Question 1

Which of the following statements best describes CCA?

Accepted Answer

A)  Since CCA deduction is not a cash expense, it plays no role in capital budgeting. 
B)  The CCA method use a specific mandated CCA rate for each asset class. 
C)  The CCA deduction is equal to the year-end UCC for the pool divided by the mandated CCA rate. 
D)  The CCA method allows that the net capital cost of an asset is added to the pool in the year the asset is put in use. 
A)  Since CCA deduction is not a cash expense, it plays no role in capital budgeting. 
B)  The CCA method use a specific mandated CCA rate for each asset class. 
C)  The CCA deduction is equal to the year-end UCC for the pool divided by the mandated CCA rate. 
D)  The CCA method allows that the net capital cost of an asset is added to the pool in the year the asset is put in use.

Question 2

Moore & Moore (MM) is considering the purchase of a new machine for $50,000, installed. MM will use the CCA method to depreciate the machine. This machine is included in CCA class 8 (20%). MM expects to sell the machine at the end of its 4-year operating life for $10,000. If MM's marginal tax rate is 40%, what will be the present value of the CCA tax shield when it disposes of the machine at the end of Year 4? Assume that the relevant discount rate is 10%.

Accepted Answer

A)  $10,905 
B)  $9,059 
C)  $9,400 
D)  $8,930 
A)  $10,905 
B)  $9,059 
C)  $9,400 
D)  $8,930

Question 3

The change in net operating working capital associated with new projects is always positive, because new projects mean that more working capital will be required. This situation is true for both expansion and replacement projects.

Accepted Answer

A) True 
 B)False

Question 4

What is the best approach to take into account of the relative risk of a proposed project?

Accepted Answer

A)  adjusting the discount rate upward if the project is judged to have above-average risk 
B)  reducing the NPV by 10% for risky projects 
C)  picking a risk factor equal to the average discount rate 
D)  ignoring risk because project risk cannot be measured accurately 
A)  adjusting the discount rate upward if the project is judged to have above-average risk 
B)  reducing the NPV by 10% for risky projects 
C)  picking a risk factor equal to the average discount rate 
D)  ignoring risk because project risk cannot be measured accurately

Question 5

In cash flow estimation, the existence of externalities must be taken into account if those externalities have any effects on the firm's cash flows.

Accepted Answer

A) True 
 B)False

Question 6

Taussig Technologies is considering two potential projects, X and Y. In assessing the projects' risks, the company estimated the beta of each project versus both the company's other assets and the stock market, and it also conducted thorough scenario and simulation analyses. This research produced the following numbers:   Which of the following statements is correct?

Accepted Answer

A)  Project X has more stand-alone risk than Project Y. 
B)  Project X has more corporate (or within-firm) risk than Project Y. 
C)  Project X has more market risk than Project Y. 
D)  Project X has the same level of corporate risk as Project Y. 
A)  Project X has more stand-alone risk than Project Y. 
B)  Project X has more corporate (or within-firm) risk than Project Y. 
C)  Project X has more market risk than Project Y. 
D)  Project X has the same level of corporate risk as Project Y.

Question 7

Which of the following statements is correct?

Accepted Answer

A)  If a project can create employment in a slump area, firm should include such an externality in the NPV calculations. 
B)  If cannibalization exists, then the cash flows associated with the project must be increased to offset these effects. Otherwise, the calculated NPV will be biased downward. 
C)  If cannibalization is determined to exist, then this means that the calculated NPV considering cannibalization will be higher than the NPV that does not recognize these effects. 
D)  Cannibalization is a type of externality that is not against the law, and any harm it causes is done to the firm itself. 
A)  If a project can create employment in a slump area, firm should include such an externality in the NPV calculations. 
B)  If cannibalization exists, then the cash flows associated with the project must be increased to offset these effects. Otherwise, the calculated NPV will be biased downward. 
C)  If cannibalization is determined to exist, then this means that the calculated NPV considering cannibalization will be higher than the NPV that does not recognize these effects. 
D)  Cannibalization is a type of externality that is not against the law, and any harm it causes is done to the firm itself.

Question 8

Party Place is considering a new investment whose data are shown below. The equipment that would be used would have a constant annual capital cost allowance over the project's 3-year life and a zero salvage value. This project would require some additional working capital that 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 3-year life. What is the project's NPV? (Hint: Cash flows are constant in Years 1 to 3. CCA is modified to smooth out the calculations.)

Accepted Answer

A)  $24,112 
B)  $25,318 
C)  $26,584 
D)  $27,913 
A)  $24,112 
B)  $25,318 
C)  $26,584 
D)  $27,913

Question 9

If an investment project would make use of land that the firm currently owns, the project should be charged with the opportunity cost of the land.

Accepted Answer

A) True 
 B)False

Which of the following statements best describes CCA?

The change in net operating working capital associated with new projects is always positive, because new projects mean that more working capital will be required. This situation is true for both expansion and replacement projects.

What is the best approach to take into account of the relative risk of a proposed project?

In cash flow estimation, the existence of externalities must be taken into account if those externalities have any effects on the firm's cash flows.

Which of the following statements is correct?

If an investment project would make use of land that the firm currently owns, the project should be charged with the opportunity cost of the land.

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 CCA?

The change in net operating working capital associated with new projects is always positive, because new projects mean that more working capital will be required. This situation is true for both expansion and replacement projects.

What is the best approach to take into account of the relative risk of a proposed project?

In cash flow estimation, the existence of externalities must be taken into account if those externalities have any effects on the firm's cash flows.

Which of the following statements is correct?

If an investment project would make use of land that the firm currently owns, the project should be charged with the opportunity cost of the land.

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