Question 1

Adding depreciation expense to net profit equals:

Accepted Answer

A)  profit before tax. 
B)  total revenues. 
C)  the depreciation tax shield. 
D)  cash flows from operations. 
A)  profit before tax. 
B)  total revenues. 
C)  the depreciation tax shield. 
D)  cash flows from operations.

Question 2

Which of the following statements is incorrect?

Accepted Answer

A)  Real cash flows must be discounted at a real discount rate. 
B)  (1 + real rate of interest) = (1 + nominal rate of interest )/(1 + inflation rate). 
C)  Real rate of interest almost equals "nominal rate of interest - inflation rate." 
D)  None of these. 
A)  Real cash flows must be discounted at a real discount rate. 
B)  (1 + real rate of interest) = (1 + nominal rate of interest )/(1 + inflation rate). 
C)  Real rate of interest almost equals "nominal rate of interest - inflation rate." 
D)  None of these.

Question 3

If a project's cash flows exceed the project's incremental cash flows,it is likely that the:

Accepted Answer

A)  project interacts with other aspects of the firm. 
B)  project must have high depreciation expense. 
C)  opportunity cost of capital must be high. 
D)  project will have a negative NPV. 
A)  project interacts with other aspects of the firm. 
B)  project must have high depreciation expense. 
C)  opportunity cost of capital must be high. 
D)  project will have a negative NPV.

Question 4

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 5

A firm generates sales of $250,000,depreciation expense of $50,000,taxable income of $50,000,and has a 35% tax rate.By how much does net cash flow deviate from net income?

Accepted Answer

A)  $17,500 
B)  $50,000 
C)  $67,500 
D)  $82,500 
A)  $17,500 
B)  $50,000 
C)  $67,500 
D)  $82,500

Question 6

Accurate capital budgeting analysis depends on total cash flows as opposed to incremental cash flows (i.e.,the difference between cash flow with project and cash flow without project).

Accepted Answer

A) True 
 B)False

Question 7

What is the present value at a 10% discount rate of the depreciation tax shield for a firm in the 35% tax bracket that purchases a $50,000 asset being depreciated straight-line over a 5-year life to a zero salvage value?

Accepted Answer

A)  $10,866 
B)  $13,268 
C)  $17,500 
D)  $37,908 
A)  $10,866 
B)  $13,268 
C)  $17,500 
D)  $37,908

Question 8

The following are all important items to look out for when you perform capital budgeting for a company except

Accepted Answer

A)  be aware of allocated overhead costs. 
B)  include all indirect effects. 
C)  include sunk costs. 
D)  include opportunity costs. 
A)  be aware of allocated overhead costs. 
B)  include all indirect effects. 
C)  include sunk costs. 
D)  include opportunity costs.

Question 9

The value of a proposed capital budgeting project depends on the:

Accepted Answer

A)  total cash flows produced. 
B)  incremental cash flows produced. 
C)  accounting profits produced. 
D)  increase in total sales produced. 
A)  total cash flows produced. 
B)  incremental cash flows produced. 
C)  accounting profits produced. 
D)  increase in total sales produced.

Question 10

What nominal annual return is required on an investment for an investor to experience a 12% gain in purchasing power? Assume inflation to be 4%.

Accepted Answer

A)  7.69% 
B)  9.29% 
C)  12.00% 
D)  16.48% 
A)  7.69% 
B)  9.29% 
C)  12.00% 
D)  16.48%

Question 11

An asset in the MACRS 5-year class life will have depreciation expense in 6 different years.

Accepted Answer

A) True 
 B)False

Question 12

How should the cash flows of a proposed new project be calculated?

Accepted Answer

Here is a checklist to bear in mind when

Question 13

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 14

The likely effect of discounting nominal cash flows with real interest rates will be to:

Accepted Answer

A)  make an investment's NPV appear more attractive. 
B)  make an investment's NPV appear less attractive. 
C)  correctly calculate an investment's NPV if inflation is expected. 
D)  correctly calculate an investment's NPV, regardless of expected inflation. 
A)  make an investment's NPV appear more attractive. 
B)  make an investment's NPV appear less attractive. 
C)  correctly calculate an investment's NPV if inflation is expected. 
D)  correctly calculate an investment's NPV, regardless of expected inflation.

Question 15

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 16

How is the company's tax bill affected by depreciation and how does this affect project value?

Accepted Answer

Depreciation is not a cash flow.However,

Question 17

What are the three methods to calculate operating cash flow?

Accepted Answer

There are several ways to work out a pro

Question 18

Assume that sales revenues are increasing more rapidly than product costs,but that a project's cash flows have been represented as an annuity when calculating NPV.Which of the following problems may occur?

Accepted Answer

A)  Nominal cash flows are possibly being discounted with a real rate. 
B)  Real cash flows are possibly being discounted with a nominal rate. 
C)  Nominal cash flows are possibly being discounted with a nominal rate. 
D)  Real cash flows are possibly being discounted with a real rate. 
A)  Nominal cash flows are possibly being discounted with a real rate. 
B)  Real cash flows are possibly being discounted with a nominal rate. 
C)  Nominal cash flows are possibly being discounted with a nominal rate. 
D)  Real cash flows are possibly being discounted with a real rate.

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

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

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

Adding depreciation expense to net profit equals:

Which of the following statements is incorrect?

If a project's cash flows exceed the project's incremental cash flows,it is likely that the:

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

A firm generates sales of $250,000,depreciation expense of $50,000,taxable income of $50,000,and has a 35% tax rate.By how much does net cash flow deviate from net income?

Accurate capital budgeting analysis depends on total cash flows as opposed to incremental cash flows (i.e.,the difference between cash flow with project and cash flow without project).

What is the present value at a 10% discount rate of the depreciation tax shield for a firm in the 35% tax bracket that purchases a $50,000 asset being depreciated straight-line over a 5-year life to a zero salvage value?

The following are all important items to look out for when you perform capital budgeting for a company except

The value of a proposed capital budgeting project depends on the:

What nominal annual return is required on an investment for an investor to experience a 12% gain in purchasing power? Assume inflation to be 4%.

An asset in the MACRS 5-year class life will have depreciation expense in 6 different years.

How should the cash flows of a proposed new project be calculated?

The opportunity cost of an asset:

The likely effect of discounting nominal cash flows with real interest rates will be to:

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

How is the company's tax bill affected by depreciation and how does this affect project value?

What are the three methods to calculate operating cash flow?

Assume that sales revenues are increasing more rapidly than product costs,but that a project's cash flows have been represented as an annuity when calculating NPV.Which of the following problems may occur?

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

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

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

Risk, Return, and Capital Budgeting

Mergers, Acquisitions, and Corporate Control

International Financial Management

Options

Risk Management

Filters