Question 1

The value of a proposed capital budgeting project depends upon the:

Accepted Answer

A) total cash flows produced. 
B) incremental cash flows produced. 
C) accounting profits produced. 
D) increase in total sales produced. 
A) total cash flows produced. 
B) incremental cash flows produced. 
C) accounting profits produced. 
D) increase in total sales produced.

Question 2

A new project requires an increase in both current assets and current liabilities of $125,000 each.What is the overall impact on net working capital investment?

Accepted Answer

A) an increase of zero. 
B) an increase of $125,000. 
C) an increase of $250,000. 
D) an increase of $62,500, when averaged over the life of the project. 
A) an increase of zero. 
B) an increase of $125,000. 
C) an increase of $250,000. 
D) an increase of $62,500, when averaged over the life of the project.

Question 3

A tax shield is equal to the reduction in:

Accepted Answer

A) tax liability resulting from a deductible expense. 
B) taxable income resulting from a deductible expense. 
C) cash flow from an expense. 
D) net income. 
A) tax liability resulting from a deductible expense. 
B) taxable income resulting from a deductible expense. 
C) cash flow from an expense. 
D) net income.

Question 4

Changes in net working capital can occur at:

Accepted Answer

A) the beginning of a project. 
B) the end of a project. 
C) any time during the life of a project. 
D) the beginning of any accounting period. 
A) the beginning of a project. 
B) the end of a project. 
C) any time during the life of a project. 
D) the beginning of any accounting period.

Question 5

The additional inventory investment that is often required for new projects can be partially funded by:

Accepted Answer

A) switching to accelerated depreciation methods. 
B) reducing accounts receivable. 
C) decreasing equipment purchases. 
D) increasing accounts payable. 
A) switching to accelerated depreciation methods. 
B) reducing accounts receivable. 
C) decreasing equipment purchases. 
D) increasing accounts payable.

Question 6

The NPV of an investment proposal becomes negative as a result of allocating a portion of the corporation president's salary.It is most likely the case that:

Accepted Answer

A) the project should be accepted. 
B) rejecting the project is the correct decision. 
C) the allocation should be postponed until the project is accepted. 
D) the salary should be considered an opportunity cost of the project. 
A) the project should be accepted. 
B) rejecting the project is the correct decision. 
C) the allocation should be postponed until the project is accepted. 
D) the salary should be considered an opportunity cost of the project.

Question 7

If the adoption of a new product will reduce the sales of an existing product, then the:

Accepted Answer

A) new product should not be undertaken. 
B) old product should be abandoned. 
C) incremental benefits of the new product may be overestimated. 
D) incremental benefits of the new product may be underestimated. 
A) new product should not be undertaken. 
B) old product should be abandoned. 
C) incremental benefits of the new product may be overestimated. 
D) incremental benefits of the new product may be underestimated.

Question 8

The opportunity cost of a resource should be considered in project analysis, unless:

Accepted Answer

A) no cash flows result from its use. 
B) the resource was purchased in a prior time period. 
C) the resource has been fully depreciated. 
D) the resource has no identifiable market value. 
A) no cash flows result from its use. 
B) the resource was purchased in a prior time period. 
C) the resource has been fully depreciated. 
D) the resource has no identifiable market value.

Question 9

New projects or products can have an indirect effect on the firm as well as a direct effect.Which of the following appears to be an indirect effect of launching a new product?

Accepted Answer

A) additional working capital is required. 
B) the sales force will need to be increased. 
C) sales of our similar product will decline. 
D) additional machinery must be purchased. 
A) additional working capital is required. 
B) the sales force will need to be increased. 
C) sales of our similar product will decline. 
D) additional machinery must be purchased.

Question 10

What is the amount of the operating cash flow for a firm with $500,000 profit before tax, $100,000 depreciation expense, and a 35 percent marginal tax rate?

Accepted Answer

A) $260,000 
B) $325,000 
C) $360,000 
D) $425,000 
A) $260,000 
B) $325,000 
C) $360,000 
D) $425,000

Question 11

A cost should be considered sunk when it:

Accepted Answer

A) is fully depreciated. 
B) produces no additional sales revenues. 
C) has no effect on future flows. 
D) is replaced by costs that are not yet sunk. 
A) is fully depreciated. 
B) produces no additional sales revenues. 
C) has no effect on future flows. 
D) is replaced by costs that are not yet sunk.

Question 12

Assuming that an asset has been fully depreciated according to its straight line CCA class, which of the following statements is correct concerning the value of the asset:

Accepted Answer

A) its market value is zero. 
B) its UCC value is zero. 
C) its book value is the current market value. 
D) it has neither book value nor market value. 
A) its market value is zero. 
B) its UCC value is zero. 
C) its book value is the current market value. 
D) it has neither book value nor market value.

Question 13

A new heater is being purchased for $250,000 that will be used for 5 years.Depreciation will be straight line over 5 years.The heater will reduce overall costs by $70,000.The corporate tax rate is 40%.Determine the operating cash flows from the cost cutting activity.Use three different methods to calculate operating cash flows.

Accepted Answer

The answer of A new heater is being purchased for...

Question 14

When assets are sold from a CCA pool:

Accepted Answer

A) other assets' values increase. 
B) the assets sold continue in the pool. 
C) a new rate is used in the pool. 
D) the remaining pool is subject to the net acquisitions rule. 
A) other assets' values increase. 
B) the assets sold continue in the pool. 
C) a new rate is used in the pool. 
D) the remaining pool is subject to the net acquisitions rule.

Question 15

For a profitable firm in the 35 percent marginal tax bracket with $100,000 of annual depreciation expense, the depreciation tax shield would be:

Accepted Answer

A) $10,500. 
B) $30,000. 
C) $35,000. 
D) $65,000. 
A) $10,500. 
B) $30,000. 
C) $35,000. 
D) $65,000.

Question 16

As a project comes to its end, there is a disinvestment in working capital, which also generates positive cash flow as inventories are sold off and accounts receivable are collected.

Accepted Answer

A) True 
 B)False

Question 17

When an asset class is terminated, there will be recaptured depreciation when the adjusted cost of disposal from UCC of the asset class is a negative balance.

Accepted Answer

A) True 
 B)False

Question 18

Your forecast shows $500,000 annually in sales for each of the next three years.If your second and third year predictions have failed to incorporate 5 percent expected annual inflation, how far off in total dollars is your three-year forecast?

Accepted Answer

A) $25,000 
B) $50,000 
C) $52,550 
D) $76,250 
A) $25,000 
B) $50,000 
C) $52,550 
D) $76,250

Question 19

What rate of nominal growth is expected in sales if they are currently $1,000,000 and expected to reach $1,600,000 in five years?

Accepted Answer

A) 3.20 percent 
B) 9.86 percent 
C) 12.00 percent 
D) 16.00 percent 
A) 3.20 percent 
B) 9.86 percent 
C) 12.00 percent 
D) 16.00 percent

Question 20

An investment today of $25,000 promises to return $10,000 annually for the next three years.What is the approximate real rate of return on this investment if inflation averages 6 percent annually during the period?

Accepted Answer

A) 3.5 percent 
B) 9.7 percent 
C) 14.0 percent 
D) 20.0 percent 
A) 3.5 percent 
B) 9.7 percent 
C) 14.0 percent 
D) 20.0 percent

Exam 9: Using Discounted Cash Flow Analysis to Make Investment Decisions

The value of a proposed capital budgeting project depends upon the:

A new project requires an increase in both current assets and current liabilities of $125,000 each.What is the overall impact on net working capital investment?

A tax shield is equal to the reduction in:

Changes in net working capital can occur at:

The additional inventory investment that is often required for new projects can be partially funded by:

The NPV of an investment proposal becomes negative as a result of allocating a portion of the corporation president's salary.It is most likely the case that:

If the adoption of a new product will reduce the sales of an existing product, then the:

The opportunity cost of a resource should be considered in project analysis, unless:

New projects or products can have an indirect effect on the firm as well as a direct effect.Which of the following appears to be an indirect effect of launching a new product?

What is the amount of the operating cash flow for a firm with $500,000 profit before tax, $100,000 depreciation expense, and a 35 percent marginal tax rate?

A cost should be considered sunk when it:

Assuming that an asset has been fully depreciated according to its straight line CCA class, which of the following statements is correct concerning the value of the asset:

When assets are sold from a CCA pool:

For a profitable firm in the 35 percent marginal tax bracket with $100,000 of annual depreciation expense, the depreciation tax shield would be:

As a project comes to its end, there is a disinvestment in working capital, which also generates positive cash flow as inventories are sold off and accounts receivable are collected.

When an asset class is terminated, there will be recaptured depreciation when the adjusted cost of disposal from UCC of the asset class is a negative balance.

Your forecast shows $500,000 annually in sales for each of the next three years.If your second and third year predictions have failed to incorporate 5 percent expected annual inflation, how far off in total dollars is your three-year forecast?

What rate of nominal growth is expected in sales if they are currently $1,000,000 and expected to reach $1,600,000 in five years?

An investment today of $25,000 promises to return $10,000 annually for the next three years.What is the approximate real rate of return on this investment if inflation averages 6 percent annually during the period?

Goals and Governance of the Firm

Financial Markets and Institutions

Accounting and Finance

Measuring Corporate Performance

The Time Value of Money

Valuing Bonds

Valuing Stocks

Net Present Value and Other Investment Criteria

Project Analysis

Introduction to Risk, Return, and the Opportunity Cost of Capital

Risk, Return, and Capital Budgeting

The Weighted-Average Cost of Capital and Company Valuation

Introduction to Corporate Financing and Governance

Venture Capital, Ipos, and Seasoned Offerings

Debt Policy

Leasing

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Cash and Inventory Management

Credit Management and Collection

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

Risk Management

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