Question 1

Which of the following changes in working capital is least likely, given an increase in the overall level of sales?

Accepted Answer

A) an increase in inventories 
B) an increase in accounts payable 
C) a decrease in accounts receivable 
D) a decrease in accruals 
A) an increase in inventories 
B) an increase in accounts payable 
C) a decrease in accounts receivable 
D) a decrease in accruals

Question 2

How is the company's tax bill affected by capital cost allowance (CCA) and how does this affect project value?

Accepted Answer

CCA is not a cash flow.However, because

Question 3

Suppose you finance a project partly with debt, you should neither subtract the debt proceeds from the required investment, nor would you recognize the interest and principal payments on the debt as cash outflows.

Accepted Answer

A) True 
 B)False

Question 4

With the half-year rule, the depreciation percentage is lower in the first year than in the second year.This is due to the fact that:

Accepted Answer

A) the depreciation percentage increases in each year. 
B) assets are assumed to be acquired at mid-year. 
C) depreciation expense increases at the rate of inflation. 
D) declining balance depreciation is less attractive than straight-line depreciation. 
A) the depreciation percentage increases in each year. 
B) assets are assumed to be acquired at mid-year. 
C) depreciation expense increases at the rate of inflation. 
D) declining balance depreciation is less attractive than straight-line depreciation.

Question 5

Assume your firm has an unused machine that originally cost $75,000, has a book value of $20,000, and is currently worth $25,000.Ignoring taxes, the correct opportunity cost for this machine in capital budgeting decisions is:

Accepted Answer

A) $75,000. 
B) $25,000. 
C) $20,000. 
D) $5,000. 
A) $75,000. 
B) $25,000. 
C) $20,000. 
D) $5,000.

Question 6

Which of the following is least likely to influence the opportunity cost of an asset?

Accepted Answer

A) its current market value 
B) alternative uses for the asset 
C) the current demand for the asset 
D) its current book value 
A) its current market value 
B) alternative uses for the asset 
C) the current demand for the asset 
D) its current book value

Question 7

Describe how adding depreciation expense to net income can approximate cash flow from operations.Does depreciation expense really reflect a cash flow?

Accepted Answer

Depreciation is a non-cash expense that

Question 8

Discuss the statement, "Changes in working capital necessitated by a project represent only an opportunity cost to the firm."

Accepted Answer

Most capital budgeting projects require

Question 9

It is easy to imagine that a financial manager would be reluctant to abandon a project in which large sums of money have been invested with no cash return.Discuss the important concept here that should be the manager's guiding policy.

Accepted Answer

Financial managers should recall that pr

Question 10

When is it appropriate to include sunk costs in the evaluation of a project?

Accepted Answer

A) include sunk costs when they are relatively large 
B) include sunk costs if it improves the project's NPV 
C) include sunk costs if they are considered to be overhead costs 
D) it is never appropriate to include sunk costs 
A) include sunk costs when they are relatively large 
B) include sunk costs if it improves the project's NPV 
C) include sunk costs if they are considered to be overhead costs 
D) it is never appropriate to include sunk costs

Question 11

Discounting real cash flows with real interest rates gives an overly optimistic idea of a project's value.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following would be more likely to make an unacceptable project appear acceptable?

Accepted Answer

A) discounting real cash flows with real rates. 
B) discounting nominal cash flows with real rates. 
C) discounting real cash flows with nominal rates. 
D) discounting nominal cash flows with nominal rates. 
A) discounting real cash flows with real rates. 
B) discounting nominal cash flows with real rates. 
C) discounting real cash flows with nominal rates. 
D) discounting nominal cash flows with nominal rates.

Question 13

Chan manufactures and sells 10 million bags to its international market at a cost of $20.00 each.It is about to introduce a new line of bags due to past success and forecast sales to be 12 million bags at a new price of $25 each.Sales on the old bags are anticipated to fall to 3 million.The old bags cost $6 each to manufacture, and the new ones will cost $8 each.What will be the cash flow used to evaluate the present value of the introduction of the new bag?

Accepted Answer

Gross revenues from new bag = 12 million

Question 14

Which of the following statements regarding investment in working capital is incorrect?

Accepted Answer

A) investment in working capital, unlike investment in plant and equipment, represents a positive cash flow. 
B) the cash flow is measured by the change in working capital, not the level of working capital. 
C) the working capital may change during the life of the project. 
D) working capital is recovered at the end of the project. 
A) investment in working capital, unlike investment in plant and equipment, represents a positive cash flow. 
B) the cash flow is measured by the change in working capital, not the level of working capital. 
C) the working capital may change during the life of the project. 
D) working capital is recovered at the end of the project.

Question 15

Which of the following costs probably should not be allocated to the investment needed for a new project?

Accepted Answer

A) increase in accounts receivable. 
B) new warehouse, built for this project. 
C) 25 percent of the vice president's salary. 
D) labour expense for employees in new warehouse. 
A) increase in accounts receivable. 
B) new warehouse, built for this project. 
C) 25 percent of the vice president's salary. 
D) labour expense for employees in new warehouse.

Question 16

What is the net effect on a firm's working capital if a new project requires: $30,000 increase in inventory, $10,000 increase in accounts receivable, $25,000 increase in machinery, and a $20,000 increase in accounts payable?

Accepted Answer

A) - $5,000 
B) + $10,000 
C) + $20,000 
D) + $45,000 
A) - $5,000 
B) + $10,000 
C) + $20,000 
D) + $45,000

Question 17

Opportunity costs for organizational resources:

Accepted Answer

A) are limited to the explicit cash flows involved. 
B) are determined according to the marginal tax rate. 
C) can involve no cash flows. 
D) should not be determined for existing products. 
A) are limited to the explicit cash flows involved. 
B) are determined according to the marginal tax rate. 
C) can involve no cash flows. 
D) should not be determined for existing products.

Question 18

The present value at any given discount rate of the depreciation tax shield is:

Accepted Answer

A) equal for all depreciation methods. 
B) higher with MACRS than straight-line depreciation. 
C) higher for the tenth year than the seven-year recovery period class. 
D) likely to increase annually due to inflation. 
A) equal for all depreciation methods. 
B) higher with MACRS than straight-line depreciation. 
C) higher for the tenth year than the seven-year recovery period class. 
D) likely to increase annually due to inflation.

Question 19

Cash flow from operations = (revenues-cash expenses) × (1-tax rate) + (depreciation × tax rate).

Accepted Answer

A) True 
 B)False

Question 20

The rationale for not including sunk costs in capital budgeting decisions is that they:

Accepted Answer

A) are usually small in magnitude. 
B) revert at the end of the investment. 
C) have no incremental effect. 
D) reduce the estimated NPV. 
A) are usually small in magnitude. 
B) revert at the end of the investment. 
C) have no incremental effect. 
D) reduce the estimated NPV.

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

Which of the following changes in working capital is least likely, given an increase in the overall level of sales?

How is the company's tax bill affected by capital cost allowance (CCA) and how does this affect project value?

Suppose you finance a project partly with debt, you should neither subtract the debt proceeds from the required investment, nor would you recognize the interest and principal payments on the debt as cash outflows.

With the half-year rule, the depreciation percentage is lower in the first year than in the second year.This is due to the fact that:

Assume your firm has an unused machine that originally cost $75,000, has a book value of $20,000, and is currently worth $25,000.Ignoring taxes, the correct opportunity cost for this machine in capital budgeting decisions is:

Which of the following is least likely to influence the opportunity cost of an asset?

Describe how adding depreciation expense to net income can approximate cash flow from operations.Does depreciation expense really reflect a cash flow?

Discuss the statement, "Changes in working capital necessitated by a project represent only an opportunity cost to the firm."

It is easy to imagine that a financial manager would be reluctant to abandon a project in which large sums of money have been invested with no cash return.Discuss the important concept here that should be the manager's guiding policy.

When is it appropriate to include sunk costs in the evaluation of a project?

Discounting real cash flows with real interest rates gives an overly optimistic idea of a project's value.

Which of the following would be more likely to make an unacceptable project appear acceptable?

Which of the following statements regarding investment in working capital is incorrect?

Which of the following costs probably should not be allocated to the investment needed for a new project?

What is the net effect on a firm's working capital if a new project requires: $30,000 increase in inventory, $10,000 increase in accounts receivable, $25,000 increase in machinery, and a $20,000 increase in accounts payable?

Opportunity costs for organizational resources:

The present value at any given discount rate of the depreciation tax shield is:

Cash flow from operations = (revenues-cash expenses) × (1-tax rate) + (depreciation × tax rate).

The rationale for not including sunk costs in capital budgeting decisions is that they:

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