Question 1

Which of the following is not relevant in a capital budgeting analysis because it is not an incremental cash flow?

Accepted Answer

A) Changes in the firm's net working capital 
B) Externalities 
C) Shipping and installation costs associated with the purchase of a capital budgeting project 
D) Purchase price of a capital budgeting project 
E) Salvage value of a capital budgeting project 
A) Changes in the firm's net working capital 
B) Externalities 
C) Shipping and installation costs associated with the purchase of a capital budgeting project 
D) Purchase price of a capital budgeting project 
E) Salvage value of a capital budgeting project

Question 2

Suppose a firm's senior management is careful to make decisions that contribute to the goal of wealth maximization. If our basic assumptions about the relationship between risk and return are valid, which of the following statements is correct?

Accepted Answer

A) If thebeta coefficient of a capital budgeting project is greater than the firm's beta coefficient, the required rate of return used to evaluate the project should be less than the firm's existing required rate of return. 
B) If the beta coefficient of a capital budgeting project is less than the firm's beta coefficient, the required rate of return used to evaluate the project should be greater than the firm's existing required rate of return. 
C) If the beta coefficient of a capital budgeting project is greater than the firm's existing beta coefficient, the firm's beta coefficient will decrease if the project is purchased. 
D) If the beta coefficient of a capital budgeting project is greater than the firm's existing beta coefficient, the firm's required rate of return will increase if the project is purchased. 
E) If the beta coefficient of a capital budgeting project is greater than the firm's existing beta coefficient, the firm should use required rate of return that is based on its existing beta coefficient to evaluate the project. 
A) If thebeta coefficient of a capital budgeting project is greater than the firm's beta coefficient, the required rate of return used to evaluate the project should be less than the firm's existing required rate of return. 
B) If the beta coefficient of a capital budgeting project is less than the firm's beta coefficient, the required rate of return used to evaluate the project should be greater than the firm's existing required rate of return. 
C) If the beta coefficient of a capital budgeting project is greater than the firm's existing beta coefficient, the firm's beta coefficient will decrease if the project is purchased. 
D) If the beta coefficient of a capital budgeting project is greater than the firm's existing beta coefficient, the firm's required rate of return will increase if the project is purchased. 
E) If the beta coefficient of a capital budgeting project is greater than the firm's existing beta coefficient, the firm should use required rate of return that is based on its existing beta coefficient to evaluate the project.

Question 3

The incremental cash flows associated with a capital budgeting project that occur only at the start of a project's life are included in the computation of the project's _____.

Accepted Answer

A) initial investment outlay 
B) terminal cash flows 
C) sunk costs 
D) supplemental operating cash flows 
E) externalities 
A) initial investment outlay 
B) terminal cash flows 
C) sunk costs 
D) supplemental operating cash flows 
E) externalities

Question 4

When evaluating capital budgeting projects, how do most firms incorporate risk in their decision-making analyses?

Accepted Answer

A) Most firms do not consider risk when making capital budgeting decisions; that is, they ignore it. 
B) Most firms increase the required rate of return used in their capital budgeting analyses when evaluating projects with higher-than-average risks. 
C) Most firms decrease the required rate of return used in their capital budgeting analyses when evaluating projects with higher-than-average risks. 
D) Most firms use the same required rate of return to evaluate all capital budgeting projects, because the risk associated with an individual capital budgeting project is not important when determining the overall riskiness of the firm. 
E) Most firms decrease the required rate of return used in their capital budgeting analyses by 6 percent when evaluating projects with lower-than-average risks. 
A) Most firms do not consider risk when making capital budgeting decisions; that is, they ignore it. 
B) Most firms increase the required rate of return used in their capital budgeting analyses when evaluating projects with higher-than-average risks. 
C) Most firms decrease the required rate of return used in their capital budgeting analyses when evaluating projects with higher-than-average risks. 
D) Most firms use the same required rate of return to evaluate all capital budgeting projects, because the risk associated with an individual capital budgeting project is not important when determining the overall riskiness of the firm. 
E) Most firms decrease the required rate of return used in their capital budgeting analyses by 6 percent when evaluating projects with lower-than-average risks.

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 firm's marginal tax rate is 40%, the initial investment outlay for the new machine is _____.

Accepted Answer

A) $19,600 
B) $30,000 
C) $33,600 
D) $21,000 
E) $44,000 
A) $19,600 
B) $30,000 
C) $33,600 
D) $21,000 
E) $44,000

Question 6

Stanton Inc. is considering the purchase of a new machine that will reduce manufacturing costs by $5,000 annually and increase earnings before depreciation and taxes by $6,000 annually. Stanton will use the Modified Accelerated Cost Recovery System (MACRS) method to depreciate the machine, and it has estimated the depreciation expense for the first year as $8,000. Which of the following is the supplemental operating cash flow for the first year? Stanton's marginal tax rate is 40 percent.

Accepted Answer

A) $19,000 
B) $7,800 
C) $6,600 
D) $9,800 
E) $3,000 
A) $19,000 
B) $7,800 
C) $6,600 
D) $9,800 
E) $3,000

Question 7

Trust Engineering Company is considering the purchase of a new machine to replace an existing, worn machine. The old machine was purchased five years ago at a cost of $20,000, and it is being depreciated on a straight line basis to a salvage value of zero over its 10-year life. The new machine, which costs $30,000, falls into the Modified Accelerated Cost Recovery System (MACRS) 5-year class, and it has an estimated life of five years. If the old machine is replaced with the new machine, the change in depreciation expense that will occur in Year 3 of the new machine's life will be _____. The MACRS rates for 5-year class are Year 1 - 20%, Year 2 - 32%, Year 3 - 19%, Year 4 - 12%, Year 5 - 11%, Year 6 - 6%.

Accepted Answer

A) $2,000 
B) $7,600 
C) $3,700 
D) $5,700 
E) $18,200 
A) $2,000 
B) $7,600 
C) $3,700 
D) $5,700 
E) $18,200

Question 8

A project's depreciation expense must be considered when evaluating its incremental operating cash flows because:

Accepted Answer

A) depreciation represents a tax-deductible cash expense. 
B) the firm incurs a cash payment equal to the depreciation expense each year. 
C) depreciation has an impact on the taxes paid by the firm, which is a cash flow. 
D) depreciation is a sunk cost. 
E) depreciation is a fixed cash payment that the firm receives each year. 
A) depreciation represents a tax-deductible cash expense. 
B) the firm incurs a cash payment equal to the depreciation expense each year. 
C) depreciation has an impact on the taxes paid by the firm, which is a cash flow. 
D) depreciation is a sunk cost. 
E) depreciation is a fixed cash payment that the firm receives each year.

Question 9

When evaluating the cash flows associated with a capital budgeting project, the shipping and installation costs associated with the purchase of an asset are included in the computation of the:

Accepted Answer

A) initial investment outlay, because these expenses are part of the project's depreciable basis. 
B) incremental operating cash flows, because shipping and installation costs represent expenses that must be written off annually over the life of the project. 
C) terminal cash flows, because these expenses are not paid until the end of the project's life. 
D) sunk costs, because these expenses do not affect any cash flows associated with purchasing the project. 
E) project's opportunity cost, because these costs increase the potential of the project. 
A) initial investment outlay, because these expenses are part of the project's depreciable basis. 
B) incremental operating cash flows, because shipping and installation costs represent expenses that must be written off annually over the life of the project. 
C) terminal cash flows, because these expenses are not paid until the end of the project's life. 
D) sunk costs, because these expenses do not affect any cash flows associated with purchasing the project. 
E) project's opportunity cost, because these costs increase the potential of the project.

Question 10

The process of sending cash from a foreign subsidiary back to the parent company is known as _____.

Accepted Answer

A) net present value analysis 
B) political exchange 
C) international earnings shifts 
D) capital allocation 
E) repatriation of earnings 
A) net present value analysis 
B) political exchange 
C) international earnings shifts 
D) capital allocation 
E) repatriation of earnings

Question 11

Which of the following methods involves calculating an average of the beta coefficients of numerous firms that are in the same (or a quite similar) line of business and then using that average beta coefficient to determine the appropriate required rate of return for a new capital budgeting project?

Accepted Answer

A) Sensitivity analysis method 
B) Pure play method 
C) Accounting beta method 
D) Risk-adjusted method 
E) Net present value (NPV) method 
A) Sensitivity analysis method 
B) Pure play method 
C) Accounting beta method 
D) Risk-adjusted method 
E) Net present value (NPV) method

Question 12

_____ risk is the uncertainty associated with the price at which the currency from one country can be converted into the currency of another country.

Accepted Answer

A) Pure play 
B) Political 
C) Money 
D) Exchange rate 
E) International 
A) Pure play 
B) Political 
C) Money 
D) Exchange rate 
E) International

Which of the following is not relevant in a capital budgeting analysis because it is not an incremental cash flow?

Suppose a firm's senior management is careful to make decisions that contribute to the goal of wealth maximization. If our basic assumptions about the relationship between risk and return are valid, which of the following statements is correct?

The incremental cash flows associated with a capital budgeting project that occur only at the start of a project's life are included in the computation of the project's _____.

When evaluating capital budgeting projects, how do most firms incorporate risk in their decision-making analyses?

A project's depreciation expense must be considered when evaluating its incremental operating cash flows because:

When evaluating the cash flows associated with a capital budgeting project, the shipping and installation costs associated with the purchase of an asset are included in the computation of the:

The process of sending cash from a foreign subsidiary back to the parent company is known as _____.

Which of the following methods involves calculating an average of the beta coefficients of numerous firms that are in the same (or a quite similar) line of business and then using that average beta coefficient to determine the appropriate required rate of return for a new capital budgeting project?

_____ risk is the uncertainty associated with the price at which the currency from one country can be converted into the currency of another country.

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 Debt Characteristics 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

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Exam 10: Project Cash Flows and Risk

Which of the following is not relevant in a capital budgeting analysis because it is not an incremental cash flow?

Suppose a firm's senior management is careful to make decisions that contribute to the goal of wealth maximization. If our basic assumptions about the relationship between risk and return are valid, which of the following statements is correct?

The incremental cash flows associated with a capital budgeting project that occur only at the start of a project's life are included in the computation of the project's _____.

When evaluating capital budgeting projects, how do most firms incorporate risk in their decision-making analyses?

A project's depreciation expense must be considered when evaluating its incremental operating cash flows because:

When evaluating the cash flows associated with a capital budgeting project, the shipping and installation costs associated with the purchase of an asset are included in the computation of the:

The process of sending cash from a foreign subsidiary back to the parent company is known as _____.

Which of the following methods involves calculating an average of the beta coefficients of numerous firms that are in the same (or a quite similar) line of business and then using that average beta coefficient to determine the appropriate required rate of return for a new capital budgeting project?

_____ risk is the uncertainty associated with the price at which the currency from one country can be converted into the currency of another country.

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 Debt Characteristics 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