Question 1

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

Accepted Answer

A) True 
 B)False

Question 2

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 3

The modified accelerated cost recovery system (MACRS)allows an increase:

Accepted Answer

A)  in total depreciation over the asset's life. 
B)  in annual depreciation during earlier years. 
C)  in real but not nominal depreciation expense. 
D)  in the number of years in each recovery class. 
A)  in total depreciation over the asset's life. 
B)  in annual depreciation during earlier years. 
C)  in real but not nominal depreciation expense. 
D)  in the number of years in each recovery class.

Question 4

A project anticipates net cash flows of $10,000 at the end of year 1,with such amount growing at the expected 5% rate of inflation over the subsequent 4 years.Calculate the real present value of this 5-year cash stream if the firm employs a nominal discount rate of 15%.

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 5

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 6

What is the NPV of a project that costs $100,000,provides $23,000 in cash flows annually for 6 years,requires a $5,000 increase in net working capital,and depreciates the asset straight-line over 6 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 
A)  -$15,561 
B)  -$13,283 
C)  $13,283 
D)  $15,561

Question 7

Sunk costs influence capital budgeting decisions only when the sunk costs exceed future cash inflows.

Accepted Answer

A) True 
 B)False

Question 8

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 these 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 these methods will provide similar results.

Question 9

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 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

A bank can purchase an ATM (automated teller machine)for $110,000 that has an estimated life of 6 years.Maintenance over that period will begin at $2,500 annually and increase at a 10% rate.If the ATM is purchased,the bank will not be required to hire one additional (human)teller.Including fringe benefits,the teller costs $18,000 per year,and this amount is expected to increase 5% annually.If the bank's cost of capital is 10%,which alternative should be selected?

Accepted Answer

The answer of A bank can purchase an ATM (automated...

Question 12

Under the MACRS:

Accepted Answer

A)  all assets are depreciated over 5 years. 
B)  depreciable percentages decline throughout the asset's class life. 
C)  straight-line depreciation percentages are doubled. 
D)  assets are assumed to be purchased and sold midyear. 
A)  all assets are depreciated over 5 years. 
B)  depreciable percentages decline throughout the asset's class life. 
C)  straight-line depreciation percentages are doubled. 
D)  assets are assumed to be purchased and sold midyear.

Question 13

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 14

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 15

Methods of accelerated depreciation:

Accepted Answer

A)  allow more depreciation over the asset's life. 
B)  decrease the depreciation tax shield. 
C)  increase the depreciation tax shield. 
D)  allow assets to be depreciated more rapidly. 
A)  allow more depreciation over the asset's life. 
B)  decrease the depreciation tax shield. 
C)  increase the depreciation tax shield. 
D)  allow assets to be depreciated more rapidly.

Question 16

When a depreciable asset is ultimately sold,the sales price is:

Accepted Answer

A)  fully taxable. 
B)  nontaxable. 
C)  nontaxable only if accelerated depreciation was used. 
D)  taxable if sales price exceeds book value. 
A)  fully taxable. 
B)  nontaxable. 
C)  nontaxable only if accelerated depreciation was used. 
D)  taxable if sales price exceeds book value.

Question 17

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 18

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 19

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

Accepted Answer

A)  negative 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)  negative 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 20

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.

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

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

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

The modified accelerated cost recovery system (MACRS)allows an increase:

A project anticipates net cash flows of $10,000 at the end of year 1,with such amount growing at the expected 5% rate of inflation over the subsequent 4 years.Calculate the real present value of this 5-year cash stream if the firm employs a nominal discount rate of 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.

What is the NPV of a project that costs $100,000,provides $23,000 in cash flows annually for 6 years,requires a $5,000 increase in net working capital,and depreciates the asset straight-line over 6 years while ignoring the half-year convention? The discount rate is 14%.

Sunk costs influence capital budgeting decisions only when the sunk costs exceed future cash inflows.

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

Corporate income statements are designed primarily to show:

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

Under the MACRS:

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

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?

Methods of accelerated depreciation:

When a depreciable asset is ultimately sold,the sales price is:

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.

Changes in net working capital can occur at:

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

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

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

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Risk, Return, and Capital Budgeting

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