Question 1

Adding depreciation expense to net profit equals:

Accepted Answer

A)  profit before tax. 
B)  total revenues. 
C)  the depreciation tax shield. 
D)  cash flows from operations. 
A)  profit before tax. 
B)  total revenues. 
C)  the depreciation tax shield. 
D)  cash flows from operations.

Question 2

What are the three methods to calculate cash flow from operations?

Accepted Answer

There are several ways to work out cash

Question 3

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 4

Firms favour assets with high CCA rates because:

Accepted Answer

A)  they have longer economic lives. 
B)  it reduces the total amount of taxes paid over the project's life. 
C)  they increase net accounting profits over the project's life. 
D)  their choice impacts project net present value favourably. 
A)  they have longer economic lives. 
B)  it reduces the total amount of taxes paid over the project's life. 
C)  they increase net accounting profits over the project's life. 
D)  their choice impacts project net present value favourably.

Question 5

Sunk costs do not affect project NPV.

Accepted Answer

A) True 
 B)False

Question 6

Why is it fairly easy to fall into the trap of discounting real cash flows with nominal rates?

Accepted Answer

A)  it is difficult to determine real discount rates. 
B)  increases in nominal cash flows are often not forecast. 
C)  inflation does not impact cash flows, but it does impact discount rates. 
D)  increases in revenues are offset by increases in costs. 
A)  it is difficult to determine real discount rates. 
B)  increases in nominal cash flows are often not forecast. 
C)  inflation does not impact cash flows, but it does impact discount rates. 
D)  increases in revenues are offset by increases in costs.

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

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 9

A project anticipates net cash flows of $10,000 at the end of year one,with such amount growing at the expected 5 percent rate of inflation over the subsequent four years.Calculate the real present value of this five-year cash stream if the firm employs a nominal discount rate of 15 percent.

Accepted Answer

A)  $33,522 
B)  $38,377 
C)  $43,294 
D)  $55,000 
A)  $33,522 
B)  $38,377 
C)  $43,294 
D)  $55,000

Question 10

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 11

Allocations of overhead should not affect a project's incremental cash flows unless the:

Accepted Answer

A)  project actually increased overhead expenses. 
B)  overhead cannot be recovered at the end of the project. 
C)  overhead cannot be allocated to other projects. 
D)  accountant is required to allocate costs to this project. 
A)  project actually increased overhead expenses. 
B)  overhead cannot be recovered at the end of the project. 
C)  overhead cannot be allocated to other projects. 
D)  accountant is required to allocate costs to this project.

Question 12

Which of the following statements is correct?

Accepted Answer

A)  real cash flows must be discounted at a real discount rate 
B)  nominal cash flows must be discounted at a nominal rate 
C)  (1 + real rate of interest) = (1 + nominal rate of interest)/(1 + inflation rate) 
D)  all statements are correct 
A)  real cash flows must be discounted at a real discount rate 
B)  nominal cash flows must be discounted at a nominal rate 
C)  (1 + real rate of interest) = (1 + nominal rate of interest)/(1 + inflation rate) 
D)  all statements are correct

Question 13

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 14

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 15

Working capital will affect incremental cash flows if:

Accepted Answer

A)  current liabilities change more than current assets. 
B)  current assets change more than current liabilities. 
C)  inventory changes from previous levels. 
D)  net working capital changes from previous levels. 
A)  current liabilities change more than current assets. 
B)  current assets change more than current liabilities. 
C)  inventory changes from previous levels. 
D)  net working capital changes from previous levels.

Question 16

Capital budgeting analysis focuses on profits as opposed to cash flows.

Accepted Answer

A) True 
 B)False

Question 17

Opportunity costs are evaluated for investment decisions at their historical (that is,book)cost.

Accepted Answer

A) True 
 B)False

Question 18

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

Question 19

At current prices and a 13 percent cost of capital,a project's NPV is $100,000.By what minimum amount must the initial cost of the project decrease (revenues will be unchanged)before you would prefer to wait two years before investing?

Accepted Answer

A)  $21,685 
B)  $26,000 
C)  $27,690 
D)  $29,380 
A)  $21,685 
B)  $26,000 
C)  $27,690 
D)  $29,380

Question 20

Which of the following methods will provide a correct analysis for capital budgeting purposes?

Accepted Answer

A)  discounting real cash flows with real rates. 
B)  discounting real cash flows with nominal rates. 
C)  discounting nominal cash flows with real rates. 
D)  all of the above methods will provide similar results. 
A)  discounting real cash flows with real rates. 
B)  discounting real cash flows with nominal rates. 
C)  discounting nominal cash flows with real rates. 
D)  all of the above methods will provide similar results.

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

Adding depreciation expense to net profit equals:

What are the three methods to calculate cash flow from operations?

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?

Firms favour assets with high CCA rates because:

Sunk costs do not affect project NPV.

Why is it fairly easy to fall into the trap of discounting real cash flows with nominal rates?

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

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.

A project anticipates net cash flows of $10,000 at the end of year one,with such amount growing at the expected 5 percent rate of inflation over the subsequent four years.Calculate the real present value of this five-year cash stream if the firm employs a nominal discount rate of 15 percent.

A cost should be considered sunk when it:

Allocations of overhead should not affect a project's incremental cash flows unless the:

Which of the following statements is correct?

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:

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.

Working capital will affect incremental cash flows if:

Capital budgeting analysis focuses on profits as opposed to cash flows.

Opportunity costs are evaluated for investment decisions at their historical (that is,book)cost.

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?

At current prices and a 13 percent cost of capital,a project's NPV is $100,000.By what minimum amount must the initial cost of the project decrease (revenues will be unchanged)before you would prefer to wait two years before investing?

Which of the following methods will provide a correct analysis for capital budgeting purposes?

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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