Question 1

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 2

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 3

Which one 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 4

The total depreciation tax shield equals the product of depreciation and the tax rate.

Accepted Answer

A) True 
 B)False

Question 5

If a firm sells an asset for more than its value in the IRS's books,the resulting net cash flow will be less than the sales price.

Accepted Answer

A) True 
 B)False

Question 6

What effect is likely at the end of the life of a project that required a $20,000 investment in net working capital?

Accepted Answer

A)  The $20,000 must now be paid by the firm. 
B)  The firm receives a $20,000 cash inflow. 
C)  Taxable income is reduced by $20,000. 
D)  No effects are expected because the $20,000 is now a sunk cost. 
A)  The $20,000 must now be paid by the firm. 
B)  The firm receives a $20,000 cash inflow. 
C)  Taxable income is reduced by $20,000. 
D)  No effects are expected because the $20,000 is now a sunk cost.

Question 7

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 8

At a 13% cost of capital,a project's NPV is $100,000 if you invest today.By what amount must the initial cost of the project decrease before you would wish to wait 2 years before investing? Assume all else is held constant.

Accepted Answer

A)  $21,685 
B)  $26,000 
C)  $27,690 
D)  $29,380 
A)  $21,685 
B)  $26,000 
C)  $27,690 
D)  $29,380

Question 9

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

Accepted Answer

A)  equal for all depreciation methods. 
B)  higher with MACRS than with straight-line depreciation. 
C)  higher for the 7-year recovery period than for the 5-year recovery period class. 
D)  likely to increase annually due to inflation. 
A)  equal for all depreciation methods. 
B)  higher with MACRS than with straight-line depreciation. 
C)  higher for the 7-year recovery period than for the 5-year recovery period class. 
D)  likely to increase annually due to inflation.

Question 10

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

Accepted Answer

A)  negative 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 or alternative use within the firm. 
A)  negative 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 or alternative use within the firm.

Question 11

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

Accepted Answer

A) True 
 B)False

Question 12

A parcel of corporate land was recently chosen as the new plant site.What cost allocation should the land receive,based on the following: original cost of $200,000,highest market value during time of ownership of $300,000,net book value of $200,000,a recent offer to purchase for $250,000?

Accepted Answer

A)  $200,000 
B)  $250,000 
C)  $275,000 
D)  $300,000 
A)  $200,000 
B)  $250,000 
C)  $275,000 
D)  $300,000

Question 13

Sunk costs remain the same whether or not you accept the project.

Accepted Answer

A) True 
 B)False

Question 14

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 15

Which one of the following formulas is incorrect?

Accepted Answer

A)  Operating cash flow = revenues − cash expenses − taxes 
B)  Operating cash flow = net profit + depreciation 
C)  Depreciation tax shield = depreciation × (1 − tax rate) 
D)  Operating cash flow = (revenues − cash expenses) × (1 − tax rate) + (depreciation × tax rate) 
A)  Operating cash flow = revenues − cash expenses − taxes 
B)  Operating cash flow = net profit + depreciation 
C)  Depreciation tax shield = depreciation × (1 − tax rate) 
D)  Operating cash flow = (revenues − cash expenses) × (1 − tax rate) + (depreciation × tax rate)

Question 16

Assuming an asset has been fully depreciated according to its MACRS class life,which one of the following statements is correct?

Accepted Answer

A)  Its market value is zero. 
B)  Its book value is zero. 
C)  Its book value is the current market value. 
D)  It has neither a book value nor a market value. 
A)  Its market value is zero. 
B)  Its book value is zero. 
C)  Its book value is the current market value. 
D)  It has neither a book value nor a market value.

Question 17

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 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 incremental amounts. 
D)  ignore them in all cases.

Question 18

What is the undiscounted cash flow in the final year of an investment,assuming $10,000 after-tax cash flows from operations,$1,000 from the sale of a fully depreciated machine,a $2,000 investment in working capital,and a 35% tax rate?

Accepted Answer

A)  $8,450 
B)  $12,600 
C)  $12,650 
D)  $14,000 
A)  $8,450 
B)  $12,600 
C)  $12,650 
D)  $14,000

Question 19

When a firm makes an investment in working capital,the cash is usually recovered later.

Accepted Answer

A) True 
 B)False

Question 20

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 expenditure on 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

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

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

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

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

The total depreciation tax shield equals the product of depreciation and the tax rate.

If a firm sells an asset for more than its value in the IRS's books,the resulting net cash flow will be less than the sales price.

What effect is likely at the end of the life of a project that required a $20,000 investment in net working capital?

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

At a 13% cost of capital,a project's NPV is $100,000 if you invest today.By what amount must the initial cost of the project decrease before you would wish to wait 2 years before investing? Assume all else is held constant.

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

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

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

A parcel of corporate land was recently chosen as the new plant site.What cost allocation should the land receive,based on the following: original cost of $200,000,highest market value during time of ownership of $300,000,net book value of $200,000,a recent offer to purchase for $250,000?

Sunk costs remain the same whether or not you accept the project.

Under the MACRS:

Which one of the following formulas is incorrect?

Assuming an asset has been fully depreciated according to its MACRS class life,which one of the following statements is correct?

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

What is the undiscounted cash flow in the final year of an investment,assuming $10,000 after-tax cash flows from operations,$1,000 from the sale of a fully depreciated machine,a $2,000 investment in working capital,and a 35% tax rate?

When a firm makes an investment in working capital,the cash is usually recovered later.

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 expenditure on machinery,and a $20,000 increase in accounts payable?

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Measuring Corporate Performance

The Time Value of Money

Valuing Bonds

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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

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