Question 1

How do changes in working capital affect project cash flows?

Accepted Answer

Increases in net working capital, such a

Question 2

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 3

A tax shield loss is created upon the sale of an asset from a pool will occur whenever:

Accepted Answer

A) Salvage is greater than zero 
B) The asset has been partially depreciated 
C) The corporation keeps two sets of books 
D) The asset's market value exceeds its book value 
A) Salvage is greater than zero 
B) The asset has been partially depreciated 
C) The corporation keeps two sets of books 
D) The asset's market value exceeds its book value

Question 4

Which of the following represents a common reason for increases in net working capital with new projects?

Accepted Answer

A) Inventory can now be held at lower levels 
B) Accounts receivable are often not paid on time 
C) Inventory increases more than accounts payable increase 
D) Accounts payable must be increased 
A) Inventory can now be held at lower levels 
B) Accounts receivable are often not paid on time 
C) Inventory increases more than accounts payable increase 
D) Accounts payable must be increased

Question 5

Which of the following categories would be least likely to require annual adjustments in a capital budgeting analysis due to the effects of inflation?

Accepted Answer

A) Sales 
B) Expenses 
C) Working capital 
D) Depreciation expense 
A) Sales 
B) Expenses 
C) Working capital 
D) Depreciation expense

Question 6

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 7

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 8

Which of the following costs probably should not be allocated to the investment needed for a new project?

Accepted Answer

A) Increase in accounts receivable 
B) New warehouse, built for this project 
C) 25 percent of the vice president's salary 
D) Labour expense for employees in new warehouse 
A) Increase in accounts receivable 
B) New warehouse, built for this project 
C) 25 percent of the vice president's salary 
D) Labour expense for employees in new warehouse

Question 9

How is the company's tax bill affected by capital cost allowance (CCA) and how does this affect project value?

Accepted Answer

CCA is not a cash flow.However, because

Question 10

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 11

What rate of nominal growth is expected in sales if they are currently $1,000,000 and expected to reach $1,600,000 in five years?

Accepted Answer

A) 3.20 percent 
B) 9.86 percent 
C) 12.00 percent 
D) 16.00 percent 
A) 3.20 percent 
B) 9.86 percent 
C) 12.00 percent 
D) 16.00 percent

Question 12

A five-year project requires an additional commitment of $100,000 in net working capital.What is the present value opportunity cost associated with this investment?

Accepted Answer

A) $100,000 
B) The present value of $100,000, discounted at the firm's cost of capital 
C) The value of $100,000, netted against the discounted present value of the $100,000 of working capital returned at the end of the project 
D) No opportunity cost is involved 
A) $100,000 
B) The present value of $100,000, discounted at the firm's cost of capital 
C) The value of $100,000, netted against the discounted present value of the $100,000 of working capital returned at the end of the project 
D) No opportunity cost is involved

Question 13

The opportunity cost of an asset:

Accepted Answer

A) Should be depreciated annually 
B) Can differ depending on market conditions 
C) Is typically ignored in capital budgeting 
D) is important only for parcels of land 
A) Should be depreciated annually 
B) Can differ depending on market conditions 
C) Is typically ignored in capital budgeting 
D) is important only for parcels of land

Question 14

Sunk costs do not affect project NPV.

Accepted Answer

A) True 
 B)False

Question 15

A parcel of corporate land was recently dedicated as the new plant site.What cost allocation should the land receive, based on the following: original cost of $200,000, market value of $300,000, net book value of $200,000, a recent offer to purchase for $250,000?

Accepted Answer

A) $200,000 
B) $250,000 
C) $275,000 
D) $300,000 
A) $200,000 
B) $250,000 
C) $275,000 
D) $300,000

Question 16

A new, more efficient machine will last four years and allow inventory levels to decrease by $100,000 during its life.At a cost of capital of 13 percent, how does the net working capital change affect the project's NPV?

Accepted Answer

A) NPV increases by $38,668 
B) NPV increases by $61,330 
C) NPV increases by $100,000 
D) NPV increases by $138,668 
A) NPV increases by $38,668 
B) NPV increases by $61,330 
C) NPV increases by $100,000 
D) NPV increases by $138,668

Question 17

For a profitable firm in the 30% 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 Depreciation tax shield = depreciation x tax rate = $100,000 x .30 
A) $10,500 
B) $30,000 
C) $35,000 
D) $65,000 Depreciation tax shield = depreciation x tax rate = $100,000 x .30

Question 18

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

Accepted Answer

A) True 
 B)False

Question 19

When you finance a project partly with debt, you should still view the project as if it were all equity-financed, treating all cash outflows required for the project as coming from stockholders, and all cash inflows as going to them.

Accepted Answer

A) True 
 B)False

Question 20

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

Accepted Answer

A) True 
 B)False

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

How do changes in working capital affect project cash flows?

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:

A tax shield loss is created upon the sale of an asset from a pool will occur whenever:

Which of the following represents a common reason for increases in net working capital with new projects?

Which of the following categories would be least likely to require annual adjustments in a capital budgeting analysis due to the effects of inflation?

Corporate income statements are designed primarily to show:

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 costs probably should not be allocated to the investment needed for a new project?

How is the company's tax bill affected by capital cost allowance (CCA) and how does this affect project value?

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

What rate of nominal growth is expected in sales if they are currently $1,000,000 and expected to reach $1,600,000 in five years?

A five-year project requires an additional commitment of $100,000 in net working capital.What is the present value opportunity cost associated with this investment?

The opportunity cost of an asset:

Sunk costs do not affect project NPV.

A parcel of corporate land was recently dedicated as the new plant site.What cost allocation should the land receive, based on the following: original cost of $200,000, market value of $300,000, net book value of $200,000, a recent offer to purchase for $250,000?

A new, more efficient machine will last four years and allow inventory levels to decrease by $100,000 during its life.At a cost of capital of 13 percent, how does the net working capital change affect the project's NPV?

For a profitable firm in the 30% marginal tax bracket with $100,000 of annual depreciation expense, the depreciation tax shield would be:

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

When you finance a project partly with debt, you should still view the project as if it were all equity-financed, treating all cash outflows required for the project as coming from stockholders, and all cash inflows as going to them.

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

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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