Question 1

If the calculated NPV is negative,then which of the following must be true? The discount rate used is

Accepted Answer

A)  Equal to the internal rate of return. 
B)  Too high. 
C)  Greater than the internal rate of return. 
D)  Too low. 
E)  Less than the internal rate of return. 
A)  Equal to the internal rate of return. 
B)  Too high. 
C)  Greater than the internal rate of return. 
D)  Too low. 
E)  Less than the internal rate of return.

Question 2

Projects L and S each have an initial cost of $10,000,followed by a series of positive cash inflows.Project L has total,undiscounted cash inflows of $16,000,while S has total undiscounted inflows of $15,000.Further,at a discount rate of 10 percent,the two projects have identical NPVs.Which project's NPV will be more sensitive to changes in the discount rate? (Hint: Projects with steeper NPV profiles are more sensitive to discount rate changes. )

Accepted Answer

A)  Project S. 
B)  Project L. 
C)  Both projects are equally sensitive to changes in the discount rate since their NPVs are equal at all required rates of return. 
D)  Neither project is sensitive to changes in the discount rate,since both have NPV profiles which are horizontal. 
E)  The solution cannot be determined unless the timing of the cash flows is known. 
A)  Project S. 
B)  Project L. 
C)  Both projects are equally sensitive to changes in the discount rate since their NPVs are equal at all required rates of return. 
D)  Neither project is sensitive to changes in the discount rate,since both have NPV profiles which are horizontal. 
E)  The solution cannot be determined unless the timing of the cash flows is known.

Question 3

Risky projects can be evaluated by discounting expected cash flows using a risk-adjusted discount rate.

Accepted Answer

A) True 
 B)False

Question 4

Any cash flow that can be classified as incremental is relevant in a capital budgeting project analysis.

Accepted Answer

A) True 
 B)False

Question 5

Monte Carlo simulation

Accepted Answer

A)  Can be useful for estimating a project's stand-alone risk. 
B)  Is capable of using probability distributions for variables as input data instead of a single numerical estimate for each variable. 
C)  Produces both an expected NPV (or IRR)and a measure of the riskiness of the NPV or IRR. 
D)  All of the above. 
E)  Only answers a and b are correct. 
A)  Can be useful for estimating a project's stand-alone risk. 
B)  Is capable of using probability distributions for variables as input data instead of a single numerical estimate for each variable. 
C)  Produces both an expected NPV (or IRR)and a measure of the riskiness of the NPV or IRR. 
D)  All of the above. 
E)  Only answers a and b are correct.

Question 6

Tapley Acquisition Inc.is considering the purchase of Target Company.The acquisition would require an initial investment of $190,000,but Tapley's after-tax net cash flows would increase by $30,000 per year and remain at this new level forever.Assume the required rate of return is 15 percent.Should Tapley buy Target?

Accepted Answer

A)  Yes,because the IRR  IRR. 
E)  No,because NPV < 0. 
A)  Yes,because the IRR  IRR. 
E)  No,because NPV < 0.

Question 7

If a typical U.S.company uses the same discount rate to evaluate all projects,the firm will most likely become

Accepted Answer

A)  Riskier over time,and its value will decline. 
B)  Riskier over time,and its value will rise. 
C)  Less risky over time,and its value will rise. 
D)  Less risky over time,and its value will decline. 
E)  There is no reason to expect its risk position or value to change over time as a result of its use of a single discount rate. 
A)  Riskier over time,and its value will decline. 
B)  Riskier over time,and its value will rise. 
C)  Less risky over time,and its value will rise. 
D)  Less risky over time,and its value will decline. 
E)  There is no reason to expect its risk position or value to change over time as a result of its use of a single discount rate.

Question 8

It is possible with a replacement project that the incremental depreciation cash flows will be negative even if the actual depreciation on the new asset is positive.

Accepted Answer

A) True 
 B)False

Question 9

Suppose a firm is considering production of a new product whose projected sales include sales that will be taken away from another product the firm also produces.The lost sales on the existing product are a sunk cost and are not a relevant cost to the new product.

Accepted Answer

A) True 
 B)False

Question 10

Your assistant has just completed an analysis of two mutually exclusive projects.You must now take her report to a board of directors meeting and present the alternatives for the board's consideration.To help you with your presentation,your assistant also constructed a graph with NPV profiles for the two projects.However,she forgot to label the profiles,so you do not know which line applies to which project.Of the following statements regarding the profiles,which one is most reasonable?

Accepted Answer

A)  If the two projects have the same investment cost,and if their NPV profiles cross once in the upper right quadrant,at a discount rate of 40 percent,this suggests that a NPV versus IRR conflict is not likely to exist. 
B)  If the two projects' NPV profiles cross once,in the upper left quadrant,at a discount rate of minus 10 percent,then there will probably not be a NPV versus IRR conflict,irrespective of the relative sizes of the two projects,in any meaningful,practical sense (that is,a conflict which will affect the actual investment decision). 
C)  If one of the projects has a NPV profile which crosses the X-axis twice,hence the project appears to have two IRRs,your assistant must have made a mistake. 
D)  Whenever a conflict between NPV and IRR exist,then,if the two projects have the same initial cost,the one with the steeper NPV profile probably has less rapid cash flows.However,if they have identical cash flow patterns,then the one with the steeper profile probably has the lower initial cost. 
E)  If the two projects both have a single outlay at t = 0,followed by a series of positive cash inflows,and if their NPV profiles cross in the lower left quadrant,then one of the projects should be accepted,and both would be accepted if they were not mutually exclusive. 
A)  If the two projects have the same investment cost,and if their NPV profiles cross once in the upper right quadrant,at a discount rate of 40 percent,this suggests that a NPV versus IRR conflict is not likely to exist. 
B)  If the two projects' NPV profiles cross once,in the upper left quadrant,at a discount rate of minus 10 percent,then there will probably not be a NPV versus IRR conflict,irrespective of the relative sizes of the two projects,in any meaningful,practical sense (that is,a conflict which will affect the actual investment decision). 
C)  If one of the projects has a NPV profile which crosses the X-axis twice,hence the project appears to have two IRRs,your assistant must have made a mistake. 
D)  Whenever a conflict between NPV and IRR exist,then,if the two projects have the same initial cost,the one with the steeper NPV profile probably has less rapid cash flows.However,if they have identical cash flow patterns,then the one with the steeper profile probably has the lower initial cost. 
E)  If the two projects both have a single outlay at t = 0,followed by a series of positive cash inflows,and if their NPV profiles cross in the lower left quadrant,then one of the projects should be accepted,and both would be accepted if they were not mutually exclusive.

Question 11

Given the following information,calculate the NPV of a proposed project: Cost = $4,000;estimated life = 3 years;initial decrease in accounts receivable = $1000,which must be restored at the end of the project's life;estimated salvage value = $1,000;net income before taxes and depreciation = $2,000 per year;method of depreciation = MACRS;tax rate = 40 percent;required rate of return = 18 percent.

Accepted Answer

A)  $1,137 
B)  −$151 
C)  $137 
D)  $804 
E)  $544 
A)  $1,137 
B)  −$151 
C)  $137 
D)  $804 
E)  $544

Question 12

If the firm is being operated so as to maximize shareholder wealth,and if our basic assumptions concerning the relationship between risk and return are true,then which of the following should be true?

Accepted Answer

A)  If the beta of the asset is larger than the firm's beta,then the required return on the asset is less than the required return on the firm. 
B)  If the beta of the asset is smaller than the firm's beta,then the required return on the asset is greater than the required return on the firm. 
C)  If the beta of the asset is greater than the corporate beta prior to the addition of that asset,then the corporate beta after the purchase of the asset will be smaller than the original corporate beta. 
D)  If the beta of an asset is larger than the corporate beta prior to the addition of that asset,then the required return on the firm will be greater after the purchase of that asset than prior to its purchase. 
E)  None of the above is a true statement. 
A)  If the beta of the asset is larger than the firm's beta,then the required return on the asset is less than the required return on the firm. 
B)  If the beta of the asset is smaller than the firm's beta,then the required return on the asset is greater than the required return on the firm. 
C)  If the beta of the asset is greater than the corporate beta prior to the addition of that asset,then the corporate beta after the purchase of the asset will be smaller than the original corporate beta. 
D)  If the beta of an asset is larger than the corporate beta prior to the addition of that asset,then the required return on the firm will be greater after the purchase of that asset than prior to its purchase. 
E)  None of the above is a true statement.

If the calculated NPV is negative,then which of the following must be true? The discount rate used is

Risky projects can be evaluated by discounting expected cash flows using a risk-adjusted discount rate.

Any cash flow that can be classified as incremental is relevant in a capital budgeting project analysis.

Monte Carlo simulation

If a typical U.S.company uses the same discount rate to evaluate all projects,the firm will most likely become

It is possible with a replacement project that the incremental depreciation cash flows will be negative even if the actual depreciation on the new asset is positive.

Suppose a firm is considering production of a new product whose projected sales include sales that will be taken away from another product the firm also produces.The lost sales on the existing product are a sunk cost and are not a relevant cost to the new product.

If the firm is being operated so as to maximize shareholder wealth,and if our basic assumptions concerning the relationship between risk and return are true,then which of the following should be true?

An Overview of Finance

Financial Assets Instruments

Financial Markets and the Investment Banking Process

Financial Intermediaries and the Banking System

The Cost of Money Interest Rates

Business Organizations and the Tax Environment

Analysis of Financial Statements

Financial Planning and Control

Time Value of Money

Valuation Concepts

Risk and Rates of Return

The Cost of Capital

Capital Structure and Dividend Policy Decisions

Working Capital Management

Investment and Securities

Investment Analysis and Valuation Techniques

Filters

Exam 13: Capital Budgeting

If the calculated NPV is negative,then which of the following must be true? The discount rate used is

Risky projects can be evaluated by discounting expected cash flows using a risk-adjusted discount rate.

Any cash flow that can be classified as incremental is relevant in a capital budgeting project analysis.

Monte Carlo simulation

If a typical U.S.company uses the same discount rate to evaluate all projects,the firm will most likely become

It is possible with a replacement project that the incremental depreciation cash flows will be negative even if the actual depreciation on the new asset is positive.

Suppose a firm is considering production of a new product whose projected sales include sales that will be taken away from another product the firm also produces.The lost sales on the existing product are a sunk cost and are not a relevant cost to the new product.

If the firm is being operated so as to maximize shareholder wealth,and if our basic assumptions concerning the relationship between risk and return are true,then which of the following should be true?

An Overview of Finance

Financial Assets Instruments

Financial Markets and the Investment Banking Process

Financial Intermediaries and the Banking System

The Cost of Money Interest Rates

Business Organizations and the Tax Environment

Analysis of Financial Statements

Financial Planning and Control

Time Value of Money

Valuation Concepts

Risk and Rates of Return

The Cost of Capital

Capital Structure and Dividend Policy Decisions

Working Capital Management

Investment and Securities

Investment Analysis and Valuation Techniques

Filters