Question 1

Accountants do not depreciate investment in net working capital because:

Accepted Answer

A) it is not a cash flow. 
B) it is recovered during-or at the end of-the project,thus is not a depreciating asset. 
C) it is a sunk cost. 
D) working capital appears on the balance sheet,not the income statement. 
A) it is not a cash flow. 
B) it is recovered during-or at the end of-the project,thus is not a depreciating asset. 
C) it is a sunk cost. 
D) working capital appears on the balance sheet,not the income statement.

Question 2

Working capital is needed for additional investment within a project and should be included within cash-flow estimates.

Accepted Answer

A) True 
 B)False

Question 3

Within the MACRS system of depreciation,most industrial equipment falls into the ten- and fifteen-year classes.

Accepted Answer

A) True 
 B)False

Question 4

You are considering the purchase of one of two machines required in your production process.Machine A has a life of two years.Machine A costs $50 initially and then $70 per year in maintenance.Machine B has an initial cost of $90.It requires $40 in maintenance for each year of its three-year life.Either machine must be replaced at the end of its life.Which is the better machine for the firm? The discount rate is 15% and the tax rate is zero.

Accepted Answer

A) Machine A as EAC for machine A is $100.76 
B) Machine B as EAC for machine B is $79.42 
C) Machine A as PV of costs for machine A is $163.80 
D) Machine B as PV of costs for machine B is $181.33Machine A: Annuity factor = (1/.15)× (1 - (1/(1.15^2)))= 1.6257.Machine B: Annuity factor = (1/.15)(1 - (1/(1.15^3)))= 2.2832.Costs:PV(
A) = 50 + 70 (1.6257)= 163.80; EAC = 163.80/(1.6257)= 100.76; 
A) Machine A as EAC for machine A is $100.76 
B) Machine B as EAC for machine B is $79.42 
C) Machine A as PV of costs for machine A is $163.80 
D) Machine B as PV of costs for machine B is $181.33Machine A: Annuity factor = (1/.15)× (1 - (1/(1.15^2)))= 1.6257.Machine B: Annuity factor = (1/.15)(1 - (1/(1.15^3)))= 2.2832.Costs:PV(
A) = 50 + 70 (1.6257)= 163.80; EAC = 163.80/(1.6257)= 100.76;

Question 5

Preferably,a financial analyst estimates cash flows for a project as:

Accepted Answer

A) cash flows before taxes. 
B) cash flows after taxes. 
C) accounting profits before taxes. 
D) accounting profits after taxes. 
A) cash flows before taxes. 
B) cash flows after taxes. 
C) accounting profits before taxes. 
D) accounting profits after taxes.

Question 6

What are some of the additional factors that an analyst should consider while estimating cash flows in foreign countries and currencies?

Accepted Answer

• Currency of the cash flow should be re

Question 7

Given the following data for Project M:

Accepted Answer

A) $25.85. 
B) $17.77. 
C) $22.65. 
D) $35.00. 
A) $25.85. 
B) $17.77. 
C) $22.65. 
D) $35.00.

Question 8

Sunk costs are bygones,i.e.,they are unaffected by the decision to accept or reject a project.They should therefore be ignored.

Accepted Answer

A) True 
 B)False

Question 9

For the case of an electric car project,the following costs should be treated as incremental costs when deciding whether to go ahead with the project EXCEPT:

Accepted Answer

A) the consequent reduction in sales of the company's existing gasoline models (i.e.,incidental effects). 
B) interest payments on debt incurred to finance the project. 
C) the value of tools that will be transferred to the project from the company's existing plants instead of being sold. 
D) the expenditure on new plants and equipment. 
A) the consequent reduction in sales of the company's existing gasoline models (i.e.,incidental effects). 
B) interest payments on debt incurred to finance the project. 
C) the value of tools that will be transferred to the project from the company's existing plants instead of being sold. 
D) the expenditure on new plants and equipment.

Question 10

A financial analyst can use the equivalent annual cash-flow approach to determine the year in which an existing machine can be profitably replaced with a new machine.

Accepted Answer

A) True 
 B)False

Question 11

Costs incurred as a result of past,irrevocable decisions and irrelevant to future decisions are called:

Accepted Answer

A) opportunity costs. 
B) sunk costs. 
C) incremental costs. 
D) marginal costs. 
A) opportunity costs. 
B) sunk costs. 
C) incremental costs. 
D) marginal costs.

Question 12

You should replace a machine when the EAC of continuing to operate it exceeds the EAC of the new machine.

Accepted Answer

A) True 
 B)False

Question 13

How do you compare projects with different lives?

Accepted Answer

One can compare projects with

Question 14

If depreciation is $600,000 and the marginal tax rate is 35%,then the tax shield due to depreciation is:

Accepted Answer

A) $210,000. 
B) $600,000. 
C) $390,000. 
D) cannot be determined from the information given. 
A) $210,000. 
B) $600,000. 
C) $390,000. 
D) cannot be determined from the information given.

Question 15

If depreciation is $100,000 and the marginal tax rate is 35%,then the tax shield due to depreciation is:

Accepted Answer

A) $35,000 
B) $100,000 
C) $65,000 
D) cannot be determined from the information given 
A) $35,000 
B) $100,000 
C) $65,000 
D) cannot be determined from the information given

Question 16

The cost of a resource that may be relevant to an investment decision even when no cash changes hand is called a(an):

Accepted Answer

A) sunk cost. 
B) opportunity cost. 
C) depreciation cost. 
D) average cost. 
A) sunk cost. 
B) opportunity cost. 
C) depreciation cost. 
D) average cost.

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

Accountants do not depreciate investment in net working capital because:

Working capital is needed for additional investment within a project and should be included within cash-flow estimates.

Within the MACRS system of depreciation,most industrial equipment falls into the ten- and fifteen-year classes.

Preferably,a financial analyst estimates cash flows for a project as:

What are some of the additional factors that an analyst should consider while estimating cash flows in foreign countries and currencies?

Given the following data for Project M:

Sunk costs are bygones,i.e.,they are unaffected by the decision to accept or reject a project.They should therefore be ignored.

For the case of an electric car project,the following costs should be treated as incremental costs when deciding whether to go ahead with the project EXCEPT:

A financial analyst can use the equivalent annual cash-flow approach to determine the year in which an existing machine can be profitably replaced with a new machine.

Costs incurred as a result of past,irrevocable decisions and irrelevant to future decisions are called:

You should replace a machine when the EAC of continuing to operate it exceeds the EAC of the new machine.

How do you compare projects with different lives?

If depreciation is $600,000 and the marginal tax rate is 35%,then the tax shield due to depreciation is:

If depreciation is $100,000 and the marginal tax rate is 35%,then the tax shield due to depreciation is:

The cost of a resource that may be relevant to an investment decision even when no cash changes hand is called a(an):

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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