Question 1

Discounting real cash flows at a nominal rate is a serious mistake.

Accepted Answer

A) True 
 B)False  True

Question 2

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

Accepted Answer

A) True 
 B)False  False

Question 3

Which of the following would be more likely to make an unacceptable project appear acceptable?

Accepted Answer

A)  Discounting real cash flows with real rates 
B)  Discounting nominal cash flows with real rates 
C)  Discounting real cash flows with nominal rates 
D)  Discounting nominal cash flows with nominal rates 
A)  Discounting real cash flows with real rates 
B)  Discounting nominal cash flows with real rates 
C)  Discounting real cash flows with nominal rates 
D)  Discounting nominal cash flows with nominal rates B

Question 4

How can the cash flows of a project be computed from standard financial statements?

Accepted Answer

Project cash flow does not equal profit.

Question 5

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 6

The statement "We've got too much invested in that project to pull out now" possibly illustrates the need to:

Accepted Answer

A)  switch to an accelerated method of depreciation. 
B)  be reacquainted with the concept of sunk costs. 
C)  reduce net working capital assigned to the project. 
D)  reduce discount rates to improve NPV. 
A)  switch to an accelerated method of depreciation. 
B)  be reacquainted with the concept of sunk costs. 
C)  reduce net working capital assigned to the project. 
D)  reduce discount rates to improve NPV.

Question 7

Which of the following statements regarding depreciation is incorrect?

Accepted Answer

A)  The depreciation tax shield adjusts with the level of inflation. 
B)  The nominal amount of depreciation is fixed, thus the higher the rate of inflation, the lower the real value of the depreciation that you can claim. 
C)  Tax law allows accelerated depreciation. 
D)  The rate at which firms are permitted to depreciate equipment is known as the modified accelerated cost recovery system, or MACRS. 
A)  The depreciation tax shield adjusts with the level of inflation. 
B)  The nominal amount of depreciation is fixed, thus the higher the rate of inflation, the lower the real value of the depreciation that you can claim. 
C)  Tax law allows accelerated depreciation. 
D)  The rate at which firms are permitted to depreciate equipment is known as the modified accelerated cost recovery system, or MACRS.

Question 8

A project that increased sales was accompanied by a $50,000 increase in inventory,a $20,000 increase in accounts receivable,and a $25,000 increase in accounts payable.Assuming these amounts remain constant,by how much has net working capital increased?

Accepted Answer

A)  $5,000 
B)  $25,000 
C)  $30,000 
D)  $45,000 
A)  $5,000 
B)  $25,000 
C)  $30,000 
D)  $45,000

Question 9

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% 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 10

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

Question 11

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 10th year than the 7-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 10th year than the 7-year recovery period class. 
D)  likely to increase annually due to inflation.

Question 12

What is the net effect on a firm's working capital if a new project requires $30,000 increase in inventory,$10,000 increase in accounts receivable,$35,000 increase in machinery,and a $20,000 increase in accounts payable?

Accepted Answer

A)  -$5,000 
B)  +$10,000 
C)  +$20,000 
D)  +$55,000 
A)  -$5,000 
B)  +$10,000 
C)  +$20,000 
D)  +$55,000

Question 13

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 14

What is the undiscounted cash flow in the final year of an investment,assuming $10,000 after-tax cash flows from operations,$1,000 from the sale of a fully depreciated machine,$2,000 required in additional working capital,and a 35% 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 15

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 16

The method of financing a project affects the determination of its cash flows for capital budgeting purposes.

Accepted Answer

A) True 
 B)False

Question 17

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 noncash expense that i

Question 18

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 19

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 20

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.

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

Discounting real cash flows at a nominal rate is a serious mistake.

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

Which of the following would be more likely to make an unacceptable project appear acceptable?

How can the cash flows of a project be computed from standard financial statements?

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.

The statement "We've got too much invested in that project to pull out now" possibly illustrates the need to:

Which of the following statements regarding depreciation is incorrect?

A project that increased sales was accompanied by a $50,000 increase in inventory,a $20,000 increase in accounts receivable,and a $25,000 increase in accounts payable.Assuming these amounts remain constant,by how much has net working capital increased?

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% marginal tax rate?

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

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

What is the net effect on a firm's working capital if a new project requires $30,000 increase in inventory,$10,000 increase in accounts receivable,$35,000 increase in machinery,and a $20,000 increase in accounts payable?

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?

What is the undiscounted cash flow in the final year of an investment,assuming $10,000 after-tax cash flows from operations,$1,000 from the sale of a fully depreciated machine,$2,000 required in additional working capital,and a 35% tax rate?

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:

The method of financing a project affects the determination of its cash flows for capital budgeting purposes.

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

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

A tax shield is equal to the reduction in:

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

Goals and Governance of the Corporation

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

How Corporations Raise Venture Capital and Issue Securities

Debt Policy

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Risk, Return, and Capital Budgeting

Mergers, Acquisitions, and Corporate Control

International Financial Management

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