Shipping and installation costs. 
C)  Cannibalization effects. 
D)  Opportunity costs. 
E)  Sunk costs that have been expensed for tax purposes. 
A)  Changes in net working capital. 
B)  Shipping and installation costs. 
C)  Cannibalization effects. 
D)  Opportunity costs. 
E)  Sunk costs that have been expensed for tax purposes.

Question 9

The use of accelerated versus straight-line depreciation causes net income reported to stockholders to be lower, and cash flows higher, during eyear of a project's life, other things held constant.

Accepted Answer

A) True 
 B)False

Question 10

Liberty Services is now at the end of the final year of a project. The equipment originally cost $22,500, of which 75% has been depreciated. The firm can sell the used equipment today for $6,000, and its tax rate is 40%. What is the equipment's after-tax salvage value for use in a capital budgeting analysis? Note that if the equipment's final market value is less than its book value, the firm will receive a tax credit as a result of the sale.

Accepted Answer

A)  $5,558 
B)  $5,850 
C)  $6,143 
D)  $6,450 
E)  $6,772 
A)  $5,558 
B)  $5,850 
C)  $6,143 
D)  $6,450 
E)  $6,772

Question 11

Temple Corp. is considering a new project whose data are shown below. The equipment that would be used has a 3-year tax life, would be depreciated by the straight-line method over its 3-year life, and would have a zero salvage value. No new working capital would be required. Revenues and other operating costs are expected to be constant over the project's 3-year life. What is the project's NPV?

Accepted Answer

A)  $15,740 
B)  $16,569 
C)  $17,441 
D)  $18,359 
E)  $19,325 
A)  $15,740 
B)  $16,569 
C)  $17,441 
D)  $18,359 
E)  $19,325

Question 12

You work for Whittenerg Inc., which is considering a new project whose data are shown below. What is the project's Year 1 cash flow?

Accepted Answer

A)  $25,816 
B)  $27,175 
C)  $28,534 
D)  $29,960 
E)  $31,458 
A)  $25,816 
B)  $27,175 
C)  $28,534 
D)  $29,960 
E)  $31,458

Question 13

As a member of UA Corporation's financial staff, you must estimate the Year 1 cash flow for a proposed project with the following data. What is the Year 1 cash flow?

Accepted Answer

A)  $16,351 
B)  $17,212 
C)  $18,118 
D)  $19,071 
E)  $20,075 
A)  $16,351 
B)  $17,212 
C)  $18,118 
D)  $19,071 
E)  $20,075

A company is considering a proposed new plant that would increase productive capacity. Which of the following statements is CORRECT?

Typically, a project will have a higher NPV if the firm uses accelerated rather than straight-line depreciation. This is because the total cash flows over the project's life will be higher if accelerated depreciation is used, other things held constant.

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Any cash flows that can be classified as incremental to a particular project--i.e., results directly from the decision to undertake the project--should be reflected in the capital budgeting analysis.

Dalrymple Inc. is considering production of a new product. In evaluating whether to go ahead with the project, which of the following items should NOT be explicitly considered when cash flows are estimated?

If debt is to be used to finance a project, then when cash flows for a project are estimated, interest payments should be included in the analysis.

Which of the following is NOT a relevant cash flow and thus should not be reflected in the analysis of a capital budgeting project?

The use of accelerated versus straight-line depreciation causes net income reported to stockholders to be lower, and cash flows higher, during eyear of a project's life, other things held constant.

You work for Whittenerg Inc., which is considering a new project whose data are shown below. What is the project's Year 1 cash flow?

As a member of UA Corporation's financial staff, you must estimate the Year 1 cash flow for a proposed project with the following data. What is the Year 1 cash flow?

An Overview of Financial Management

Financial Markets and Institutions

Financial Statements, Cash Flow, and Taxes

Analysis of Financial Statements

Time Value of Money

Bonds and Their Valuation

Bonds and Their Valuation

Risk and Rates of Return

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The Basics of Capital Budgeting

Real Options and Other Topics in Capital Budgeting

Capital Structure and Leverage

Distributions to Shareholders: Dividends and

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Exam 12: Cash Flow Estimation and Risk Analysis

A company is considering a proposed new plant that would increase productive capacity. Which of the following statements is CORRECT?

Typically, a project will have a higher NPV if the firm uses accelerated rather than straight-line depreciation. This is because the total cash flows over the project's life will be higher if accelerated depreciation is used, other things held constant.

Which of the following statements is CORRECT?

Which of the following statements is CORRECT?

Any cash flows that can be classified as incremental to a particular project--i.e., results directly from the decision to undertake the project--should be reflected in the capital budgeting analysis.

Dalrymple Inc. is considering production of a new product. In evaluating whether to go ahead with the project, which of the following items should NOT be explicitly considered when cash flows are estimated?

If debt is to be used to finance a project, then when cash flows for a project are estimated, interest payments should be included in the analysis.

Which of the following is NOT a relevant cash flow and thus should not be reflected in the analysis of a capital budgeting project?

The use of accelerated versus straight-line depreciation causes net income reported to stockholders to be lower, and cash flows higher, during eyear of a project's life, other things held constant.

You work for Whittenerg Inc., which is considering a new project whose data are shown below. What is the project's Year 1 cash flow?

As a member of UA Corporation's financial staff, you must estimate the Year 1 cash flow for a proposed project with the following data. What is the Year 1 cash flow?

An Overview of Financial Management

Financial Markets and Institutions

Financial Statements, Cash Flow, and Taxes

Analysis of Financial Statements

Time Value of Money

Bonds and Their Valuation

Bonds and Their Valuation

Risk and Rates of Return

Stocks and Their Valuation

The Cost of Capital

The Basics of Capital Budgeting

Real Options and Other Topics in Capital Budgeting

Capital Structure and Leverage

Distributions to Shareholders: Dividends and

Working Capital Management

Financial Planning and Forecasting

Derivatives and Risk Management

Multinational Financial Management

Hybrid Financing: Preferred Stock, Leasing, Warrants, and Convertibles

Mergers and Acquisitions

Financial Management and Stock Equilibrium

Filters