Question 1

Methods of accelerated depreciation:

Accepted Answer

A)  allow more total 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 total 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 2

The statement "We've got too much invested in that project to pull out now" possibly illustrates the need to:

Accepted Answer

A)  switch to an accelerated method of depreciation. 
B)  recognize sunk costs. 
C)  reduce net working capital assigned to the project. 
D)  reduce discount rates to improve NPV. 
A)  switch to an accelerated method of depreciation. 
B)  recognize sunk costs. 
C)  reduce net working capital assigned to the project. 
D)  reduce discount rates to improve NPV.

Question 3

Which of the following costs probably should not be allocated to the investment needed for a new project?

Accepted Answer

A)  Project's required increase in accounts receivable 
B)  New warehouse, built for this project 
C)  A portion of the vice president's salary 
D)  Labor expense for employees involved in the project 
A)  Project's required increase in accounts receivable 
B)  New warehouse, built for this project 
C)  A portion of the vice president's salary 
D)  Labor expense for employees involved in the project

Question 4

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

Accepted Answer

A)  The new machine required for the project uses less electricity than the existing machine. 
B)  Orders for your complementary products are expected to increase. 
C)  Customer orders of supplies for the firm's existing products are expected to decrease. 
D)  Variable costs are expected to decrease since the firm can order larger quantities. 
A)  The new machine required for the project uses less electricity than the existing machine. 
B)  Orders for your complementary products are expected to increase. 
C)  Customer orders of supplies for the firm's existing products are expected to decrease. 
D)  Variable costs are expected to decrease since the firm can order larger quantities.

Question 5

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

Accepted Answer

A)  disinflation must be occurring. 
B)  investment returns cannot increase the purchasing power of an investment. 
C)  nominal cash flows should be discounted with real rates. 
D)  the rate of inflation must be positive. 
A)  disinflation must be occurring. 
B)  investment returns cannot increase the purchasing power of an investment. 
C)  nominal cash flows should be discounted with real rates. 
D)  the rate of inflation must be positive.

Question 6

Which of the following is true of the depreciation tax shield?

Accepted Answer

A)  It increases annually with the rate of inflation. 
B)  It decreases annually in nominal terms. 
C)  It is not altered by inflation. 
D)  The real value of the depreciation is fixed. 
A)  It increases annually with the rate of inflation. 
B)  It decreases annually in nominal terms. 
C)  It is not altered by inflation. 
D)  The real value of the depreciation is fixed.

Question 7

Capital budgeting proposals should be evaluated as if the project were financed:

Accepted Answer

A)  entirely by debt. 
B)  entirely by equity. 
C)  half by debt and half by equity. 
D)  with the highest cost source of funds, to be safe. 
A)  entirely by debt. 
B)  entirely by equity. 
C)  half by debt and half by equity. 
D)  with the highest cost source of funds, to be safe.

Question 8

In which of the following cases will a cash investment in net working capital be most likely?

Accepted Answer

A)  Inventory levels will be reduced when the project is introduced. 
B)  All sales related to the project will be cash sales to a subsidiary. 
C)  The project will increase inventory more than accounts payable. 
D)  The project will require additional inventory which will be financed by a supplier. 
A)  Inventory levels will be reduced when the project is introduced. 
B)  All sales related to the project will be cash sales to a subsidiary. 
C)  The project will increase inventory more than accounts payable. 
D)  The project will require additional inventory which will be financed by a supplier.

Question 9

In the MACRS depreciation schedules,the depreciation percentage is lower in the first year than in the second year.This is due to the fact that:

Accepted Answer

A)  the depreciation percentage increases every year over the project's life. 
B)  assets are assumed to be acquired at midyear. 
C)  depreciation expense increases at the rate of inflation. 
D)  MACRS depreciation is less attractive than straight-line depreciation. 
A)  the depreciation percentage increases every year over the project's life. 
B)  assets are assumed to be acquired at midyear. 
C)  depreciation expense increases at the rate of inflation. 
D)  MACRS depreciation is less attractive than straight-line depreciation.

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

An asset in the MACRS 5-year class life will have depreciation expense in 6 different years.

Accepted Answer

A) True 
 B)False

Question 12

A new project requires an increase in both current assets and current liabilities of $125,000 each.What is the overall impact on the net working capital investment?

Accepted Answer

A)  An increase of zero 
B)  An increase of $125,000 
C)  An increase of $250,000 
D)  An increase of $62,500, when averaged over the life of the project 
A)  An increase of zero 
B)  An increase of $125,000 
C)  An increase of $250,000 
D)  An increase of $62,500, when averaged over the life of the project

Question 13

Which one 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 future 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 future 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 14

Net working capital is expected to increase by $25,000 in year 5 of a project.If this extra working capital is recovered when the project ends in year 6,what is the effect on the project's net present value,if the cost of capital is 15%?

Accepted Answer

A)  NPV will not be affected because the $25,000 will all be recouped. 
B)  NPV will increase by $12,429.42. 
C)  NPV will decrease by $25,000. 
D)  NPV will decrease by $1,621.23. 
A)  NPV will not be affected because the $25,000 will all be recouped. 
B)  NPV will increase by $12,429.42. 
C)  NPV will decrease by $25,000. 
D)  NPV will decrease by $1,621.23.

Question 15

Opportunity costs are evaluated for investment decisions at their historical cost.

Accepted Answer

A) True 
 B)False

Question 16

In project analysis,allocations of overhead should be limited to those that represent additional expense.

Accepted Answer

A) True 
 B)False

Question 17

What is the effect of using MACRS rather than straight-line depreciation?

Accepted Answer

A)  It increases the NPV. 
B)  The total amount of depreciation is increased. 
C)  It allows asset book values to increase with market values. 
D)  It increases gross fixed assets. 
A)  It increases the NPV. 
B)  The total amount of depreciation is increased. 
C)  It allows asset book values to increase with market values. 
D)  It increases gross fixed assets.

Question 18

What nominal annual return is required on an investment for an investor to experience a 12% gain in purchasing power? Assume inflation is 4%.

Accepted Answer

A)  7.69% 
B)  9.29% 
C)  12.00% 
D)  16.48% 
A)  7.69% 
B)  9.29% 
C)  12.00% 
D)  16.48%

Question 19

A firm invests in a 7-year project that requires the purchase of a $135,000 machine tool.This will be depreciated using 5-year MACRS and will have no salvage value.When will this equipment affect the project's tax payments?

Accepted Answer

A)  Every year for 5 years 
B)  At the time of purchase only 
C)  Every year for 6 years 
D)  Every year for 7 years 
A)  Every year for 5 years 
B)  At the time of purchase only 
C)  Every year for 6 years 
D)  Every year for 7 years

Question 20

The recovery of an additional investment in working capital is likely to:

Accepted Answer

A)  occur at the end of a project's life. 
B)  occur at the beginning of a project's life. 
C)  occur whenever the project first shows a profit. 
D)  be a sunk cost. 
A)  occur at the end of a project's life. 
B)  occur at the beginning of a project's life. 
C)  occur whenever the project first shows a profit. 
D)  be a sunk cost.

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

Methods of accelerated depreciation:

The statement "We've got too much invested in that project to pull out now" possibly illustrates the need to:

Which of the following costs probably should not be allocated to the investment needed for a new project?

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

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

Which of the following is true of the depreciation tax shield?

Capital budgeting proposals should be evaluated as if the project were financed:

In which of the following cases will a cash investment in net working capital be most likely?

In the MACRS depreciation schedules,the depreciation percentage is lower in the first year than in the second year.This is due to the fact that:

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

An asset in the MACRS 5-year class life will have depreciation expense in 6 different years.

A new project requires an increase in both current assets and current liabilities of $125,000 each.What is the overall impact on the net working capital investment?

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

Net working capital is expected to increase by $25,000 in year 5 of a project.If this extra working capital is recovered when the project ends in year 6,what is the effect on the project's net present value,if the cost of capital is 15%?

Opportunity costs are evaluated for investment decisions at their historical cost.

In project analysis,allocations of overhead should be limited to those that represent additional expense.

What is the effect of using MACRS rather than straight-line depreciation?

What nominal annual return is required on an investment for an investor to experience a 12% gain in purchasing power? Assume inflation is 4%.

A firm invests in a 7-year project that requires the purchase of a $135,000 machine tool.This will be depreciated using 5-year MACRS and will have no salvage value.When will this equipment affect the project's tax payments?

The recovery of an additional investment in working capital is likely to:

Goals and Governance of the Firm

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 and Governance

Venture Capital, IPOs, and Seasoned Offerings

Debt Policy

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Working Capital Management

Mergers,Acquisitions,and Corporate Control

International Financial Management

Options

Risk Management

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