Exam 6: Making Investment Decisions With the Net Present Value Rule
Exam 1: Introduction to Corporate Finance57 Questions
Exam 2: How to Calculate Present Values103 Questions
Exam 3: Valuing Bonds60 Questions
Exam 4: The Value of Common Stocks67 Questions
Exam 5: Net Present Value and Other Investment Criteria74 Questions
Exam 6: Making Investment Decisions With the Net Present Value Rule76 Questions
Exam 7: Introduction to Risk and Return89 Questions
Exam 8: Portfolio Theory and the Capital Asset Pricing Model86 Questions
Exam 9: Risk and the Cost of Capital75 Questions
Exam 10: Project Analysis75 Questions
Exam 11: Investment, Strategy, and Economic Rents70 Questions
Exam 12: Agency Problems, Compensation, and Performance Measurement67 Questions
Exam 13: Efficient Markets and Behavioral Finance63 Questions
Exam 14: An Overview of Corporate Financing72 Questions
Exam 15: How Corporations Issue Securities70 Questions
Exam 16: Payout Policy73 Questions
Exam 17: Does Debt Policy Matter81 Questions
Exam 18: How Much Should a Corporation Borrow75 Questions
Exam 19: Financing and Valuation84 Questions
Exam 20: Understanding Options76 Questions
Exam 21: Valuing Options75 Questions
Exam 22: Real Options59 Questions
Exam 23: Credit Risk and the Value of Corporate Debt53 Questions
Exam 24: The Many Different Kinds of Debt98 Questions
Exam 25: Leasing55 Questions
Exam 26: Managing Risk65 Questions
Exam 27: Managing International Risks64 Questions
Exam 28: Financial Analysis57 Questions
Exam 29: Financial Planning59 Questions
Exam 30: Working Capital Management90 Questions
Exam 31: Mergers77 Questions
Exam 32: Corporate Restructuring70 Questions
Exam 33: Governance and Corporate Control Around the World54 Questions
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Money that a firm has already spent,or committed to spend regardless of whether a project is taken,is called:
Free
(Multiple Choice)
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Correct Answer:
C
Two mutually exclusive projects have the following positive NPVs and project lives. Project NPV Life Project A \ 5,000 3 years Project B \ 6,500 5 years
If the cost of capital were 15%,which project would you accept?
Free
(Multiple Choice)
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Correct Answer:
A
Important points to remember while estimating the cash flows of a project are:
I.Only cash flow is relevant.
II.Always estimate cash flows on an incremental basis.
III.Be consistent in the treatment of inflation.
Free
(Multiple Choice)
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Correct Answer:
D
Suppose that a project has a depreciable investment of $1,000,000 and falls under the following MACRS year 5 class depreciation schedule:
Year 1: 20%; year 2: 32%; year 3: 19.2%; year 4: 11.5%; year 5: 11.5%; and year 6: 5.8%.
Calculate the depreciation tax shield for year 2 using a tax rate of 30%:
(Multiple Choice)
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RainMan Inc.is in the business of producing rain upon request.They must decide between two investment projects: a new airplane for seeding rain clouds or a new weather control machine built by Dr.Nutzbaum.The discount rate for the new airplane is 9%,while the discount rate for the weather machine is 39% (it happens to have higher market risk).Which investment should the company select and why? (Assume a 0% inflation rate and that projected costs do not change over time.) Year Airplane Weather Machine 0 -900 -900 1 500 550 2 600 600 3 685
(Multiple Choice)
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Capital equipment costing $250,000 today has 50,000 salvage value at the end of five years.If the straight-line depreciation method is used,what is the book value of the equipment at the end of two years?
(Multiple Choice)
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Using the technique of equivalent annual cash flows and a discount rate of 7%,what is the value of the following project? Year 0 1 2 3 4 CF -22 8 9 11 13
(Multiple Choice)
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The principal short-term assets are:
i.cash; II)accounts receivable; III)inventories; and IV)accounts payable
(Multiple Choice)
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A project requires an initial investment of $200,000 and expects to produce a cash flow before taxes of 120,000 per year for two years .The corporate tax rate is 30%.The assets will depreciate using the MACRS - 3-year schedule: (t = 1,33%); (t = 2: 45%); (t = 3: 15%); (t = 4: 7%).The company's tax situation is such that it can use all applicable tax shields.The opportunity cost of capital is 12%.Assume that the asset can sell for book value at the end of the project.Calculate the NPV of the project (approximately):
(Multiple Choice)
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A reduction in the sales of existing products caused by the introduction of a new product is an example of:
(Multiple Choice)
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Opportunity costs should not be included in project analysis,as they are missed opportunities.
(True/False)
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An analyst wishes to determine the value of resources used by a proposed project.Which values should the analyst use to approximate opportunity costs?
(Multiple Choice)
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Most large U.S.corporations keep two separate sets of books,one for stockholders and one for the Internal Revenue Service.
(True/False)
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Net working capital is best represented as:
I.short-term assets;
II.short-term liabilities;
III.long-term assets;
IV.long-term liabilities
(Multiple Choice)
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Your boss asked you to evaluate a project with an infinite life.Sales and costs project to $1,000 and $500 per year,respectively.(Assume sales and costs occur at the end of the year,i.e.,profit of $500 at the end of year one.)There is no depreciation and the tax rate is 30%.The real required rate of return is 10%.The inflation rate is 4% and is expected to be 4% forever.Sales and costs will increase at the rate of inflation.If the project costs $3,000,what is the NPV?
(Multiple Choice)
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Two machines,A and B,which perform the same functions,have the following costs and lives. Type PV Costs Life Machine A \ 6000 5 Machine B \ 8000 7
Which machine would you choose? The two machines are mutually exclusive and the cost of capital is 15%.
(Multiple Choice)
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For the case of an electric car project,which of the following costs or cash flows should be categorized as incremental when analyzing whether to invest in the project?
(Multiple Choice)
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Which of the following countries allows firms to keep two separate sets of books,one for the stockholders and one for the tax authorities like the Internal Revenue Service?
i.U)S.; II)Japan; III)France
(Multiple Choice)
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Suppose that a project has a depreciable investment of $600,000 and falls under the following MACRS year 5 class depreciation schedule:
Year 1: 20%; year 2: 32%; year 3: 19.2%; year 4: 11.5%; year 5: 11.5%; and year 6: 5.8%.
Calculate depreciation for year 2.
(Multiple Choice)
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