Question 1

The method of financing a project affects the determination of its cash flows for capital budgeting purposes.

Accepted Answer

A) True 
 B)False

Question 2

Although the rule seems very straightforward, why is it stated that financial managers often make the mistake of discounting real cash flows with nominal rates? Mention one common example, and state the effect that this has on project evaluation.

Accepted Answer

Perhaps the most common violation of thi

Question 3

Which of the following typically results from using straight-line depreciation rather than MACRS in the set of books for shareholders?

Accepted Answer

A)  Net income appears higher during the early periods of depreciation. 
B)  Less money is paid to the Internal Revenue Service over an asset's life. 
C)  Financial managers have more funds from operations available over the asset's life. 
D) Cash flow from operations will be higher in the second year of the asset's life. 
A)  Net income appears higher during the early periods of depreciation. 
B)  Less money is paid to the Internal Revenue Service over an asset's life. 
C)  Financial managers have more funds from operations available over the asset's life. 
D) Cash flow from operations will be higher in the second year of the asset's life.

Question 4

Why is accelerated depreciation often favored for the corporation's set of tax books?

Accepted Answer

A)  It increases the total depreciation tax shield over the project's life. 
B)  It reduces the total amount of taxes paid over the project's life. 
C)  It increases net accounting profits over the project's life. 
D) It impacts favorably with the time value of money. 
A)  It increases the total depreciation tax shield over the project's life. 
B)  It reduces the total amount of taxes paid over the project's life. 
C)  It increases net accounting profits over the project's life. 
D) It impacts favorably with the time value of money.

Question 5

Which one of the following is not accurate in depicting the cash flows from operations for an all-equity firm?

Accepted Answer

A)  (revenues - cash expenses)(1 - tax rate) + (depreciation × tax rate) 
B)  (revenues - expenses - taxes) 
C)  (net profit + depreciation) 
D) (revenues - cash expenses - taxes) 
A)  (revenues - cash expenses)(1 - tax rate) + (depreciation × tax rate) 
B)  (revenues - expenses - taxes) 
C)  (net profit + depreciation) 
D) (revenues - cash expenses - taxes)

Question 6

Discounting real cash flows at a nominal rate is a serious mistake.

Accepted Answer

A) True 
 B)False

Question 7

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 8

What is the effect on a firm's net working capital if a new project requires a $30,000 increase in inventory, a $10,000 increase in accounts receivable, a $35,000 increase in machinery, and a $20,000 increase in accounts payable?

Accepted Answer

A)  -$5,000 
B)  $10,000 
C)  $20,000 
D) $55,000 
A)  -$5,000 
B)  $10,000 
C)  $20,000 
D) $55,000

Question 9

A project will reduce the amount of inventory that a firm must carry. What effect will this have on the project's cash flows if all inventory is purchased for cash?

Accepted Answer

A)  There will only be a cash outflow at time zero. 
B)  There will be no effect on the cash flows since the inventory has already been paid for. 
C)  There will be a cash outflow at time zero and an equal cash inflow when the project ends. 
D) There is an assumed cash outflow equal to the inventory reduction at the end of the project. 
A)  There will only be a cash outflow at time zero. 
B)  There will be no effect on the cash flows since the inventory has already been paid for. 
C)  There will be a cash outflow at time zero and an equal cash inflow when the project ends. 
D) There is an assumed cash outflow equal to the inventory reduction at the end of the project.

Question 10

Which one of these represents a cash outflow for a project?

Accepted Answer

A)  A sunk cost 
B)  Increase in accounts receivable 
C)  Depreciation 
D) Accrued expenses 
A)  A sunk cost 
B)  Increase in accounts receivable 
C)  Depreciation 
D) Accrued expenses

Question 11

A project will always generate extra overhead costs.

Accepted Answer

A) True 
 B)False

Question 12

Which one of the following statements is most likely to be correct for a project in which the NPV is negative when the cash inflows are based on net income?

Accepted Answer

A)  NPV may turn positive after adjusting for depreciation expense. 
B)  NPV should be calculated with pretax cash flows rather than net income. 
C)  NPV has probably been overestimated. 
D) The project should be rejected or abandoned. 
A)  NPV may turn positive after adjusting for depreciation expense. 
B)  NPV should be calculated with pretax cash flows rather than net income. 
C)  NPV has probably been overestimated. 
D) The project should be rejected or abandoned.

Question 13

Investments in working capital, just like investments in plant and equipment, result in cash inflows at time zero.

Accepted Answer

A) True 
 B)False

Question 14

Determine the change in net working capital that appears warranted for the following proposed project: Inventory levels will increase 20% from their current value of $500,000; cash will increase by $25,000; wage accruals will increase by $60,000; machinery will increase by $75,000; accounts receivable-because of a new collection system-will increase by only $15,000; accounts payable will increase by $45,000. What happens to net working capital at the end of the project's life?

Accepted Answer

@#IMG-DLM& It is assumed that at the end

Question 15

Discuss the statement, "Changes in working capital necessitated by a project represent only an opportunity cost to the firm."

Accepted Answer

Most capital budgeting projects require

Question 16

Projects that have negative NPVs should be:

Accepted Answer

A)  depreciated over a longer time period. 
B)  charged less in overhead costs. 
C)  discounted using lower rates. 
D) rejected or abandoned. 
A)  depreciated over a longer time period. 
B)  charged less in overhead costs. 
C)  discounted using lower rates. 
D) rejected or abandoned.

Question 17

Under the MACRS:

Accepted Answer

A)  all assets are depreciated over 5 years. 
B)  depreciable percentages decline throughout the asset's class life. 
C)  straight-line depreciation percentages are doubled. 
D) assets are assumed to be purchased and sold midyear. 
A)  all assets are depreciated over 5 years. 
B)  depreciable percentages decline throughout the asset's class life. 
C)  straight-line depreciation percentages are doubled. 
D) assets are assumed to be purchased and sold midyear.

Question 18

In project analysis, allocations of overhead should be limited to only those that represent additional expense.

Accepted Answer

A) True 
 B)False

Question 19

Suppose you finance a project partly with debt. You should neither subtract the debt proceeds from the project's required investment, nor would you recognize the interest and principal payments on the debt as cash outflows.

Accepted Answer

A) True 
 B)False

Question 20

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

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

The method of financing a project affects the determination of its cash flows for capital budgeting purposes.

Although the rule seems very straightforward, why is it stated that financial managers often make the mistake of discounting real cash flows with nominal rates? Mention one common example, and state the effect that this has on project evaluation.

Which of the following typically results from using straight-line depreciation rather than MACRS in the set of books for shareholders?

Why is accelerated depreciation often favored for the corporation's set of tax books?

Which one of the following is not accurate in depicting the cash flows from operations for an all-equity firm?

Discounting real cash flows at a nominal rate is a serious mistake.

In what manner does depreciation expense affect investment projects?

What is the effect on a firm's net working capital if a new project requires a $30,000 increase in inventory, a $10,000 increase in accounts receivable, a $35,000 increase in machinery, and a $20,000 increase in accounts payable?

A project will reduce the amount of inventory that a firm must carry. What effect will this have on the project's cash flows if all inventory is purchased for cash?

Which one of these represents a cash outflow for a project?

A project will always generate extra overhead costs.

Which one of the following statements is most likely to be correct for a project in which the NPV is negative when the cash inflows are based on net income?

Investments in working capital, just like investments in plant and equipment, result in cash inflows at time zero.

Discuss the statement, "Changes in working capital necessitated by a project represent only an opportunity cost to the firm."

Projects that have negative NPVs should be:

Under the MACRS:

In project analysis, allocations of overhead should be limited to only those that represent additional expense.

Suppose you finance a project partly with debt. You should neither subtract the debt proceeds from the project's required investment, nor would you recognize the interest and principal payments on the debt as cash outflows.

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.

Goals and Governance of the Corporation

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

How Corporations Raise Venture Capital and Issue Securities

Debt Policy

Payout Policy

Long-Term Financial Planning

Short-Term Financial Planning

Working Capital Management

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

Risk Management

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