Question 1

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 2

In what manner does depreciation expense affect investment projects?

Accepted Answer

A)  it reduces cash flows by the amount of the depreciation expense. 
B)  it increases cash flows by the amount of the depreciation expense. 
C)  it reduces taxable income by the amount of the depreciation expense. 
D)  it reduces taxes by the amount of the depreciation expense. 
A)  it reduces cash flows by the amount of the depreciation expense. 
B)  it increases cash flows by the amount of the depreciation expense. 
C)  it reduces taxable income by the amount of the depreciation expense. 
D)  it reduces taxes by the amount of the depreciation expense.

Question 3

The correct method to handle overhead costs in capital budgeting is to:

Accepted Answer

A)  allocate a portion to each project. 
B)  allocate them to projects with the highest NPVs. 
C)  ignore all except identifiable incremental amounts. 
D)  ignore them in all cases. 
A)  allocate a portion to each project. 
B)  allocate them to projects with the highest NPVs. 
C)  ignore all except identifiable incremental amounts. 
D)  ignore them in all cases.

Question 4

When you finance a project partly with debt,you should still view the project as if it were all equity-financed,treating all cash outflows required for the project as coming from stockholders,and all cash inflows as going to them.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following categories would be least likely to require annual adjustments in a capital budgeting analysis due to the effects of inflation?

Accepted Answer

A)  sales 
B)  expenses 
C)  working capital 
D)  depreciation expense 
A)  sales 
B)  expenses 
C)  working capital 
D)  depreciation expense

Question 6

In capital budgeting analysis,an increase in working capital can be shown as:

Accepted Answer

A)  a cash inflow at the beginning of the project. 
B)  an outflow at the beginning and an equal inflow at the end of the project. 
C)  an inflow at the beginning and an equal outflow at the end of the project. 
D)  a decrease in the initial amount invested. 
A)  a cash inflow at the beginning of the project. 
B)  an outflow at the beginning and an equal inflow at the end of the project. 
C)  an inflow at the beginning and an equal outflow at the end of the project. 
D)  a decrease in the initial amount invested.

Question 7

A tax shield is equal to the reduction in:

Accepted Answer

A)  tax liability resulting from a deductible expense. 
B)  taxable income resulting from a deductible expense. 
C)  cash flow from an expense. 
D)  net income. 
A)  tax liability resulting from a deductible expense. 
B)  taxable income resulting from a deductible expense. 
C)  cash flow from an expense. 
D)  net income.

Question 8

Offer examples to confirm that firms do experience opportunity costs,even when cash payments are not explicitly made.

Accepted Answer

Students,as well as corporate managers,m

Question 9

The primary difficulty in the allocation of overhead costs to prospective projects is that the:

Accepted Answer

A)  allocation will reduce the project's NPV. 
B)  discount rate is unknown. 
C)  costs may not represent an incremental expense. 
D)  expenses may have been previously allocated. 
A)  allocation will reduce the project's NPV. 
B)  discount rate is unknown. 
C)  costs may not represent an incremental expense. 
D)  expenses may have been previously allocated.

Question 10

For a profitable firm in the 30% marginal tax bracket with $100,000 of annual depreciation expense,the depreciation tax shield would be:

Accepted Answer

A)  $10,500. 
B)  $30,000. 
C)  $35,000. 
D)  $65,000. 
A)  $10,500. 
B)  $30,000. 
C)  $35,000. 
D)  $65,000.

Question 11

The opportunity cost of an asset:

Accepted Answer

A)  should be depreciated annually. 
B)  can differ depending on market conditions. 
C)  is typically ignored in capital budgeting. 
D)  is important only for parcels of land. 
A)  should be depreciated annually. 
B)  can differ depending on market conditions. 
C)  is typically ignored in capital budgeting. 
D)  is important only for parcels of land.

Question 12

If a project is expected to increase inventory by $15,000,increase accounts payable by $10,000,and decrease accounts receivable by $1,000,what effect does working capital have during the life of the project?

Accepted Answer

A)  increases investment by $4,000 
B)  increases investment by $5,000 
C)  increases investment by $6,000 
D)  working capital has no effect during the life of the project 
A)  increases investment by $4,000 
B)  increases investment by $5,000 
C)  increases investment by $6,000 
D)  working capital has no effect during the life of the project

Question 13

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

Accepted Answer

A)  the new, efficient machine uses less electricity. 
B)  orders of your complementary products increase. 
C)  the project has a positive NPV. 
D)  accelerated methods of depreciation can be used. 
A)  the new, efficient machine uses less electricity. 
B)  orders of your complementary products increase. 
C)  the project has a positive NPV. 
D)  accelerated methods of depreciation can be used.

Question 14

Which of the following is least likely to influence the opportunity cost of an asset?

Accepted Answer

A)  its current market value 
B)  alternative uses for the asset 
C)  the current demand for the asset 
D)  its current book value 
A)  its current market value 
B)  alternative uses for the asset 
C)  the current demand for the asset 
D)  its current book value

Question 15

Which of the following is not accurate in depicting cash flows from operations?

Accepted Answer

A)  (Revenues - expenses) (1 - tax rate) + (depreciation x tax rate) 
B)  (Revenues - expenses - taxes paid) 
C)  (Net profit + depreciation) 
D)  (Revenues - cash expenses - taxes paid) 
A)  (Revenues - expenses) (1 - tax rate) + (depreciation x tax rate) 
B)  (Revenues - expenses - taxes paid) 
C)  (Net profit + depreciation) 
D)  (Revenues - cash expenses - taxes paid)

Question 16

The opportunity cost of a resource should be considered in project analysis,unless:

Accepted Answer

A)  no cash flows result from its use. 
B)  the resource was purchased in a prior time period. 
C)  the resource has been fully depreciated. 
D)  the resource has no identifiable market value. 
A)  no cash flows result from its use. 
B)  the resource was purchased in a prior time period. 
C)  the resource has been fully depreciated. 
D)  the resource has no identifiable market value.

Question 17

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

Accepted Answer

A)  increase in accounts receivable. 
B)  new warehouse, built for this project. 
C)  25 percent of the vice president's salary. 
D)  labour expense for employees in new warehouse. 
A)  increase in accounts receivable. 
B)  new warehouse, built for this project. 
C)  25 percent of the vice president's salary. 
D)  labour expense for employees in new warehouse.

Question 18

Cash flow from operations = (revenues-cash expenses)× (1-tax rate)+ (depreciation × tax rate).

Accepted Answer

A) True 
 B)False

Question 19

The present value at any given discount rate of the depreciation tax shield is:

Accepted Answer

A)  equal for all depreciation methods. 
B)  higher with MACRS than straight-line depreciation. 
C)  higher for the tenth year than the seven-year recovery period class. 
D)  likely to increase annually due to inflation. 
A)  equal for all depreciation methods. 
B)  higher with MACRS than straight-line depreciation. 
C)  higher for the tenth year than the seven-year recovery period class. 
D)  likely to increase annually due to inflation.

Question 20

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 another CCA method. 
B)  be reacquainted with the concept of sunk costs. 
C)  reduce net working capital assigned to the project. 
D)  reduce discount rates to improve NPV. 
A)  switch to another CCA method. 
B)  be reacquainted with the concept of sunk costs. 
C)  reduce net working capital assigned to the project. 
D)  reduce discount rates to improve NPV.

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

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

In what manner does depreciation expense affect investment projects?

The correct method to handle overhead costs in capital budgeting is to:

When you finance a project partly with debt,you should still view the project as if it were all equity-financed,treating all cash outflows required for the project as coming from stockholders,and all cash inflows as going to them.

Which of the following categories would be least likely to require annual adjustments in a capital budgeting analysis due to the effects of inflation?

In capital budgeting analysis,an increase in working capital can be shown as:

A tax shield is equal to the reduction in:

Offer examples to confirm that firms do experience opportunity costs,even when cash payments are not explicitly made.

The primary difficulty in the allocation of overhead costs to prospective projects is that the:

For a profitable firm in the 30% marginal tax bracket with $100,000 of annual depreciation expense,the depreciation tax shield would be:

The opportunity cost of an asset:

If a project is expected to increase inventory by $15,000,increase accounts payable by $10,000,and decrease accounts receivable by $1,000,what effect does working capital have during the life of the project?

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

Which of the following is least likely to influence the opportunity cost of an asset?

Which of the following is not accurate in depicting cash flows from operations?

The opportunity cost of a resource should be considered in project analysis,unless:

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

Cash flow from operations = (revenues-cash expenses)× (1-tax rate)+ (depreciation × tax rate).

The present value at any given discount rate of the depreciation tax shield is:

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

Leasing

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Cash and Inventory Management

Credit Management and Collection

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

Risk Management

Filters