Question 1

Which of the following statements best describes externalities?

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 favourable 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 decline. 
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 favour 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. 
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 favourable 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 decline. 
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 favour 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. B

Question 2

Capital cost allowance (CCA) rates are based on the declining balance for tax calculation.

Accepted Answer

A) True 
 B)False  True

Question 3

Within the same asset class in the same year, when the sale of assets exceeds the purchase, net acquisition is negative. The half-year rule will apply.

Accepted Answer

A) True 
 B)False  False

Question 4

Laurier Inc., a household products firm, is considering production of a new detergent. 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 detergent 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 other Laurier 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 is expected to benefit other projects that might be proposed in the future. 
D)  The new detergent will cut into sales of the firm's other detergents. 
A)  The company will produce the detergent 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 other Laurier 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 is expected to benefit other projects that might be proposed in the future. 
D)  The new detergent will cut into sales of the firm's other detergents.

Question 5

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

Accepted Answer

A)  changes in net operating working capital 
B)  shipping and installation costs 
C)  cannibalization effects 
D)  sunk costs that have been expensed for tax purposes 
A)  changes in net operating working capital 
B)  shipping and installation costs 
C)  cannibalization effects 
D)  sunk costs that have been expensed for tax purposes

Question 6

Accepted Answer

A)  Sensitivity analysis is a good way to measure market risk because it explicitly takes into account diversification effects. 
B)  One advantage of sensitivity analysis relative to scenario analysis is that it explicitly takes into account the probability of specific effects occurring, whereas scenario analysis cannot account for probabilities. 
C)  Simulation analysis is a computerized version of scenario analysis where input variables are selected randomly on the basis of their probability distributions. 
A)  Sensitivity analysis is a good way to measure market risk because it explicitly takes into account diversification effects. 
B)  One advantage of sensitivity analysis relative to scenario analysis is that it explicitly takes into account the probability of specific effects occurring, whereas scenario analysis cannot account for probabilities. 
C)  Simulation analysis is a computerized version of scenario analysis where input variables are selected randomly on the basis of their probability distributions.

Question 7

Sensitivity analysis measures the stand-alone risk of a project by showing how much the project's NPV is affected by a small change in one of the input variables, such as sales. Other things held constant, with the independent variable graphed on the horizontal axis, the steeper the graph of the relationship line, the more risky the project.

Accepted Answer

A) True 
 B)False

Question 8

Fool Proof Software is considering a new project whose data are shown below. The equipment has an economic life of 3 years, and is in the CCA class 10 (30%). Revenues and cash operating costs are expected to be constant over the project's 3-year life. What is the net operating cash flow for Year 1?

Accepted Answer

A)  $26,162.50 
B)  $28,770.00 
C)  $30,359.25 
D)  $25,275.50 
A)  $26,162.50 
B)  $28,770.00 
C)  $30,359.25 
D)  $25,275.50

Question 9

Opportunity costs include those cash inflows that could be generated from assets the firm already owns, if those assets were not used for the project being evaluated.

Accepted Answer

A) True 
 B)False

Question 10

It is extremely difficult to estimate the revenues and costs associated with large, complex projects that take several years to develop. This is why subjective judgment instead of a discounted cash flow analysis is recommended for such projects.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following statements best describes sunk costs?

Accepted Answer

A)  A sunk cost is any cost that must be expended in order to complete a project and bring it into operation. 
B)  A sunk cost is any cost that was expended in the past but can be recovered if the firm decides not to go forward with the project. 
C)  A sunk cost is a cost that was incurred and expensed in the past and cannot be recovered if the firm decides not to go forward with the project. 
D)  Sunk costs were formerly hard to deal with, but once the NPV method came into wide use, it became possible to simply include sunk costs in the cash flows and then calculate the PV. 
A)  A sunk cost is any cost that must be expended in order to complete a project and bring it into operation. 
B)  A sunk cost is any cost that was expended in the past but can be recovered if the firm decides not to go forward with the project. 
C)  A sunk cost is a cost that was incurred and expensed in the past and cannot be recovered if the firm decides not to go forward with the project. 
D)  Sunk costs were formerly hard to deal with, but once the NPV method came into wide use, it became possible to simply include sunk costs in the cash flows and then calculate the PV.

Question 12

Dumpe Industries is analyzing an average-risk project, and the following data have been developed. Unit sales will be constant, but the sales price will increase with inflation. Fixed costs will also be constant, but variable costs will rise with inflation. The project should last for 3 years, and there will be no salvage value. This is just one project for the firm, so any losses can be used to offset gains on other firm projects. What is the project's expected NPV? (Note: the constant annual capital cost deduction rate facilitates the calculations.)

Accepted Answer

A)  $8,536 
B)  $8,985 
C)  $9,458 
D)  $9,931 
A)  $8,536 
B)  $8,985 
C)  $9,458 
D)  $9,931

Question 13

Which of the following statements best describes CCA?

Accepted Answer

A)  Since CCA deduction is a cash expense, the faster an asset is depreciated, the lower the projected NPV from investing in the asset. 
B)  When corporations use CCA depreciation method, the stockholder report financially looks better. 
C)  CCA is a pool concept calculating values for the entire asset class, not individual assets. 
D)  Using CCA declining-balance depreciation rather than straight line normally has the effect of slowing down cash flows and thus reducing a project's forecasted NPV. 
A)  Since CCA deduction is a cash expense, the faster an asset is depreciated, the lower the projected NPV from investing in the asset. 
B)  When corporations use CCA depreciation method, the stockholder report financially looks better. 
C)  CCA is a pool concept calculating values for the entire asset class, not individual assets. 
D)  Using CCA declining-balance depreciation rather than straight line normally has the effect of slowing down cash flows and thus reducing a project's forecasted NPV.

Question 14

The primary advantage of declining-balance depreciation over straight-line depreciation is that, while the total amount of depreciation and thus tax savings is unchanged, charges are taken sooner. This means that the firm gets the benefits of the tax savings sooner, which increases their present value.

Accepted Answer

A) True 
 B)False

Question 15

Rowell Company spent $3 million two years ago to build a plant for a new product. It then decided not to go forward with the project, so the building is available for sale or for a new product. Rowell owns the building free and clear-there is no mortgage on it. Which of the following statements is correct?

Accepted Answer

A)  Since the building has been paid for, it can be used by another project with no additional cost. Therefore, it should not be reflected in the cash flows for any new project. 
B)  If the building could be sold, then the after-tax proceeds that would be generated by any such sale should be charged as a cost to any new project that would use it. 
C)  This is an example of an externality, because the very existence of the building affects the cash flows for any new project that Rowell might consider. 
D)  Since the building was built in the past, its cost is a sunk cost and thus need not be considered when new projects are being evaluated, even if it would be used by those new projects. 
A)  Since the building has been paid for, it can be used by another project with no additional cost. Therefore, it should not be reflected in the cash flows for any new project. 
B)  If the building could be sold, then the after-tax proceeds that would be generated by any such sale should be charged as a cost to any new project that would use it. 
C)  This is an example of an externality, because the very existence of the building affects the cash flows for any new project that Rowell might consider. 
D)  Since the building was built in the past, its cost is a sunk cost and thus need not be considered when new projects are being evaluated, even if it would be used by those new projects.

Question 16

You work for Athens Inc., and you must estimate the Year 1 operating cash flow for a project with the following data. What is the Year 1 operating cash flow?

Accepted Answer

A)  $7,250 
B)  $7,431 
C)  $7,617 
D)  $7,807 
A)  $7,250 
B)  $7,431 
C)  $7,617 
D)  $7,807

Question 17

Estimating project cash flows is generally the most important but also the most difficult step in the capital budgeting process. Methodology, such as the use of NPV versus IRR, is important, but less so than estimating projects' cash flows.

Accepted Answer

A) True 
 B)False

Question 18

Majestic Theaters is considering investing in some new projection equipment whose data are shown below. The required equipment has a 7-year project life falling into a CCA class of 30%, but it would have a positive pre-tax salvage value at the end of Year 7. Also, some new working capital would be required, but it would be recovered at the end of the project's life. Revenues and cash operating costs are expected to be constant over the project's 7-year life. What is the project's NPV?

Accepted Answer

A)  $13,965 
B)  $15,226 
C)  $16,910 
D)  $17,882 
A)  $13,965 
B)  $15,226 
C)  $16,910 
D)  $17,882

Question 19

The undepreciated capital cost (UCC) is defined as the total cost of all assets in a class less the accumulated CCA for that class.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following should be considered when a company estimates the cash flows used to analyze a proposed project?

Accepted Answer

A)  The new project is expected to reduce sales of one of the company's existing products by 5%. 
B)  Since the firm's director of capital budgeting spent some of her time last year to evaluate the new project, a portion of her salary for that year should be charged to the project's initial cost. 
C)  The company has spent and expensed $1 million on R&D associated with the new project. 
D)  The firm would borrow all the money used to finance the new project, and the interest on this debt would be $1.5 million per year. 
A)  The new project is expected to reduce sales of one of the company's existing products by 5%. 
B)  Since the firm's director of capital budgeting spent some of her time last year to evaluate the new project, a portion of her salary for that year should be charged to the project's initial cost. 
C)  The company has spent and expensed $1 million on R&D associated with the new project. 
D)  The firm would borrow all the money used to finance the new project, and the interest on this debt would be $1.5 million per year.

Which of the following statements best describes externalities?

Capital cost allowance (CCA) rates are based on the declining balance for tax calculation.

Within the same asset class in the same year, when the sale of assets exceeds the purchase, net acquisition is negative. The half-year rule will apply.

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

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

Fool Proof Software is considering a new project whose data are shown below. The equipment has an economic life of 3 years, and is in the CCA class 10 (30%). Revenues and cash operating costs are expected to be constant over the project's 3-year life. What is the net operating cash flow for Year 1?

Opportunity costs include those cash inflows that could be generated from assets the firm already owns, if those assets were not used for the project being evaluated.

It is extremely difficult to estimate the revenues and costs associated with large, complex projects that take several years to develop. This is why subjective judgment instead of a discounted cash flow analysis is recommended for such projects.

Which of the following statements best describes sunk costs?

Which of the following statements best describes CCA?

You work for Athens Inc., and you must estimate the Year 1 operating cash flow for a project with the following data. What is the Year 1 operating cash flow?

Estimating project cash flows is generally the most important but also the most difficult step in the capital budgeting process. Methodology, such as the use of NPV versus IRR, is important, but less so than estimating projects' cash flows.

The undepreciated capital cost (UCC) is defined as the total cost of all assets in a class less the accumulated CCA for that class.

Which of the following should be considered when a company estimates the cash flows used to analyze a proposed project?

Overview of Financial Management and the Financial Environment

Financial Statements, Cash Flow, and Taxes

Analysis of Financial Statements

Time Value of Money

Financial Planning and Forecasting Financial Statements

Bonds, Bond Valuation, and Interest Rates

Risk, Return, and the Capital Asset Pricing Model

Stocks, Stock Valuation, and Stock Market Equilibrium

The Cost of Capital

The Basics of Capital Budgeting: Evaluating Cash Flows

Capital Structure Decisions

Distributions to Shareholders: Dividends and Repurchases

Initial Public Offerings, Investment Banking, and Financial Restructuring

Lease Financing

Capital Market Financing: Hybrid and Other Securities

Working Capital Management and Short-Term Financing

Current Asset Management

Financial Options and Applications in Corporate Finance

Decision Trees, Real Options, and Other Capital Budgeting Techniques

Derivatives and Risk Management

International Financial Management

Corporate Valuation, Value-Based Management, and Corporate Governance

Mergers, Acquisitions, and Restructuring

Filters

Exam 11: Cash Flow Estimation and Risk Analysis

Which of the following statements best describes externalities?

Capital cost allowance (CCA) rates are based on the declining balance for tax calculation.

Within the same asset class in the same year, when the sale of assets exceeds the purchase, net acquisition is negative. The half-year rule will apply.

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

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

Fool Proof Software is considering a new project whose data are shown below. The equipment has an economic life of 3 years, and is in the CCA class 10 (30%). Revenues and cash operating costs are expected to be constant over the project's 3-year life. What is the net operating cash flow for Year 1?

Opportunity costs include those cash inflows that could be generated from assets the firm already owns, if those assets were not used for the project being evaluated.

It is extremely difficult to estimate the revenues and costs associated with large, complex projects that take several years to develop. This is why subjective judgment instead of a discounted cash flow analysis is recommended for such projects.

Which of the following statements best describes sunk costs?

Which of the following statements best describes CCA?

You work for Athens Inc., and you must estimate the Year 1 operating cash flow for a project with the following data. What is the Year 1 operating cash flow?

Estimating project cash flows is generally the most important but also the most difficult step in the capital budgeting process. Methodology, such as the use of NPV versus IRR, is important, but less so than estimating projects' cash flows.

The undepreciated capital cost (UCC) is defined as the total cost of all assets in a class less the accumulated CCA for that class.

Which of the following should be considered when a company estimates the cash flows used to analyze a proposed project?

Overview of Financial Management and the Financial Environment

Financial Statements, Cash Flow, and Taxes

Analysis of Financial Statements

Time Value of Money

Financial Planning and Forecasting Financial Statements

Bonds, Bond Valuation, and Interest Rates

Risk, Return, and the Capital Asset Pricing Model

Stocks, Stock Valuation, and Stock Market Equilibrium

The Cost of Capital

The Basics of Capital Budgeting: Evaluating Cash Flows

Capital Structure Decisions

Distributions to Shareholders: Dividends and Repurchases

Initial Public Offerings, Investment Banking, and Financial Restructuring

Lease Financing

Capital Market Financing: Hybrid and Other Securities

Working Capital Management and Short-Term Financing

Current Asset Management

Financial Options and Applications in Corporate Finance

Decision Trees, Real Options, and Other Capital Budgeting Techniques

Derivatives and Risk Management

International Financial Management

Corporate Valuation, Value-Based Management, and Corporate Governance

Mergers, Acquisitions, and Restructuring

Filters