Question 1

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 2

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 3

Suppose you finance a project partly with debt, you should neither subtract the debt proceeds from the required investment, nor would you recognize the interest and principal payments on the debt as cash outflows.

Accepted Answer

A) True 
 B)False

Question 4

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 5

Cash flow from operations = (revenues-cash expenses) *(1-tax rate) + (depreciation * tax rate).

Accepted Answer

A) True 
 B)False

Question 6

The correct method to handle overhead costs in capital budgeting is to:

Accepted Answer

A) Allocate a portion to each project 
B) Allocate them to projects with the highest NPVs 
C) Ignore all except identifiable incremental amounts 
D) Ignore them in all cases 
A) Allocate a portion to each project 
B) Allocate them to projects with the highest NPVs 
C) Ignore all except identifiable incremental amounts 
D) Ignore them in all cases

Question 7

In what manner does depreciation expense affect investment projects?

Accepted Answer

A) It reduces cash flows by the amount of the depreciation expense 
B) It increases cash flows by the amount of the depreciation expense 
C) It reduces taxable income by the amount of the depreciation expense 
D) It reduces taxes by the amount of the depreciation expense 
A) It reduces cash flows by the amount of the depreciation expense 
B) It increases cash flows by the amount of the depreciation expense 
C) It reduces taxable income by the amount of the depreciation expense 
D) It reduces taxes by the amount of the depreciation expense

Question 8

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 at 15 percent declining balance over six years and sold at zero salvage value? The discount rate is 14 percent.The tax rate is 40 percent.

Accepted Answer

A) -$23,460 
B) -$13,283 
C) $13,283 
D) $44,866 
A) -$23,460 
B) -$13,283 
C) $13,283 
D) $44,866

Question 9

Your forecast shows $500,000 annually in sales for each of the next three years.If your second and third year predictions have failed to incorporate 2.5% expected annual inflation, how far off in total dollars is your three-year forecast?

Accepted Answer

A) $37,813 
B) $50,000 
C) $52,550 
D) $76,250 
A) $37,813 
B) $50,000 
C) $52,550 
D) $76,250

Question 10

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 11

A new project requires an increase in both current assets and current liabilities of $125,000 each.What is the overall impact on net working capital investment?

Accepted Answer

A) An increase of zero 
B) An increase of $125,000 
C) An increase of $250,000 
D) An increase of $62,500, when averaged over the life of the project 
A) An increase of zero 
B) An increase of $125,000 
C) An increase of $250,000 
D) An increase of $62,500, when averaged over the life of the project

Question 12

Which of the following typically results from using straight-line depreciation in the set of books for shareholders?

Accepted Answer

A) Net income appears higher during the early periods of depreciation 
B) Less money is paid to the Canada Revenue Agency 
C) Financial managers have more funds from operations available 
D) Depreciable assets last for a longer period of time 
A) Net income appears higher during the early periods of depreciation 
B) Less money is paid to the Canada Revenue Agency 
C) Financial managers have more funds from operations available 
D) Depreciable assets last for a longer period of time

Question 13

The primary difficulty in the allocation of overhead costs to prospective projects is that the:

Accepted Answer

A) Allocation will reduce the project's NPV 
B) Discount rate is unknown 
C) Costs may not represent an incremental expense 
D) Expenses may have been previously allocated 
A) Allocation will reduce the project's NPV 
B) Discount rate is unknown 
C) Costs may not represent an incremental expense 
D) Expenses may have been previously allocated

Question 14

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

Question 15

Determine the change in net working capital that appears warranted for the following proposed project: Inventory levels will increase 20% from their current value of $500,000; cash will increase by $25,000; wage accruals will increase by $60,000; machinery will increase by $75,000; accounts receivable--because of a new collection system--will increase by only $15,000; accounts payable will increase by $45,000.What happens to net working capital at the end of the project's life?

Accepted Answer

@#IMG-DLM& At the end of the project's l

Question 16

When the real rate of interest is less than the nominal rate of interest, then:

Accepted Answer

A) Inflation must be added to the nominal rate 
B) Investment returns do not increase purchasing power 
C) Nominal flows should be discounted with real rates 
D) Inflation is expected to occur 
A) Inflation must be added to the nominal rate 
B) Investment returns do not increase purchasing power 
C) Nominal flows should be discounted with real rates 
D) Inflation is expected to occur

Question 17

The present value at any given discount rate of the depreciation tax shield is:

Accepted Answer

A) Equal for all depreciation methods 
B) Higher with MACRS than straight-line depreciation 
C) Higher for the tenth year than the seven-year recovery period class 
D) Likely to increase annually due to inflation 
A) Equal for all depreciation methods 
B) Higher with MACRS than straight-line depreciation 
C) Higher for the tenth year than the seven-year recovery period class 
D) Likely to increase annually due to inflation

Question 18

A firm generates sales of $250,000, depreciation expense of $50,000, taxable income of $50,000, and has a 35 percent tax rate.By how much does net cash flow deviate from net income?

Accepted Answer

A) $17,500 
B) $50,000 
C) $67,500 
D) $82,500 
A) $17,500 
B) $50,000 
C) $67,500 
D) $82,500

Question 19

Calculate the present value of the depreciation tax shield for an asset with a three-year estimated life costing $100,000.The firm has a 35 percent tax rate and a 10 percent cost of capital.Its CCA is 30 percent declining balance with a half-year rule.Compare this present value to that calculated for straight-line depreciation with no salvage value in both cases.

Accepted Answer

straight line: $100,000/4 = 25,000; 25,0

Question 20

Offer examples to confirm that firms do experience opportunity costs, even when cash payments are not explicitly made.

Accepted Answer

Students, as well as corporate managers,

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

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

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:

Suppose you finance a project partly with debt, you should neither subtract the debt proceeds from the required investment, nor would you recognize the interest and principal payments on the debt as cash outflows.

A cost should be considered sunk when it:

Cash flow from operations = (revenues-cash expenses) *(1-tax rate) + (depreciation * tax rate).

The correct method to handle overhead costs in capital budgeting is to:

In what manner does depreciation expense affect investment projects?

Your forecast shows $500,000 annually in sales for each of the next three years.If your second and third year predictions have failed to incorporate 2.5% expected annual inflation, how far off in total dollars is your three-year forecast?

Changes in net working capital can occur at:

A new project requires an increase in both current assets and current liabilities of $125,000 each.What is the overall impact on net working capital investment?

Which of the following typically results from using straight-line depreciation in the set of books for shareholders?

The primary difficulty in the allocation of overhead costs to prospective projects is that the:

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

When the real rate of interest is less than the nominal rate of interest, then:

The present value at any given discount rate of the depreciation tax shield is:

A firm generates sales of $250,000, depreciation expense of $50,000, taxable income of $50,000, and has a 35 percent tax rate.By how much does net cash flow deviate from net income?

Offer examples to confirm that firms do experience opportunity costs, even when cash payments are not explicitly made.

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

Filters

Cash flow from operations = (revenues-cash expenses) (1-tax rate) + (depreciation tax rate).