Question 1

What are some of the different outlays that may be classified as capital expenditures?

Accepted Answer

1.The purchase of new equipment, real estate, or a building for improved service or expansion purposes.
1.The replacement of existing equipment.
2.Expenditures for an advertising campaign.
3.Expenditures for research and development.
4.Investments in permanent increases of target inventory or levels of accounts receivable.
5.Employee education and training
6.The refunding of an old bond issue
7.Lease-versus-buy analysis
8.Merger and acquisition evaluation.

Question 2

When managers knowingly bias estimates of cash flows from investment projects in order to serve their personal objectives, they are .

Accepted Answer

A) performing management by exception 
B) increasing their total compensation 
C) departing from the shareholder wealth maximization goal 
D) increasing their confidence level 
A) performing management by exception 
B) increasing their total compensation 
C) departing from the shareholder wealth maximization goal 
D) increasing their confidence level C

Question 3

List the steps that a firm uses in the capital budgeting process:

Accepted Answer

The steps in the process are:
1.Generate capital investment project proposals.
2.Estimate cash flows.
3.Evaluate alternatives and select projects to be implemented.
4.Review the project's performance after it has been implemented, and post auditing
the performance of the project after its termination.

Question 4

A Lotta Bread Corp.is replacing an entire baking line that was purchased for $420,000 and currently has a book value of $60,000.The new, more efficient line, will cost $940,000 installed and can be depreciated as a 7-year MACRS asset.With the increased efficiency, Lotta expects annual revenues to increase by $425,000, and operating expenses to increase by $170,000.The older machine, which was being depreciated at the straight-line rate of $20,000/year, will be sold for $30,000.What are the net cash flows for year 2? Assume the firm's marginal tax rate is 40% and that the year 2 depreciation rate is 24.49%.

Accepted Answer

A) $26,996 
B) $332,206 
C) $237,082 
D) $383,206 
A) $26,996 
B) $332,206 
C) $237,082 
D) $383,206

Question 5

Which of the following is a basic principle when estimating a project's cash flows?

Accepted Answer

A) cash flows should be measured on a pretax basis 
B) cash flows should ignore depreciation because it is a non-cash charge 
C) only direct effects of a project should be included in cash flow calculations 
D) cash flows should be measured on an incremental basis 
A) cash flows should be measured on a pretax basis 
B) cash flows should ignore depreciation because it is a non-cash charge 
C) only direct effects of a project should be included in cash flow calculations 
D) cash flows should be measured on an incremental basis

Question 6

A (n) is a cash outlay that is expected to generate a flow of future cash benefits lasting longer than 1 year.

Accepted Answer

A) depreciation charge 
B) operating expenditure 
C) capital expenditure 
D) capital gain 
A) depreciation charge 
B) operating expenditure 
C) capital expenditure 
D) capital gain

Question 7

A(n) project is one whose acceptance is dependent on the adoption of one or more other projects.

Accepted Answer

A) contingent 
B) mutually exclusive 
C) independent 
D) perfectly correlated 
A) contingent 
B) mutually exclusive 
C) independent 
D) perfectly correlated

Question 8

The Johnson Drum Company is planning to build a new factory.The purchase of the land, building the plant, and installation of equipment will take place over a two year period.The following are planned cash outflows:
$$\begin{array} { l l } 
\frac { \text { Year } } { 0 } & \frac { \text { Cash Outflow } } { \$ 3,500,000 } \
1 & \$ 4,750,000 \
2 & \$ 6,100,000
\end{array}$$
Johnson Drum's cost of capital is 14%, and its marginal tax rate is 35%.What is the NINV measured in present value terms today?

Accepted Answer

A) $14,350,000 
B) $12,356,650 
C) $9,327,500 
D) $8,035,788 
A) $14,350,000 
B) $12,356,650 
C) $9,327,500 
D) $8,035,788

Question 9

In Step Video is considering expanding its video rental library to 8,000 tapes.The purchase price of the additional videos will be $80,000 and the shipping cost is another $4,000.To house the tapes, the owner will have to spend another $10,000 for display shelves, increase net working capital by $5,000, and interest expenses will add another $8,000 to the operating cost.What is the net investment to In Step Video for this project?

Accepted Answer

A) $95,000 
B) $99,000 
C) $84,000 
D) $107,000 
A) $95,000 
B) $99,000 
C) $84,000 
D) $107,000

Question 10

Most existing products become obsolete. For a firm to continue to grow they must do all of the following EXCEPT:

Accepted Answer

A) move all production to the firm's existing facilities for economies of scale 
B) generate research and development investment proposals 
C) invest in marketing research 
D) invest in new plants 
A) move all production to the firm's existing facilities for economies of scale 
B) generate research and development investment proposals 
C) invest in marketing research 
D) invest in new plants

Question 11

Depreciation is based on the asset cost plus all of the following except

Accepted Answer

A) shipping costs 
B) increase in inventory 
C) installation 
D) cost of attached equipment acquired at the same time 
A) shipping costs 
B) increase in inventory 
C) installation 
D) cost of attached equipment acquired at the same time

Question 12

The set of investment projects arranged in descending order according to their expected rates of return is known as the ____.

Accepted Answer

A) marginal cost of capital schedule 
B) schedule of mutually exclusive projects 
C) schedule of contingent projects 
D) simplified capital budgeting model 
A) marginal cost of capital schedule 
B) schedule of mutually exclusive projects 
C) schedule of contingent projects 
D) simplified capital budgeting model

Question 13

There is a capital gain on the sale of an asset for .

Accepted Answer

A) more than its original cost 
B) more than its book value but less than its original cost 
C) its depreciation value 
D) its net present value 
A) more than its original cost 
B) more than its book value but less than its original cost 
C) its depreciation value 
D) its net present value

Question 14

The Weis Corp.purchased a new conveyor system to replace an older less automated system.The old system, which was 10 years old, was being depreciated on a straight line basis over its 20-year life at $25,000 per year.The new system will be depreciated as a 7-year asset for MACRS purposes.The more efficient machine, which costs $520,000 installed, will reduce operating costs by $74,000 per year.Compute the net cash flows in year 3 for the new system.Assume a 40% tax rate.Use the rounded MACRS schedule listed below:
(7-Year Depreciation Schedule: 14%, 25%, 18%, 12%, 9%, 9%, 9%, 4%)

Accepted Answer

A) $71,840 
B) $80,779 
C) $68,600 
D) $149,917 
A) $71,840 
B) $80,779 
C) $68,600 
D) $149,917

Question 15

Little Giant is building a manufacturing plant that will require a cash outlay of $300,000 for the initial purchase of a building, $450,000 for remodeling the first year, and $710,00 for new equipment in the second year.If the firm's cost of capital is 12 percent, what is the present value of the net investment at time 0?

Accepted Answer

A) $1,460,000 
B) $1,132,070 
C) $1,267,720 
D) $300,000 
A) $1,460,000 
B) $1,132,070 
C) $1,267,720 
D) $300,000

Question 16

Cash flows for all investment projects should be projected over the of the project.

Accepted Answer

A) MACRS recovery period 
B) depreciable life 
C) economic life 
D) smaller of depreciable or economic lives 
A) MACRS recovery period 
B) depreciable life 
C) economic life 
D) smaller of depreciable or economic lives

Question 17

The the amount of depreciation charged in a period, the will be the firm's taxable income.

Accepted Answer

A) greater, lower 
B) lower, lower 
C) lower, greater 
D) greater, higher 
A) greater, lower 
B) lower, lower 
C) lower, greater 
D) greater, higher

Question 18

Determine if this project is profitable under the following circumstances:
A company is undertaking a new project.The specialized equipment that needs to be bought has an expense of $28,000.In addition, permits and licenses are required which will cost $1500.Employee training will be an additional $46,000 expenditure.To produce the merchandise, raw materials are required that will cost $48,000 and this project will generate cash flows of $25,000 per year for 10 years.The cost of capital for this project is 12%.

Accepted Answer

A) Yes, the project is acceptable with a net present value equaling about $17,756. 
B) Yes, the project is acceptable with a net present value equaling about $48,257. 
C) No, the project is not acceptable with a net present value equaling about -$15,275. 
D) No, the project is not acceptable with a net present value equaling about -$18,000. 
A) Yes, the project is acceptable with a net present value equaling about $17,756. 
B) Yes, the project is acceptable with a net present value equaling about $48,257. 
C) No, the project is not acceptable with a net present value equaling about -$15,275. 
D) No, the project is not acceptable with a net present value equaling about -$18,000.

Question 19

The effect of a one dollar increase in depreciation expenses is to the typical firm's net cash flows by one dollar.

Accepted Answer

A) increase, less than 
B) increase, exactly 
C) decrease, more than 
D) increase, more than 
A) increase, less than 
B) increase, exactly 
C) decrease, more than 
D) increase, more than

Question 20

Which of the following items is not considered as a part of the net investment calculation?

Accepted Answer

A) the first year's net cash flow 
B) increase in net working capital 
C) salvage of an old piece of equipment that is being replaced 
D) installation and shipping charges 
A) the first year's net cash flow 
B) increase in net working capital 
C) salvage of an old piece of equipment that is being replaced 
D) installation and shipping charges

Exam 9: Capital Budgeting and Cash Flow Analysis

What are some of the different outlays that may be classified as capital expenditures?

When managers knowingly bias estimates of cash flows from investment projects in order to serve their personal objectives, they are .

List the steps that a firm uses in the capital budgeting process:

Which of the following is a basic principle when estimating a project's cash flows?

A (n) is a cash outlay that is expected to generate a flow of future cash benefits lasting longer than 1 year.

A(n) project is one whose acceptance is dependent on the adoption of one or more other projects.

Most existing products become obsolete. For a firm to continue to grow they must do all of the following EXCEPT:

Depreciation is based on the asset cost plus all of the following except

The set of investment projects arranged in descending order according to their expected rates of return is known as the ____.

There is a capital gain on the sale of an asset for .

Cash flows for all investment projects should be projected over the of the project.

The the amount of depreciation charged in a period, the will be the firm's taxable income.

The effect of a one dollar increase in depreciation expenses is to the typical firm's net cash flows by one dollar.

Which of the following items is not considered as a part of the net investment calculation?

The Role and Objective of Financial Management

The Domestic and International Financial Marketplace

Evaluation of Financial Performance

Financial Planning and Forecasting

The Time Value of Money

A: The Time Value of Money

Fixed-Income Securities: Characteristics and Valuation

Common Stock: Characteristics, Valuation, and Issuance

Analysis of Risk and Return

Capital Budgeting: Decision Criteria and Real Option Considerations

A: Capital Budgeting: Decision Criteria and Real Option Considerations

Capital Budgeting and Risk

The Cost of Capital, Capital Structure, and Dividend Policy

Capital Structure Concepts

Capital Structure Management in Practice

A: Capital Structure Management in Practice

Dividend Policy

Working Capital Management

The Management of Cash and Marketable Securities

The Management of Accounts Receivable and Inventories

Lease and Intermediate-Term Financing

Financing with Derivatives

A: Financing with Derivatives

Risk Management

International Financial Management

Corporate Restructuring

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