Question 1

The net present value method assumes that the cash flows over the life of the project are reinvested at

Accepted Answer

A)  the computed internal rate of return 
B)  the risk-free rate 
C)  the market capitalization rate 
D)  the firm's cost of capital 
A)  the computed internal rate of return 
B)  the risk-free rate 
C)  the market capitalization rate 
D)  the firm's cost of capital

Question 2

Road Hawk Inc. is adding a new production line that will cost $720,000. The line will be depreciated on a straight-line basis over a 7-year period and will generate net cash flows of $160,000 in each of the 7 years. At the end of the project, it is expected the line can be sold as scrap for $10,000. If the firm's marginal tax rate is 40% and it's required rate of return is 14 percent, what is the net present value of this project?

Accepted Answer

A)  $70,091 
B)  -$27,920 
C)  $64,091 
D)  -$31,520 
A)  $70,091 
B)  -$27,920 
C)  $64,091 
D)  -$31,520

Question 3

A project requires a net investment of $450,000. It has a profitability index of 1.25 based on the firm's 12 percent cost of capital. Determine the net present value of the project.

Accepted Answer

A)  $ 112,500 
B)  $ 562,500 
C)  $1,012,500 
D)  $ 140,625 
A)  $ 112,500 
B)  $ 562,500 
C)  $1,012,500 
D)  $ 140,625

Question 4

Ecogen is considering the purchase of some new equipment that will cost $340,000 installed. The equipment will produce a product that must be FDA approved and this will require at least a year. Net cash flow in Year 1 will be a negative $110,000 but is expected to be a positive $50,000 in Year 2. Net cash flows will be $150,000, $240,000, and $330,000 in the next 3 years. At the end of 5 years the equipment and the product will be obsolete. If the firm's marginal tax rate is 40% and their costs of capital is 15%, should they invest in the new equipment?

Accepted Answer

A)  Yes, NPV = $2,090 
B)  Yes, NPV = $12,390 
C)  No, NPV = -$63,210 
D)  No, NPV = -$12,210 
A)  Yes, NPV = $2,090 
B)  Yes, NPV = $12,390 
C)  No, NPV = -$63,210 
D)  No, NPV = -$12,210

Question 5

The net present value method assumes that cash flows are reinvested at the ____, whereas the internal rate of return method assumes that cash flows are reinvested at the ____.

Accepted Answer

A)  discount rate, required rate of return 
B)  cost of capital, market rate of return 
C)  firm's cost of capital, computed internal rate of return 
D)  marginal cost of capital, discount rate 
A)  discount rate, required rate of return 
B)  cost of capital, market rate of return 
C)  firm's cost of capital, computed internal rate of return 
D)  marginal cost of capital, discount rate

Question 6

An investment project requires a net investment of $100,000. The project is expected to generate annual net cash inflows of $28,000 for the next 5 years. The firm's cost of capital is 12 percent. Determine the net present value for the project.

Accepted Answer

A)  $940 
B)  $100,940 
C)  $ 77,884 
D)  $ 40,000 
A)  $940 
B)  $100,940 
C)  $ 77,884 
D)  $ 40,000

Question 7

An investment project requires a net investment of $100,000. The project is expected to generate annual net cash inflows of $28,000 for the next 5 years. The firm's cost of capital is 12 percent. Determine the payback period for the project.

Accepted Answer

A)  0.28 years 
B)  1.4 years 
C)  3.57 years 
D)  17.86 years 
A)  0.28 years 
B)  1.4 years 
C)  3.57 years 
D)  17.86 years

Question 8

Zimmer, a manufacturer of modular rooms, plans to expand its operation in Landshut, Germany. The expansion will cost $14.5 million and is expected to generate annual net cash flows of DM4.5 million for a period of 12 years and then the operation will be sold for DM2 million. The cost of capital for the project is 14%. Using the spot exchange rate of $0.60 per DM, compute the NPV of this expansion project.

Accepted Answer

A)  $0.78 million 
B)  $1.03 million 
C)  $2.58 million 
D)  $11.39 million 
A)  $0.78 million 
B)  $1.03 million 
C)  $2.58 million 
D)  $11.39 million

Question 9

In order to compensate for inflation in capital budgeting procedures, it is necessary to:

Accepted Answer

A)  use constant dollar estimates of costs and revenues 
B)  use a low discount rate to avoid double counting for inflationary effects 
C)  rely heavily on the payback procedures 
D)  none of the above 
A)  use constant dollar estimates of costs and revenues 
B)  use a low discount rate to avoid double counting for inflationary effects 
C)  rely heavily on the payback procedures 
D)  none of the above

Question 10

A project requires a net investment of $100,000. At the firm's cost of capital of 10%, the project's profitability index is 1.15. Determine the net present value of the project.

Accepted Answer

A)  $15,000 
B)  $215,000 
C)  $115,000 
D)  none of the above/cannot be determined 
A)  $15,000 
B)  $215,000 
C)  $115,000 
D)  none of the above/cannot be determined

Question 11

ZPS Models is considering a project that has a NINV of $564,000 and generates net cash flows of $105,000 per year for 10 years. What is the NPV of this project if ZPS has a cost of capital of 12.45%?

Accepted Answer

A)  $47,625 
B)  $18,503 
C)  $17,490 
D)  none of the above 
A)  $47,625 
B)  $18,503 
C)  $17,490 
D)  none of the above

Question 12

Capital expenditures levels tend ____ (in real terms) during periods of relatively high inflation than during low inflation times.

Accepted Answer

A)  to be higher 
B)  to be lower 
C)  to be the same 
D)  to depend on business risk 
A)  to be higher 
B)  to be lower 
C)  to be the same 
D)  to depend on business risk

Question 13

The value additivity principle indicates that, when a firm undertakes an independent project, the value of the firm is increased by the ____ from the project.

Accepted Answer

A)  present value of the cash inflows 
B)  sum of the cash inflows and outflows 
C)  net present value 
D)  none of the above 
A)  present value of the cash inflows 
B)  sum of the cash inflows and outflows 
C)  net present value 
D)  none of the above

Question 14

The ____ is interpreted as the ____ for each dollar of initial investment.

Accepted Answer

A)  net present value; present value return 
B)  profitability index; cash flow return 
C)  profitability index; present value return 
D)  none of the above 
A)  net present value; present value return 
B)  profitability index; cash flow return 
C)  profitability index; present value return 
D)  none of the above

Question 15

Real options in capital budgeting can be classified in all of the following ways except:

Accepted Answer

A)  abandonment option 
B)  investment option 
C)  purchasing power option 
D)  shutdown options 
A)  abandonment option 
B)  investment option 
C)  purchasing power option 
D)  shutdown options

Question 16

A digital assembly system that costs $160,000 is expected to operate for 8 years. The estimated salvage value at the end of 8 years is $12,000. The system is expected to save the company $38,000 in labor costs before taxes and depreciation. The company will depreciate this system on a 5-year MACRS schedule. If the firm's cost of capital is 12% and its marginal tax rate is 35%, compute the NPV for the project. (Note: Requires MACRS tables)

Accepted Answer

A)  $4,045 
B)  $7,196 
C)  $20,873 
D)  $167,196 
A)  $4,045 
B)  $7,196 
C)  $20,873 
D)  $167,196

Question 17

GoFlo is a small growing firm that is considering the purchase of another truck to serve GoFlo's expanding customer base. The new truck will cost $21,000 and should generate annual net cash flows of $6,000 over the truck's 5-year life. What is the payback period for this project?

Accepted Answer

A)  3 years 
B)  4.2 years 
C)  3.5 years 
D)  3.3 years 
A)  3 years 
B)  4.2 years 
C)  3.5 years 
D)  3.3 years

Question 18

The payback period of an investment is defined as:

Accepted Answer

A)  the number of years required for cumulative profits from a project to equal the initial outlay. 
B)  the number of years required for the cumulative cash flows from a project to equal the initial outlay. 
C)  the number of years required for the cumulative cash flows from a project to equal the average investment in the project, when depreciation is considered. 
D)  a period of time sufficient to earn a rate of return equal to the firm's cost of capital. 
A)  the number of years required for cumulative profits from a project to equal the initial outlay. 
B)  the number of years required for the cumulative cash flows from a project to equal the initial outlay. 
C)  the number of years required for the cumulative cash flows from a project to equal the average investment in the project, when depreciation is considered. 
D)  a period of time sufficient to earn a rate of return equal to the firm's cost of capital.

Question 19

Maplewood Creations is considering the purchase of a new truck to replace an old truck that has a book value of $2,500 and a market value of $800. The annual depreciation expense on the old truck was $500. The new truck, which will cost $29,000, will reduce operating costs $9,000 per year over it's 6 year economic life. The new truck has a 5-year MACRS life and an estimated salvage value at the end of 6 years of $2,000. If Maplewood has a 40 percent marginal tax rate and a cost of capital of 12 percent, what is the NPV of the new truck? Use the Depreciation schedule listed below:
(5-Year depreciation Schedule: 20%, 32%, 19%, 12%, 12%, 5%)

Accepted Answer

A)  $1,517 
B)  $3,233 
C)  $29,037 
D)  $836 
A)  $1,517 
B)  $3,233 
C)  $29,037 
D)  $836

Question 20

G-III Apparel is considering increasing the size of a warehouse. The cost of the expansion is $825,000 and the increase in inventories and accounts payable will be $410,000 and $360,000 respectively. G-III expects that the expansion will increase net cash flows by $150,000 a year for the next 5 years and $200,000 a year for years 6-12. G-III has a 14% cost of capital and a marginal tax rate of 35%. What is the NPV of the warehouse expansion?

Accepted Answer

A)  -$3,450 
B)  $60,050 
C)  $10,050 
D)  -$338,570 
A)  -$3,450 
B)  $60,050 
C)  $10,050 
D)  -$338,570

Exam 10: Capital Budgeting: Decision Criteria and Real Option Considerations

The net present value method assumes that the cash flows over the life of the project are reinvested at

A project requires a net investment of $450,000. It has a profitability index of 1.25 based on the firm's 12 percent cost of capital. Determine the net present value of the project.

The net present value method assumes that cash flows are reinvested at the ____, whereas the internal rate of return method assumes that cash flows are reinvested at the ____.

An investment project requires a net investment of $100,000. The project is expected to generate annual net cash inflows of $28,000 for the next 5 years. The firm's cost of capital is 12 percent. Determine the net present value for the project.

An investment project requires a net investment of $100,000. The project is expected to generate annual net cash inflows of $28,000 for the next 5 years. The firm's cost of capital is 12 percent. Determine the payback period for the project.

In order to compensate for inflation in capital budgeting procedures, it is necessary to:

A project requires a net investment of $100,000. At the firm's cost of capital of 10%, the project's profitability index is 1.15. Determine the net present value of the project.

ZPS Models is considering a project that has a NINV of $564,000 and generates net cash flows of $105,000 per year for 10 years. What is the NPV of this project if ZPS has a cost of capital of 12.45%?

Capital expenditures levels tend ____ (in real terms) during periods of relatively high inflation than during low inflation times.

The value additivity principle indicates that, when a firm undertakes an independent project, the value of the firm is increased by the ____ from the project.

The ____ is interpreted as the ____ for each dollar of initial investment.

Real options in capital budgeting can be classified in all of the following ways except:

GoFlo is a small growing firm that is considering the purchase of another truck to serve GoFlo's expanding customer base. The new truck will cost $21,000 and should generate annual net cash flows of $6,000 over the truck's 5-year life. What is the payback period for this project?

The payback period of an investment is defined as:

The Role and Objective of Financial Management

The Domestic and International Financial Marketplace

Evaluation of Financial Performance

Financial Planning and Forecasting

The Time Value of Money

Fixed Income Securities: Characteristics and Valuation

Common Stock: Characteristics, Valuation, and Issuance

Analysis of Risk and Return

Capital Budgeting and Cash Flow Analysis

Capital Budgeting and Risk

The Cost of Capital

Capital Structure Concepts

Capital Structure Management in Practice

Dividend Policy

Working Capital Policy and Short-term Financing

The Management of Cash and Marketable Securities

Management of Accounts Receivable and Inventories

Lease and Intermediate-term Financing

Financing With Derivatives

Risk Management

International Financial Management

Corporate Restructuring

Continuous Compounding and Discounting

Mutually Exclusive Investments Having Unequal Lives

Breakeven Analysis

Bond Refunding Analysis

Taxes

Filters

The net present value method assumes that cash flows are reinvested at the , whereas the internal rate of return method assumes that cash flows are reinvested at the .

The is interpreted as the for each dollar of initial investment.