Question 1

In project analysis,allocations of overhead should be limited to only those that represent additional expense.

Accepted Answer

A) True 
 B)False  True

Question 2

How can the cash flows of a project be computed from standard financial statements?

Accepted Answer

Projected cash flow does not equal profit.You must allow for changes in working capital as well as non-cash expenses such as depreciation.Also,if you use a nominal cost of capital,consistency requires that you forecast nominal cash flows,that is,cash flows that recognize effect of inflation.

Question 3

CumChan has been in the chemical industry for the past 22 years.Current employment total is 65 workers,and the current economic situation (inflation of 4 percent,nominal discount rate)has forced the company to close its doors.CumChan however,must continue to pay health care costs for the next four years at a cost of $2,400 per worker,at an increasing rate of 3 percent above inflation.A consultant is called in to find the present value of this obligation.

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Question 3

Correct Answer:

Verified

Cost per worker will increase by seven percent (2400x .07)per year
The present value at 10 percent is $9,214 if the first payment is made immediately.If it is delayed a year,present value falls to $8,377.

Accepted Answer

Cost per worker will increase by seven percent (2400x .07)per year
The present value at 10 percent is $9,214 if the first payment is made immediately.If it is delayed a year,present value falls to $8,377.

Question 4

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 5

Capital budgeting projects typically assume that all cash flows transpire at the end of the year.The reason for this is that:

Accepted Answer

A)  less tax liability results from this practice. 
B)  balance sheets are prepared at the end of the year. 
C)  it is easier for the analyst in this manner. 
D)  most corporations collect their cash at the end of the year. 
A)  less tax liability results from this practice. 
B)  balance sheets are prepared at the end of the year. 
C)  it is easier for the analyst in this manner. 
D)  most corporations collect their cash at the end of the year.

Question 6

The total depreciation tax shield equals the product of depreciation and the tax rate.

Accepted Answer

A) True 
 B)False

Question 7

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 8

The method of financing a project affects the determination of its cash flows for capital budgeting purposes.

Accepted Answer

A) True 
 B)False

Question 9

Although the rule seems very straightforward,why is it stated that financial managers often make the mistake of discounting real cash flows with nominal rates? Mention one common example,and state the effect that this has on project evaluation.

Accepted Answer

Perhaps the most common violation of thi

Question 10

Upon the sale of equipment at the end of its useful life,tax liability will be incurred whenever the book value of the equipment exceeds the sales price.

Accepted Answer

A) True 
 B)False

Question 11

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.

Question 12

Which of the following statements is most likely to be correct for a project in which the NPV is negative when based on the inflows from net income?

Accepted Answer

A)  NPV may turn positive after adjusting for depreciation expense. 
B)  NPV should be calculated with pretax cash flows. 
C)  NPV has probably been overestimated. 
D)  The project should be rejected or abandoned. 
A)  NPV may turn positive after adjusting for depreciation expense. 
B)  NPV should be calculated with pretax cash flows. 
C)  NPV has probably been overestimated. 
D)  The project should be rejected or abandoned.

Question 13

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 14

What is the amount of the annual depreciation tax shield for a firm with $200,000 in net income,$75,000 in depreciation expense and a 35 percent marginal tax rate?

Accepted Answer

A)  $26,250 
B)  $43,750 
C)  $70,000 
D)  $75,000 
A)  $26,250 
B)  $43,750 
C)  $70,000 
D)  $75,000

Question 15

The likely effect of discounting nominal cash flows with real interest rates will be to:

Accepted Answer

A)  make an investment's NPV appear more attractive. 
B)  make an investment's NPV appear less attractive. 
C)  correctly calculate an investment's NPV if inflation is expected. 
D)  correctly calculate an investment's NPV, regardless of expected inflation. 
A)  make an investment's NPV appear more attractive. 
B)  make an investment's NPV appear less attractive. 
C)  correctly calculate an investment's NPV if inflation is expected. 
D)  correctly calculate an investment's NPV, regardless of expected inflation.

Question 16

What is the undiscounted cash flow in the final year of an investment,assuming: 10,000 after-tax cash flows from operations,the fully depreciated machine,the sole asset in the pool,is sold for $1,000,the project had required $2,000 in additional working capital,and a 35 percent tax rate?

Accepted Answer

A)  $8,450 
B)  $12,600 
C)  $12,650 
D)  $14,000 
A)  $8,450 
B)  $12,600 
C)  $12,650 
D)  $14,000

Question 17

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 18

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 19

Corporate income statements are designed primarily to show:

Accepted Answer

A)  cash flows during a period. 
B)  account balances at the end of a period. 
C)  performance during a period. 
D)  market values of assets and liabilities. 
A)  cash flows during a period. 
B)  account balances at the end of a period. 
C)  performance during a period. 
D)  market values of assets and liabilities.

Question 20

One can continue to earn CCA tax shields from an asset sold from an existing pool if:

Accepted Answer

A)  UCC is positive and greater than salvage. 
B)  salvage is positive. 
C)  the present value of the tax shields is negative. 
D)  the tax bracket is greater than 50 percent. 
A)  UCC is positive and greater than salvage. 
B)  salvage is positive. 
C)  the present value of the tax shields is negative. 
D)  the tax bracket is greater than 50 percent.

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

In project analysis,allocations of overhead should be limited to only those that represent additional expense.

How can the cash flows of a project be computed from standard financial statements?

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

Capital budgeting projects typically assume that all cash flows transpire at the end of the year.The reason for this is that:

The total depreciation tax shield equals the product of depreciation and the tax rate.

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

The method of financing a project affects the determination of its cash flows for capital budgeting purposes.

Although the rule seems very straightforward,why is it stated that financial managers often make the mistake of discounting real cash flows with nominal rates? Mention one common example,and state the effect that this has on project evaluation.

Upon the sale of equipment at the end of its useful life,tax liability will be incurred whenever the book value of the equipment exceeds the sales price.

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

Which of the following statements is most likely to be correct for a project in which the NPV is negative when based on the inflows from net income?

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

What is the amount of the annual depreciation tax shield for a firm with $200,000 in net income,$75,000 in depreciation expense and a 35 percent marginal tax rate?

The likely effect of discounting nominal cash flows with real interest rates will be to:

What is the undiscounted cash flow in the final year of an investment,assuming: 10,000 after-tax cash flows from operations,the fully depreciated machine,the sole asset in the pool,is sold for $1,000,the project had required $2,000 in additional working capital,and a 35 percent tax rate?

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:

Changes in net working capital can occur at:

Corporate income statements are designed primarily to show:

One can continue to earn CCA tax shields from an asset sold from an existing pool if:

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 and Payout 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

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