Question 1

Given the following data for Project M:

Accepted Answer

A)  $51.70 
B)  $35.54 
C)  $45.21 
D)  None of the above 
A)  $51.70 
B)  $35.54 
C)  $45.21 
D)  None of the above

Question 2

A capital equipment costing $400,000 today has no (zero) salvage value at the end of 5 years. If straight-line depreciation is used, what is the book value of the equipment at the end of three years?

Accepted Answer

A)  $120,000 
B)  $80,000 
C)  $160,000 
D)  $240,000 
A)  $120,000 
B)  $80,000 
C)  $160,000 
D)  $240,000

Question 3

Briefly explain the difference between an equivalent annual cost and an equivalent annual annuity.

Accepted Answer

The technique of equivalent annual cash

Question 4

A project requires an investment of $900 today. It has sales of $1,100 per year forever. Costs will be $600 the first year and increase by 20% per year. Ignoring taxes calculate the NPV of the project at 12% discount rate.

Accepted Answer

A)  $65.00 
B)  $57.51 
C)  $100.00 
D)  Cannot be calculated as g > r 
A)  $65.00 
B)  $57.51 
C)  $100.00 
D)  Cannot be calculated as g > r

Question 5

Define the term cash flow for a project.

Accepted Answer

Cash flow for a project is the

Question 6

OM Construction Company must choose between two types of cranes. Crane A costs
$600,000, will last for 5 years, and will require $60,000 in maintenance each year. Crane B costs $750,000 and will last for seven years and will require $30,000 in maintenance each year. Maintenance costs for cranes A and B are incurred at the end of each year. The appropriate discount rate is 12% per year. Which machine should OM Construction purchase?

Accepted Answer

A)  Crane A as EAC is $226,444 
B)  Crane B as EAC is $194,336 
C)  Crane A as the PV is $816,286 
D)  Cannot be calculated as the revenues for the project are not given 
A)  Crane A as EAC is $226,444 
B)  Crane B as EAC is $194,336 
C)  Crane A as the PV is $816,286 
D)  Cannot be calculated as the revenues for the project are not given

Question 7

You should replace a machine when the EAC of continuing to operate it exceeds the EAC
of the new machine.

Accepted Answer

A) True 
 B)False

Question 8

Do not forget to include interest and dividend payments when calculating the project's cash flows.

Accepted Answer

A) True 
 B)False

Question 9

The cost of a resource that may be relevant to an investment decision even when no cash changes hand is called a (an):

Accepted Answer

A)  Sunk cost 
B)  Opportunity cost 
C)  Working capital 
D)  None of the above 
A)  Sunk cost 
B)  Opportunity cost 
C)  Working capital 
D)  None of the above

Question 10

Two machines, A and B, which perform the same functions, have the following costs and lives.   Which machine would you choose? The two machines are mutually exclusive and the cost of capital is 15%.

Accepted Answer

A)  Machine A as the EAC is $1789.89 
B)  Machine B as the EAC is $1922.88 
C)  Don't buy either machine 
D)  Accept both A and B 
A)  Machine A as the EAC is $1789.89 
B)  Machine B as the EAC is $1922.88 
C)  Don't buy either machine 
D)  Accept both A and B

Question 11

Preferably, cash flows for a project are estimated as:

Accepted Answer

A)  Cash flows before taxes 
B)  Cash flows after taxes 
C)  Accounting profits before taxes 
D)  Accounting profits after taxes 
A)  Cash flows before taxes 
B)  Cash flows after taxes 
C)  Accounting profits before taxes 
D)  Accounting profits after taxes

Question 12

What are some of the additional factors that have to be considered while estimating cash flows in other countries and currencies?

Accepted Answer

• Currency of the cash flow should be re

Question 13

Net Working Capital should be considered in project cash flows because:

Accepted Answer

A)  Firms must invest cash in short-term assets to produce finished goods 
B)  They are sunk costs 
C)  Firms need positive NPV projects for investment 
D)  None of the above 
A)  Firms must invest cash in short-term assets to produce finished goods 
B)  They are sunk costs 
C)  Firms need positive NPV projects for investment 
D)  None of the above

Question 14

In the MACRS system of depreciation most industrial equipment fall into the ten- and fifteen-year classes.

Accepted Answer

A) True 
 B)False

Question 15

The rule for comparing machines with different lines is to select the machine with the greatest equivalent annual cost (EAC).

Accepted Answer

A) True 
 B)False

Question 16

Working capital is needed additional investment in the project and should considered for cash flow estimation.

Accepted Answer

A) True 
 B)False

Question 17

If the discount rate is stated in nominal terms, then in order to calculate the NPV in a consistent manner requires that project:
I. cash flows be estimated in nominal terms
II. cash flows be estimated in real terms
III. accounting income be used

Accepted Answer

A)  I only 
B)  II only 
C)  III only 
D)  None of the above 
A)  I only 
B)  II only 
C)  III only 
D)  None of the above

Question 18

Equivalent annual cash flow approach can be used to determine the year in which the existing machine can be profitably replaced with a new machine.

Accepted Answer

A) True 
 B)False

Question 19

A cash flow received in two years is expected to be $10,816 in nominal terms. If the real rate of interest is 2% and the inflation rate is 4%, what is the real cash flow for year-2?

Accepted Answer

A)  $11,236 
B)  $10,816 
C)  $10,000 
D)  $9,246 
A)  $11,236 
B)  $10,816 
C)  $10,000 
D)  $9,246

Question 20

The NPV value obtained by discounting nominal cash flows using the nominal discount rate is the:
I. same as the NPV value obtained by discounting real cash flows using the real discount rate II) same as the NPV value obtained by discounting real cash flows using the nominal discount rate
III. same as the NPV value obtained by discounting nominal cash flows using the real discount rate

Accepted Answer

A)  I only 
B)  II only 
C)  III only 
D)  II and III only 
A)  I only 
B)  II only 
C)  III only 
D)  II and III only

Exam 6: Making Investment Decisions With the Net Present Value Rule

Given the following data for Project M:

A capital equipment costing $400,000 today has no (zero) salvage value at the end of 5 years. If straight-line depreciation is used, what is the book value of the equipment at the end of three years?

Briefly explain the difference between an equivalent annual cost and an equivalent annual annuity.

A project requires an investment of $900 today. It has sales of $1,100 per year forever. Costs will be $600 the first year and increase by 20% per year. Ignoring taxes calculate the NPV of the project at 12% discount rate.

Define the term cash flow for a project.

You should replace a machine when the EAC of continuing to operate it exceeds the EAC of the new machine.

Do not forget to include interest and dividend payments when calculating the project's cash flows.

The cost of a resource that may be relevant to an investment decision even when no cash changes hand is called a (an):

Two machines, A and B, which perform the same functions, have the following costs and lives. Which machine would you choose? The two machines are mutually exclusive and the cost of capital is 15%.

Preferably, cash flows for a project are estimated as:

What are some of the additional factors that have to be considered while estimating cash flows in other countries and currencies?

Net Working Capital should be considered in project cash flows because:

In the MACRS system of depreciation most industrial equipment fall into the ten- and fifteen-year classes.

The rule for comparing machines with different lines is to select the machine with the greatest equivalent annual cost (EAC).

Working capital is needed additional investment in the project and should considered for cash flow estimation.

If the discount rate is stated in nominal terms, then in order to calculate the NPV in a consistent manner requires that project: I. cash flows be estimated in nominal terms II. cash flows be estimated in real terms III. accounting income be used

Equivalent annual cash flow approach can be used to determine the year in which the existing machine can be profitably replaced with a new machine.

A cash flow received in two years is expected to be $10,816 in nominal terms. If the real rate of interest is 2% and the inflation rate is 4%, what is the real cash flow for year-2?

Goals and Governance of the Firm

How to Calculate Present Values

Valuing Bonds

The Value of Common Stocks

Net Present Value and Other Investment Criteria

Introduction to Risk and Return

Portfolio Theory and the Capital Asset Pricing Model

Risk and the Cost of Capital

Project Analysis

Investment, Strategy, and Economic Rents

Agency Problems, Compensation, and Performance Measurement

Efficient Markets and Behavioral Finance

An Overview of Corporate Financing

How Corporations Issue Securities

Payout Policy

Does Debt Policy Matter

How Much Should a Corporation Borrow

Financing and Valuation

Understanding Options

Valuing Options

Real Options

Credit Risk and the Value of Corporate Debt

The Many Different Kinds of Debt

Leasing

Managing Risk

Managing International Risks

Financial Analysis

Financial Planning

Working Capital Management

Mergers

Corporate Restructuring

Governance and Corporate Control Around the World

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