Question 1

Money that a firm has already spent, or committed to spend regardless of whether a project is taken, is called a(n)

Accepted Answer

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

Question 2

Within the MACRS system of depreciation, most industrial equipment falls into the 10-15 year classes.

Accepted Answer

A) True 
 B)False

Question 3

The rule for comparing machines with different lives is to select the machine with the greatest equivalent annual cost (EAC).

Accepted Answer

A) True 
 B)False

Question 4

If the discount rate is stated in real terms, then in order to calculate the NPV in a consistent manner, the project requires that

Accepted Answer

A) cash flows be estimated in nominal terms. 
B) cash flows be estimated in real terms. 
C) accounting income be used. 
D) cash flows be estimated including future inflation. 
A) cash flows be estimated in nominal terms. 
B) cash flows be estimated in real terms. 
C) accounting income be used. 
D) cash flows be estimated including future inflation.

Question 5

Using the technique of equivalent annual cash flows and a discount rate of 7 percent, what is the value of the following project? $\begin{array} { l l l l l l } 
\text { Year } & 0 & 1 & 2 & 3 & 4 \
\text { CF } & - 22 & 8 & 9 & 11 & 13
\end{array}$

Accepted Answer

A) 3.06 
B) 3.61 
C) 10.25 
D) 12.23 
A) 3.06 
B) 3.61 
C) 10.25 
D) 12.23

Question 6

When calculating cash flows, one should consider all incidental effects.

Accepted Answer

A) True 
 B)False

Question 7

Germany allows firms to choose the depreciation method(s) of

Accepted Answer

A) straight-line method only. 
B) declining-balance method only. 
C) straight-line method and declining-balance method. 
D) Germany allows a very different system. 
A) straight-line method only. 
B) declining-balance method only. 
C) straight-line method and declining-balance method. 
D) Germany allows a very different system.

Question 8

Proper treatment of inflation in NPV calculations involves

Accepted Answer

A) discounting nominal cash flows by the nominal discount rate. 
B) discounting real cash flows by the real discount rate. 
C) discounting nominal cash flows by the real discount rate. 
D) discounting nominal cash flows by the nominal discount rate and discounting real cash flows by the real discount rate. 
A) discounting nominal cash flows by the nominal discount rate. 
B) discounting real cash flows by the real discount rate. 
C) discounting nominal cash flows by the real discount rate. 
D) discounting nominal cash flows by the nominal discount rate and discounting real cash flows by the real discount rate.

Question 9

A piece of capital equipment costing $400,000 today has no (zero) salvage value at the end of five years.If straight-line depreciation is used, what is the book value of the equipment at the end of three years?

Accepted Answer

A) $120,000 
B) $80,000 
C) $160,000 
D) $240,000 
A) $120,000 
B) $80,000 
C) $160,000 
D) $240,000

Question 10

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

Accepted Answer

In Japan and all of the European Communi

Question 11

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 it 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 it is not a depreciating asset. 
C) it is a sunk cost. 
D) working capital appears on the balance sheet, not the income statement.

Question 12

When calculating cash flows, one should consider them on an incremental basis.

Accepted Answer

A) True 
 B)False

Question 13

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 percent per year.(Assume all sales and costs occur at year-end [i.e., costs are $600 @ t = 1].) The project can be terminated at any time without cost.Ignore taxes and calculate the NPV of the project at a 12 percent discount rate.

Accepted Answer

A) $65.00 
B) $57.51 
C) $100.00 
D) It cannot be calculated as g > r. 
A) $65.00 
B) $57.51 
C) $100.00 
D) It cannot be calculated as g > r.

Question 14

Given the following data for Project M calculate the NPV of the project. 
$\begin{array} { c c c } 
&\mathrm { C } _ { 6 } & \mathrm { C } _ { 1 } & \mathrm { C } _ { 2 } \ 
\text {Cash flow in nominal terms:}&- 100 & 75 & 60 \
\text {Real discount rate = 5 \%}\
\text {Nominal discount rate = 10 \%}\
\end{array}$

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 15

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 percent; year 2: 32 percent; year 3: 19.2 percent; year 4: 11.5 percent; year 5: 11.5 percent; and year 6: 5.8 percent.
Calculate the depreciation tax shield for year 2 using a tax rate of 30 percent.

Accepted Answer

A) $224,000 
B) $60,000 
C) $96,000 
D) $300,000 
A) $224,000 
B) $60,000 
C) $96,000 
D) $300,000

Question 16

Two mutually exclusive projects have the following positive NPVs and project lives. $\begin{array} { r c c } 
\text { Project } & \text { NPV } & \text { Life } \
\text { Project A } & \$ 5,000 & \text { 3 years } \
\text { Project B } & \$ 6,500 & \text { 5 years }
\end{array}$ If the cost of capital were 15 percent, which project would you accept?

Accepted Answer

A) Project A, because it has higher EAC 
B) Project B, because it has higher EAC 
C) Project A, because its NPV can be earned more quickly 
D) Project B, because it has higher NPV 
A) Project A, because it has higher EAC 
B) Project B, because it has higher EAC 
C) Project A, because its NPV can be earned more quickly 
D) Project B, because it has higher NPV

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

Money that a firm has already spent, or committed to spend regardless of whether a project is taken, is called a(n)

Within the MACRS system of depreciation, most industrial equipment falls into the 10-15 year classes.

The rule for comparing machines with different lives is to select the machine with the greatest equivalent annual cost (EAC).

If the discount rate is stated in real terms, then in order to calculate the NPV in a consistent manner, the project requires that

Using the technique of equivalent annual cash flows and a discount rate of 7 percent, what is the value of the following project? Year 0 1 2 3 4 CF -22 8 9 11 13

When calculating cash flows, one should consider all incidental effects.

Germany allows firms to choose the depreciation method(s) of

Proper treatment of inflation in NPV calculations involves

A piece of capital equipment costing $400,000 today has no (zero) salvage value at the end of five years.If straight-line depreciation is used, what is the book value of the equipment at the end of three years?

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

Accountants do not depreciate investment in net working capital because

When calculating cash flows, one should consider them on an incremental basis.

Given the following data for Project M calculate the NPV of the project. Cash flow in nominal terms: -100 75 60 Real discount rate = 5 \% Nominal discount rate = 10 \%

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 percent, which project would you accept?

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 Risk

Financial Analysis

Financial Planning

Working Capital Management

Mergers

Corporate Restructuring

Governance and Corporate Control Around the World

Filters