Question 1

Sunk costs remain the same whether or not you accept the project.

Accepted Answer

A) True 
 B)False

Question 2

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

Accepted Answer

A) True 
 B)False

Question 3

As a project comes to its end,there is a disinvestment in working capital,which also generates positive cash flow as inventories are sold off and accounts receivable are collected.

Accepted Answer

A) True 
 B)False

Question 4

Why is it likely that firms use straight-line depreciation methods for reporting to shareholders?

Accepted Answer

A)  It increases the NPV of the project. 
B)  It decreases the tax liability of the project. 
C)  It mirrors the market value of the assets. 
D)  It allows asset balances to decline more slowly. 
A)  It increases the NPV of the project. 
B)  It decreases the tax liability of the project. 
C)  It mirrors the market value of the assets. 
D)  It allows asset balances to decline more slowly.

Question 5

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

Accepted Answer

A) True 
 B)False

Question 6

A new,more efficient machine will last 4 years and allow inventory levels to decrease by $100,000 during its life.At a cost of capital of 13%,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 7

Calculate the present value of the depreciation tax shield for an asset in the 3-year class life costing $100,000.Three-year class percentages are 33.33%,44.45%,14.81%,and 7.41%,respectively for years 1 through 4.The firm has a 35% tax rate and a 10% cost of capital.Compare this present value to that calculated for straight-line depreciation with no salvage value.

Accepted Answer

@#IMG-DLM& The difference in p

Question 8

New projects or products can provide positive indirect effects as well as negative effects.Which of the following appears to be a positive indirect effect?

Accepted Answer

A)  The new, efficient machine uses less electricity. 
B)  Orders of your complementary products increase. 
C)  The project has a positive NPV. 
D)  Accelerated methods of depreciation can be used. 
A)  The new, efficient machine uses less electricity. 
B)  Orders of your complementary products increase. 
C)  The project has a positive NPV. 
D)  Accelerated methods of depreciation can be used.

Question 9

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 10

What rate of nominal growth is expected in sales if they are currently $1,000,000 and expected to reach $1,600,000 in 5 years?

Accepted Answer

A)  3.20% 
B)  9.86% 
C)  12.00% 
D)  26.49% 
A)  3.20% 
B)  9.86% 
C)  12.00% 
D)  26.49%

Question 11

Which of the following would not be expected to affect the decision of whether to undertake an investment?

Accepted Answer

A)  Income tax rates 
B)  Estimates of inflation rates 
C)  Sales reductions in other products caused by this investment 
D)  Cost of the feasibility study that was conducted for this project 
A)  Income tax rates 
B)  Estimates of inflation rates 
C)  Sales reductions in other products caused by this investment 
D)  Cost of the feasibility study that was conducted for this project

Question 12

Which of the following is least likely to influence the opportunity cost of an asset?

Accepted Answer

A)  Its current market value. 
B)  Alternative uses for the asset. 
C)  The current demand for the asset. 
D)  Its current book value. 
A)  Its current market value. 
B)  Alternative uses for the asset. 
C)  The current demand for the asset. 
D)  Its current book value.

Question 13

Why is accelerated depreciation often favored for the corporation's set of tax books?

Accepted Answer

A)  It increases the total depreciation tax shield over the project's life. 
B)  It reduces the total amount of taxes paid over the project's life. 
C)  It increases net accounting profits over the project's life. 
D)  It impacts favorably with the time value of money. 
A)  It increases the total depreciation tax shield over the project's life. 
B)  It reduces the total amount of taxes paid over the project's life. 
C)  It increases net accounting profits over the project's life. 
D)  It impacts favorably with the time value of money.

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

Which of the following statements regarding calculating cash flow from operations is incorrect?

Accepted Answer

A)  Cash flow from operations = revenues - cash expenses - taxes paid 
B)  Cash flow from operations = net profit + depreciation 
C)  Depreciation tax shield = depreciation * (1 -tax rate) 
D)  Cash flow from operations = (revenues - cash expenses) * (1 - tax rate) + (depreciation * tax rate) 
A)  Cash flow from operations = revenues - cash expenses - taxes paid 
B)  Cash flow from operations = net profit + depreciation 
C)  Depreciation tax shield = depreciation * (1 -tax rate) 
D)  Cash flow from operations = (revenues - cash expenses) * (1 - tax rate) + (depreciation * tax rate)

Question 16

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 17

At current prices and a 13% 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 wait 2 years to invest?

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 18

A project will always generate extra overhead costs.

Accepted Answer

A) True 
 B)False

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

Sunk costs remain the same whether or not you accept the project.

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

As a project comes to its end,there is a disinvestment in working capital,which also generates positive cash flow as inventories are sold off and accounts receivable are collected.

Why is it likely that firms use straight-line depreciation methods for reporting to shareholders?

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

A new,more efficient machine will last 4 years and allow inventory levels to decrease by $100,000 during its life.At a cost of capital of 13%,how does the net working capital change affect the project's NPV?

New projects or products can provide positive indirect effects as well as negative effects.Which of the following appears to be a positive indirect effect?

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.

What rate of nominal growth is expected in sales if they are currently $1,000,000 and expected to reach $1,600,000 in 5 years?

Which of the following would not be expected to affect the decision of whether to undertake an investment?

Which of the following is least likely to influence the opportunity cost of an asset?

Why is accelerated depreciation often favored for the corporation's set of tax books?

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

Which of the following statements regarding calculating cash flow from operations is incorrect?

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

At current prices and a 13% 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 wait 2 years to invest?

A project will always generate extra overhead costs.

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

Options

Risk Management

Filters