Question 1

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 2

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 3

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 4

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 5

For a profitable firm in the 35 percent marginal tax bracket with $100,000 of annual depreciation expense, the depreciation tax shield would be:

Accepted Answer

A) $10,500 
B) $30,000 
C) $35,000 
D) $65,000 
A) $10,500 
B) $30,000 
C) $35,000 
D) $65,000

Question 6

A company purchases equipment to be used in business operations for $250,000.The equipment has a CCA rate of 25%.You intend to sell the equipment in year 8 for a salvage value of $8,000.At the time of sale, you still anticipate having other assets in the class.Tax rate is 35%.Company uses a 12% rate of return.Determine the present value of the incremental tax shields generated.

Accepted Answer

@#IMG-DLM& - @#IMG-DLM& Use the followin

Question 7

In capital budgeting analysis, an increase in working capital can be shown as:

Accepted Answer

A) A cash inflow at the beginning of the project 
B) An outflow at the beginning and an equal inflow at the end of the project 
C) An inflow at the beginning and an equal outflow at the end of the project 
D) A decrease in the initial amount invested 
A) A cash inflow at the beginning of the project 
B) An outflow at the beginning and an equal inflow at the end of the project 
C) An inflow at the beginning and an equal outflow at the end of the project 
D) A decrease in the initial amount invested

Question 8

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 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

What is the NPV of a project that costs $100,000, provides $23,000 in cash flows annually for six years, requires a $5,000 increase in net working capital, and depreciates the asset straight line over six years while ignoring the half-year convention? The discount rate is 14%.

Accepted Answer

A) -$15,561 
B) -$13,283 
C) $13,283 
D) $15,561 Net Present Value = 23,000 
A) -$15,561 
B) -$13,283 
C) $13,283 
D) $15,561 Net Present Value = 23,000

Question 11

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 12

Accurate capital budgeting analysis depends on total cash flows as opposed to incremental cash flows.

Accepted Answer

A) True 
 B)False

Question 13

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 14

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

Accepted Answer

A) True 
 B)False

Question 15

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 16

A new heater is being purchased for $250,000 that will be used for 5 years.Depreciation will be straight line over 5 years.The heater will reduce overall costs by $70,000.The corporate tax rate is 40%.Determine the operating cash flows from the cost cutting activity.Use three different methods to calculate operating cash flows.

Accepted Answer

The answer of A new heater is being purchased for...

Question 17

What is the amount of the operating cash flow for a firm with $500,000 profit before tax, $100,000 depreciation expense, and a 35 percent marginal tax rate?

Accepted Answer

A) $260,000 
B) $325,000 
C) $360,000 
D) $425,000 
A) $260,000 
B) $325,000 
C) $360,000 
D) $425,000

Question 18

Class 45 asset purchased for $68,000 at the start of Year 1; Sold at the end of year 3 for $4,000.Analyze what will transpire at the end of year 3.

Accepted Answer

The answer of Class 45 asset purchased for $68,000 at...

Question 19

Which of the following statements is most likely to be correct for a project in which the NPV is negative when based on flows 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 20

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 Solving with financial calculator, the IRR = 9.701%. 
A) 3.5 percent 
B) 9.7 percent 
C) 14.0 percent 
D) 20.0 percent Solving with financial calculator, the IRR = 9.701%.

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

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

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?

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.

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

For a profitable firm in the 35 percent marginal tax bracket with $100,000 of annual depreciation expense, the depreciation tax shield would be:

In capital budgeting analysis, an increase in working capital can be shown as:

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.

What is the NPV of a project that costs $100,000, provides $23,000 in cash flows annually for six years, requires a $5,000 increase in net working capital, and depreciates the asset straight line over six years while ignoring the half-year convention? The discount rate is 14%.

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

Accurate capital budgeting analysis depends on total cash flows as opposed to incremental cash flows.

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

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

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

What is the amount of the operating cash flow for a firm with $500,000 profit before tax, $100,000 depreciation expense, and a 35 percent marginal tax rate?

Class 45 asset purchased for $68,000 at the start of Year 1; Sold at the end of year 3 for $4,000.Analyze what will transpire at the end of year 3.

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

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?

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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