Question 1

Which of the following changes would be likely to increase the NPV of a project?

Accepted Answer

A) Increasing the firm's opportunity cost of capital 
B) Permitting a net decrease in working capital 
C) Spreading the total cash inflows over a longer interval 
D) Increasing the project's estimated expenses 
A) Increasing the firm's opportunity cost of capital 
B) Permitting a net decrease in working capital 
C) Spreading the total cash inflows over a longer interval 
D) Increasing the project's estimated expenses

Question 2

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 3

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 4

What effect is expected at the end of the life of a project that initially required a $20,000 increase in net working capital?

Accepted Answer

A) The $20,000 must now be paid by the firm 
B) The firm receives a $20,000 cash inflow 
C) Taxable income is reduced by $20,000 
D) No effects are expected from sunk costs 
A) The $20,000 must now be paid by the firm 
B) The firm receives a $20,000 cash inflow 
C) Taxable income is reduced by $20,000 
D) No effects are expected from sunk costs

Question 5

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

Accepted Answer

A) True 
 B)False

Question 6

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 7

If a project permits a reduction in the level of working capital, this reduction is assumed to increase cash flows.

Accepted Answer

A) True 
 B)False

Question 8

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 9

New projects or products can provide positive indirect effects as well as negative effects.Which of the following appears to be a positive indirect effect?

Accepted Answer

A) The new, efficient machine uses less electricity 
B) Orders of your complementary products increase 
C) The project has a positive NPV 
D) Accelerated methods of depreciation can be used 
A) The new, efficient machine uses less electricity 
B) Orders of your complementary products increase 
C) The project has a positive NPV 
D) Accelerated methods of depreciation can be used

Question 10

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 11

An asset's CAA class number affects its CCA dollar deduction amount from taxable income.

Accepted Answer

A) True 
 B)False

Question 12

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 13

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 14

How should the cash flows of a proposed new project be calculated?

Accepted Answer

Here is a checklist to bear in mind when

Question 15

Which of the following is representative of how depreciation expense is handled in the face of inflation?

Accepted Answer

A) It increases annually with the rate of inflation 
B) It decreases annually in nominal terms 
C) The depreciable base is not altered by inflation 
D) The real value of the depreciation is fixed 
A) It increases annually with the rate of inflation 
B) It decreases annually in nominal terms 
C) The depreciable base is not altered by inflation 
D) The real value of the depreciation is fixed

Question 16

What nominal annual return is required on an investment in order that an investor experiences a 12 percent gain in purchasing power? Assume inflation to be 4 percent.

Accepted Answer

A) 7.69 percent 
B) 9.29 percent 
C) 12.00 percent 
D) 16.48 percent (1 + real rate) x (1 + inflation rate) = 1 + nominal rate 
A) 7.69 percent 
B) 9.29 percent 
C) 12.00 percent 
D) 16.48 percent (1 + real rate) x (1 + inflation rate) = 1 + nominal rate

Question 17

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 18

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

Question 19

A project generates revenues of $5,000; cash expenses of $2,600; and depreciation charges of $800.The firm's tax rate is 40%.Using the following data calculate cash flows from operations using three different methods

Accepted Answer

The answer of A project generates revenues of $5,000; cash...

Question 20

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

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

Which of the following changes would be likely to increase the NPV of a project?

Working capital will affect incremental cash flows if:

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

What effect is expected at the end of the life of a project that initially required a $20,000 increase in net working capital?

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

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

If a project permits a reduction in the level of working capital, this reduction is assumed to increase cash flows.

Which of the following statements is correct?

New projects or products can provide positive indirect effects as well as negative effects.Which of the following appears to be a positive indirect effect?

Opportunity costs for organizational resources:

An asset's CAA class number affects its CCA dollar deduction amount from taxable income.

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

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?

How should the cash flows of a proposed new project be calculated?

Which of the following is representative of how depreciation expense is handled in the face of inflation?

What nominal annual return is required on an investment in order that an investor experiences a 12 percent gain in purchasing power? Assume inflation to be 4 percent.

A tax shield is equal to the reduction in:

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

A project generates revenues of $5,000; cash expenses of $2,600; and depreciation charges of $800.The firm's tax rate is 40%.Using the following data calculate cash flows from operations using three different methods

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

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

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Working Capital Management

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

Risk Management

Conclusion

What We Do and Do Not Know About Finance

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