Question 1

Which of the following statements concerning cash flow evaluation in capital budgeting is correct?

Accepted Answer

A)  When determining a project's terminal cash flows, it is generally assumed that the firm's operations do not return to the same level as they were before the project was purchased. 
B)  Any change in depreciation expense must be computed as it affects the cash flow of a project. 
C)  The relevant marginal cash flows associated with a project should always include depreciation, because depreciation is an annual operating expense that requires a cash payment. 
D)  If an asset is depreciated using the Modified Accelerated Cost Recovery System (MACRS), its depreciable basis is the amount that can be depreciated over the asset's useful life, which generally includes the purchase price minus any shipping and installation charges or other costs that are incurred in order to prepare the asset for use. 
E)  The sunk costs associated with an investment proposal are relevant cash flows for capital budgeting analysis, so they should not be included in the computation of the marginal cash flows. 
A)  When determining a project's terminal cash flows, it is generally assumed that the firm's operations do not return to the same level as they were before the project was purchased. 
B)  Any change in depreciation expense must be computed as it affects the cash flow of a project. 
C)  The relevant marginal cash flows associated with a project should always include depreciation, because depreciation is an annual operating expense that requires a cash payment. 
D)  If an asset is depreciated using the Modified Accelerated Cost Recovery System (MACRS), its depreciable basis is the amount that can be depreciated over the asset's useful life, which generally includes the purchase price minus any shipping and installation charges or other costs that are incurred in order to prepare the asset for use. 
E)  The sunk costs associated with an investment proposal are relevant cash flows for capital budgeting analysis, so they should not be included in the computation of the marginal cash flows.

Question 2

Which of the following items is considered when computing the terminal cash flow for an expansion project?

Accepted Answer

A)  Change in net working capital. 
B)  Inflation during the project's life. 
C)  Book value of the asset. 
D)  Opportunity cost of the project. 
E)  Sunk cost of the project. 
A)  Change in net working capital. 
B)  Inflation during the project's life. 
C)  Book value of the asset. 
D)  Opportunity cost of the project. 
E)  Sunk cost of the project.

Question 3

Which of the following statements is correct?

Accepted Answer

A)  If a firm's stockholders are well diversified, we know from theory and from studies of market behavior that corporate risk is not important. 
B)  Undiversified stockholders, including the owners of small businesses, are more concerned about corporate risk than market risk. 
C)  Empirical studies of the determinants of required rates of return (k) have found that only market risk affects stock prices. 
D)  Market risk is important but does not have a direct effect on stock price because it only affects beta. 
E)  Market risk does not play any role in determining the rate of return on an investment. 
A)  If a firm's stockholders are well diversified, we know from theory and from studies of market behavior that corporate risk is not important. 
B)  Undiversified stockholders, including the owners of small businesses, are more concerned about corporate risk than market risk. 
C)  Empirical studies of the determinants of required rates of return (k) have found that only market risk affects stock prices. 
D)  Market risk is important but does not have a direct effect on stock price because it only affects beta. 
E)  Market risk does not play any role in determining the rate of return on an investment.

Question 4

When a particular project might have very uncertain cash flows, the Monte Carlo simulation technique can be used to measure the net present value (NPV) of the cash flows to understand the outcomes for worst case scenario and best case scenario.

Accepted Answer

A) True 
 B)False

Question 5

Tech Engineering Company is considering the purchase of a new machine to replace an existing one. The current market value of the old machine is $14,000 and its book value is $5,000. The new machine's cost is $30,000. If the tax rate is 40%, the initial investment outlay for the new machine is _____.

Accepted Answer

A)  $24,600 
B)  $30,000 
C)  $14,000 
D)  $16,000 
E)  $36,000 
A)  $24,600 
B)  $30,000 
C)  $14,000 
D)  $16,000 
E)  $36,000

Question 6

A firm is evaluating a new machine to replace an existing, older machine. The change in depreciation is $3,000. The firm's marginal tax rate is 30 percent. Which of the following statements is true?

Accepted Answer

A)  Depreciation does not affect the calculation of the supplemental operating cash flow. 
B)  Depreciation is added to the net income to calculate the supplemental operating cash flow. 
C)  Depreciation expense is added to the initial outlay incurred to purchase an asset. 
D)  Depreciation is deducted from the terminal cash flows from an asset. 
E)  Depreciation is included in capital budgeting only if it exceeds the tax expense of an asset. 
A)  Depreciation does not affect the calculation of the supplemental operating cash flow. 
B)  Depreciation is added to the net income to calculate the supplemental operating cash flow. 
C)  Depreciation expense is added to the initial outlay incurred to purchase an asset. 
D)  Depreciation is deducted from the terminal cash flows from an asset. 
E)  Depreciation is included in capital budgeting only if it exceeds the tax expense of an asset.

Question 7

A sunk cost is a cash outlay that has already been incurred and that cannot be recovered regardless of whether the project is accepted or rejected. These sunk costs are extremely important in capital budgeting decisions.

Accepted Answer

A) True 
 B)False

Question 8

Chovita Sports Company evaluated a project as a low-risk project. Chovita generally evaluates projects that are less risky than average by adjusting its required rate of return by 2 percent. If Chovita expects 12% return on average risk projects, then it should expect a return of _____ for a less-risky project.

Accepted Answer

A)  8% 
B)  12% 
C)  16% 
D)  10% 
E)  48% 
A)  8% 
B)  12% 
C)  16% 
D)  10% 
E)  48%

Question 9

Sun State currently has a required rate of return of 18 percent, U.S. Treasury bonds yield 7 percent, and the market risk premium is 5 percent. Which of the following is the value of the beta?

Accepted Answer

A)  1.64 
B)  2.20 
C)  0.91 
D)  2.98 
E)  0.14 
A)  1.64 
B)  2.20 
C)  0.91 
D)  2.98 
E)  0.14

Question 10

Risk in a revenue-producing project can best be adjusted for by:

Accepted Answer

A)  ignoring it. 
B)  adjusting the discount rate upward for increasing risk. 
C)  adjusting the discount rate downward for increasing risk. 
D)  Picking a risk factor equal to the average discount rate. 
E)  reducing the NPV by 10 percent for risky projects. 
A)  ignoring it. 
B)  adjusting the discount rate upward for increasing risk. 
C)  adjusting the discount rate downward for increasing risk. 
D)  Picking a risk factor equal to the average discount rate. 
E)  reducing the NPV by 10 percent for risky projects.

Which of the following statements concerning cash flow evaluation in capital budgeting is correct?

Which of the following items is considered when computing the terminal cash flow for an expansion project?

Which of the following statements is correct?

When a particular project might have very uncertain cash flows, the Monte Carlo simulation technique can be used to measure the net present value (NPV) of the cash flows to understand the outcomes for worst case scenario and best case scenario.

A firm is evaluating a new machine to replace an existing, older machine. The change in depreciation is $3,000. The firm's marginal tax rate is 30 percent. Which of the following statements is true?

A sunk cost is a cash outlay that has already been incurred and that cannot be recovered regardless of whether the project is accepted or rejected. These sunk costs are extremely important in capital budgeting decisions.

Sun State currently has a required rate of return of 18 percent, U.S. Treasury bonds yield 7 percent, and the market risk premium is 5 percent. Which of the following is the value of the beta?

Risk in a revenue-producing project can best be adjusted for by:

An Overview of Managerial Finance

Analysis of Financial Statements

The Financial Environment: Markets, Institutions, and Investment Banking

Time Value of Money

The Cost of Money Interest Rates

Bonds Debtcharacteristics and Valuation

Stocks Equity Characteristics and Valuation

Risk and Rates of Return

Capital Budgeting Techniques

The Cost of Capital

Capital Structure

Distribution of Retained Earnings: Dividends and Stock Repurchases

Managing Short-Term Financing Liabilities

Managing Short-Term Assets

Financial Planning and Control

Filters

Exam 10: Project Cash Flows and Risk

Which of the following statements concerning cash flow evaluation in capital budgeting is correct?

Which of the following items is considered when computing the terminal cash flow for an expansion project?

Which of the following statements is correct?

When a particular project might have very uncertain cash flows, the Monte Carlo simulation technique can be used to measure the net present value (NPV) of the cash flows to understand the outcomes for worst case scenario and best case scenario.

A firm is evaluating a new machine to replace an existing, older machine. The change in depreciation is $3,000. The firm's marginal tax rate is 30 percent. Which of the following statements is true?

A sunk cost is a cash outlay that has already been incurred and that cannot be recovered regardless of whether the project is accepted or rejected. These sunk costs are extremely important in capital budgeting decisions.

Sun State currently has a required rate of return of 18 percent, U.S. Treasury bonds yield 7 percent, and the market risk premium is 5 percent. Which of the following is the value of the beta?

Risk in a revenue-producing project can best be adjusted for by:

An Overview of Managerial Finance

Analysis of Financial Statements

The Financial Environment: Markets, Institutions, and Investment Banking

Time Value of Money

The Cost of Money Interest Rates

Bonds Debtcharacteristics and Valuation

Stocks Equity Characteristics and Valuation

Risk and Rates of Return

Capital Budgeting Techniques

The Cost of Capital

Capital Structure

Distribution of Retained Earnings: Dividends and Stock Repurchases

Managing Short-Term Financing Liabilities

Managing Short-Term Assets

Financial Planning and Control

Filters