Question 1

The current market value of a previously purchased machine proposed for use in a project is an example of a:

Accepted Answer

A) sunk cost. 
B) opportunity cost. 
C) fixed cost. 
D) inventoriable cost. 
A) sunk cost. 
B) opportunity cost. 
C) fixed cost. 
D) inventoriable cost.

Question 2

The real rate of interest is 3% and inflation is 4%.What is the nominal rate of interest?

Accepted Answer

A) 3% 
B) 1.00% 
C) 7.12% 
D) -1.00% 
A) 3% 
B) 1.00% 
C) 7.12% 
D) -1.00%

Question 3

OM Construction Company must choose between two types of cranes.Crane A costs $600,000,will last for five years,and will require $60,000 in maintenance each year.Crane B costs $750,000,will last for seven years,and will require $30,000 in maintenance each year.Maintenance costs for cranes A and B occur at the end of each year.The appropriate discount rate is 12% per year.Which machine should OM Construction purchase?

Accepted Answer

A) Crane A as EAC is $226,444 
B) Crane B as EAC is $194,336 
C) Crane A because its PV is $816,286,i.e.,less than the PV of Project B 
D) Cannot be calculated as the revenues for the project are not givenCrane A: Annuity factor = (1/.12)× (1 - (1/(1.12^5)))= 3.6048.Crane B: Annuity factor = (1/.12)× (1 - (1/(1.12^7)))= 4.5638.Costs:PV (
A) = 600,000 + 60,000 (3.6048)= 816,286;EAC = 816,286/(3.6048)= $226,444;PV(
B) = 750,000 + 30,000 (4.5638)= 886,913; 
A) Crane A as EAC is $226,444 
B) Crane B as EAC is $194,336 
C) Crane A because its PV is $816,286,i.e.,less than the PV of Project B 
D) Cannot be calculated as the revenues for the project are not givenCrane A: Annuity factor = (1/.12)× (1 - (1/(1.12^5)))= 3.6048.Crane B: Annuity factor = (1/.12)× (1 - (1/(1.12^7)))= 4.5638.Costs:PV (
A) = 600,000 + 60,000 (3.6048)= 816,286;EAC = 816,286/(3.6048)= $226,444;PV(
B) = 750,000 + 30,000 (4.5638)= 886,913;

Question 4

Briefly discuss how tax reporting to governments vs.shareholders is treated in countries like Japan.

Accepted Answer

In Japan and all of the European Communi

Question 5

Investment in inventories includes investment in:
i.raw material; II)work-in-progress; III)finished goods

Accepted Answer

A) I only 
B) I and II only 
C) I,II,and III 
D) III only 
A) I only 
B) I and II only 
C) I,II,and III 
D) III only

Question 6

The real interest rate is 3.0% and the inflation rate is 5.0%.What is the nominal interest rate?

Accepted Answer

A) 3.00% 
B) 5.00% 
C) 8.15% 
D) 2.00% 
A) 3.00% 
B) 5.00% 
C) 8.15% 
D) 2.00%

Question 7

When Honda develops a new engine the incidental effects might include the following:
I.demand for replacement parts;
II.profits from the sale of repair services;
III.offer modified or improved versions of the new engine for other uses

Accepted Answer

A) I only 
B) I and II only 
C) I,II,and III 
D) I and III only 
A) I only 
B) I and II only 
C) I,II,and III 
D) I and III only

Question 8

By undertaking an analysis in real terms,the financial manager avoids having to forecast inflation.

Accepted Answer

A) True 
 B)False

Question 9

A financial analyst should include interest and dividend payments when calculating a project's cash flows.

Accepted Answer

A) True 
 B)False

Question 10

Given the following data for Project M:

Accepted Answer

A) $51.70. 
B) $35.54. 
C) $45.21. 
D) $70.00. 
A) $51.70. 
B) $35.54. 
C) $45.21. 
D) $70.00.

Question 11

A project requires an investment of $900 today.It can generate sales of $1,100 per year forever.Costs are $600 for the first year and will increase by 20% per year.(Assume all sales and costs occur at year-end,i.e.,costs are $600 @ t = 1.)Ignore taxes and calculate the NPV of the project at a 12% discount rate.

Accepted Answer

A) $65.00 
B) $57.51 
C) $100.00 
D) Cannot be calculated as g > rNPV = -900 + (1,100 - 600)/1.12 + (1,100 - (600 × 1.2))/(1.12^2)+ (1,100 - 600 (1.2^2))/(1.12)^3 + (1,100 - 600 (1.2^3))/(1.12^4)= $57.51). 
A) $65.00 
B) $57.51 
C) $100.00 
D) Cannot be calculated as g > rNPV = -900 + (1,100 - 600)/1.12 + (1,100 - (600 × 1.2))/(1.12^2)+ (1,100 - 600 (1.2^2))/(1.12)^3 + (1,100 - 600 (1.2^3))/(1.12^4)= $57.51).

Question 12

Briefly explain how the decision to replace an existing machine is made?

Accepted Answer

The decision to replace an existing mach

Question 13

One should consider net working capital (NWC)in project cash flows because:

Accepted Answer

A) typically,firms must invest cash in short-term assets to produce finished goods. 
B) NWC represents sunk costs. 
C) firms need positive NPV projects for investment. 
D) inclusion of NWC typically increases calculated NPV. 
A) typically,firms must invest cash in short-term assets to produce finished goods. 
B) NWC represents sunk costs. 
C) firms need positive NPV projects for investment. 
D) inclusion of NWC typically increases calculated NPV.

Question 14

When evaluating projects with positive NPV but different life spans,the proper technique to employ is the equivalent annual cash-flow approach.

Accepted Answer

A) True 
 B)False

Question 15

Germany allows firms to choose the following depreciation methods:
i.straight-line method; II)declining-balance method

Accepted Answer

A) I only 
B) II only 
C) I and II only 
D) Germany allows a very different system 
A) I only 
B) II only 
C) I and II only 
D) Germany allows a very different system

Question 16

Define the term cash flow for a project.

Accepted Answer

Cash flow for a project is the

Question 17

A firm has a general-purpose machine,which has a book value of $300,000 and is worth $500,000 in the market.If the tax rate is 35%,what is the opportunity cost of using the machine in a project?

Accepted Answer

A) $500,000 
B) $430,000 
C) $300,000 
D) $200,000 
A) $500,000 
B) $430,000 
C) $300,000 
D) $200,000

Question 18

The equivalent annual cash-flow technique is primarily used whenever the lives of two different projects are the same.

Accepted Answer

A) True 
 B)False

Question 19

Proper treatment of inflation in NPV calculations involves:
I.discounting nominal cash flows by the nominal discount rate;
II.discounting real cash flows by the real discount rate;
III.discounting nominal cash flows by the real discount rate

Accepted Answer

A) I only 
B) II only 
C) III only 
D) I and II only 
A) I only 
B) II only 
C) III only 
D) I and II only

Question 20

Working capital is one of the most common sources of mistakes in estimating project cash flows.

Accepted Answer

A) True 
 B)False

Exam 6: Making Investment Decisions With the Net Present Value Rule

The current market value of a previously purchased machine proposed for use in a project is an example of a:

The real rate of interest is 3% and inflation is 4%.What is the nominal rate of interest?

Briefly discuss how tax reporting to governments vs.shareholders is treated in countries like Japan.

Investment in inventories includes investment in: i.raw material; II)work-in-progress; III)finished goods

The real interest rate is 3.0% and the inflation rate is 5.0%.What is the nominal interest rate?

When Honda develops a new engine the incidental effects might include the following: I.demand for replacement parts; II.profits from the sale of repair services; III.offer modified or improved versions of the new engine for other uses

By undertaking an analysis in real terms,the financial manager avoids having to forecast inflation.

A financial analyst should include interest and dividend payments when calculating a project's cash flows.

Given the following data for Project M:

Briefly explain how the decision to replace an existing machine is made?

One should consider net working capital (NWC)in project cash flows because:

When evaluating projects with positive NPV but different life spans,the proper technique to employ is the equivalent annual cash-flow approach.

Germany allows firms to choose the following depreciation methods: i.straight-line method; II)declining-balance method

Define the term cash flow for a project.

A firm has a general-purpose machine,which has a book value of $300,000 and is worth $500,000 in the market.If the tax rate is 35%,what is the opportunity cost of using the machine in a project?

The equivalent annual cash-flow technique is primarily used whenever the lives of two different projects are the same.

Proper treatment of inflation in NPV calculations involves: I.discounting nominal cash flows by the nominal discount rate; II.discounting real cash flows by the real discount rate; III.discounting nominal cash flows by the real discount rate

Working capital is one of the most common sources of mistakes in estimating project cash flows.

Introduction to Corporate Finance

How to Calculate Present Values

Valuing Bonds

The Value of Common Stocks

Net Present Value and Other Investment Criteria

Introduction to Risk and Return

Portfolio Theory and the Capital Asset Pricing Model

Risk and the Cost of Capital

Project Analysis

Investment, Strategy, and Economic Rents

Agency Problems, Compensation, and Performance Measurement

Efficient Markets and Behavioral Finance

An Overview of Corporate Financing

How Corporations Issue Securities

Payout Policy

Does Debt Policy Matter

How Much Should a Corporation Borrow

Financing and Valuation

Understanding Options

Valuing Options

Real Options

Credit Risk and the Value of Corporate Debt

The Many Different Kinds of Debt

Leasing

Managing Risk

Managing International Risks

Financial Analysis

Financial Planning

Working Capital Management

Mergers

Corporate Restructuring

Governance and Corporate Control Around the World

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