Question 1

Reducing the probability of bankruptcy is a benefit of diversification.

Accepted Answer

A) True 
 B)False

Question 2

If the cash flows of an accepted investment project are negatively correlated with the average cash flow of the firm's existing assets,then the company's total exposure to risk can decrease.

Accepted Answer

A) True 
 B)False

Question 3

Using simulation provides the financial manager with a probability distribution of an investment's net present value or internal rate of return.

Accepted Answer

A) True 
 B)False

Question 4

Increases in inventory and accounts receivable expected to occur if a proposed advertising campaign is undertaken are examples of sunk costs.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following should be excluded in an analysis of a new project's cash flows?

Accepted Answer

A)  Additional investment in fixed assets 
B)  Additional investment in accounts receivable 
C)  Additional investment in inventory 
D)  Additional interest expenses on debt financing 
A)  Additional investment in fixed assets 
B)  Additional investment in accounts receivable 
C)  Additional investment in inventory 
D)  Additional interest expenses on debt financing

Question 6

Nickel Industries is considering the purchase of a new machine that will cost $178,000,plus an additional $12,000 to ship and install.The new machine will have a 5-year useful life and will be depreciated using the straight-line method.The machine is expected to generate new sales of $85,000 per year and is expected to increase operating costs by $10,000 annually.Nickel's income tax rate is 40%.What is the projected incremental cash flow of the machine for year 1?

Accepted Answer

A)  $54,800 
B)  $60,200 
C)  $66,350 
D)  $68,200 
A)  $54,800 
B)  $60,200 
C)  $66,350 
D)  $68,200

Question 7

JW Enterprises is considering a new marketing campaign that will require the addition of a new computer programmer and new software.The programmer will occupy an office in JW's current building and will be paid $8,000 per month.The software license costs $1,000 per month.The rent for the building is $4,000 per month.JW's computer system is always on,so running the new software will not change the current monthly electric bill of $900.The incremental expenses for the new marketing campaign are

Accepted Answer

A)  $13,900 per month. 
B)  $9,000 per month. 
C)  $13,000 per month. 
D)  $8,000 per month. 
A)  $13,900 per month. 
B)  $9,000 per month. 
C)  $13,000 per month. 
D)  $8,000 per month.

Question 8

Taste Good Chocolates develops a new candy bar and plans to sell each bar for $1.Taste Good predicts that 1 million candy bars will be sold in the first year if the new candy bar is produced and sold,and includes $1 million of incremental revenues in its capital budgeting analysis.A senior executive in the company believes that 1 million candy bars will be sold,but lowers the estimate of incremental revenue to $700,000.What would explain this change?

Accepted Answer

A)  cannibalization of 300,000 of Taste Good Chocolates' other candy bars 
B)  excessive marketing costs to sell the 1 million candy bars 
C)  a lower discount rate 
D)  a higher selling price for the new candy bars 
A)  cannibalization of 300,000 of Taste Good Chocolates' other candy bars 
B)  excessive marketing costs to sell the 1 million candy bars 
C)  a lower discount rate 
D)  a higher selling price for the new candy bars

Question 9

A bakery company is considering one capital budgeting project involving the replacement of a sophisticated brick oven,and another capital budgeting project involving research and development into synthetic food substitutes.Which of the following statements is most correct concerning the risk-adjusted discount rate(s)for the projects?

Accepted Answer

A)  The rate will likely be higher for the replacement project because the likelihood of success is higher. 
B)  The rate will likely be higher for the research and development project because of the uncertainty involved with research and development projects. 
C)  The rate should be the same for both projects because they are being considered by one company with the same common shareholders. 
D)  The rate should be higher for the replacement project because the company is more certain of the returns from a project similar to their existing business. 
A)  The rate will likely be higher for the replacement project because the likelihood of success is higher. 
B)  The rate will likely be higher for the research and development project because of the uncertainty involved with research and development projects. 
C)  The rate should be the same for both projects because they are being considered by one company with the same common shareholders. 
D)  The rate should be higher for the replacement project because the company is more certain of the returns from a project similar to their existing business.

Question 10

A project's annual free cash flow is the change in operating cash flow less any change in net working capital and less any change in capital spending.

Accepted Answer

A) True 
 B)False

Question 11

The initial outlay includes the cost of purchasing the asset and getting it operational,including the purchase price,shipping and installation,and any training costs for employees who will be operating the equipment,and any increases in working capital requirements.

Accepted Answer

A) True 
 B)False

Question 12

According to the CAPM,systematic risk is the only relevant risk for capital budgeting purposes.

Accepted Answer

A) True 
 B)False

Question 13

To be included in a capital budgeting analysis,all incremental free cash flows must be expensed on the company's books,otherwise generally accepted accounting principles will be violated.

Accepted Answer

A) True 
 B)False

Question 14

Depreciation expense produces a cash inflow equal to the depreciation expense multiplied by the firm's marginal tax rate.

Accepted Answer

A) True 
 B)False

Question 15

A project's annual free cash flow is the change in operating cash flow less any change in net working capital and less any change in capital spending.

Accepted Answer

A) True 
 B)False

Question 16

Crighton Industries is considering the purchase of a new machine that will cost $250,000,plus an additional $10,000 to ship and install.The new machine will have a 5-year useful life and will be depreciated to zero using the straight-line method.The machine is expected to have a salvage value of $30,000 at the end of year five.Crighton's income tax rate is 40%.The additional net working capital from this project of $50,000 is expected to return to its pre-project level upon termination.What is the non-operating terminal cash flow of the machine?

Accepted Answer

A)  -$32,000 
B)  $48,000 
C)  $68,000 
D)  $80,000 
A)  -$32,000 
B)  $48,000 
C)  $68,000 
D)  $80,000

Question 17

Operating cash flow is equal to the change in EBIT less the change in interest expense,less the change in taxes,plus the change in depreciation.

Accepted Answer

A) True 
 B)False

Question 18

Accounting profits,adjusted for taxes and differences in accounting methods,provide the best measure of relevant cash flows for capital budgeting purposes.

Accepted Answer

A) True 
 B)False

Question 19

John Q.Enterprises is considering two potential investments.The probability distributions of annual end-of-year cash flows for the respective projects are:
   Both projects will require an initial outlay of $45,000 and will have an estimated life of 6 years.Project A is considered a riskier investment and will have to have a risk-adjusted required rate of return of 15%,while Project B's risk-adjusted required rate of return is 12%.
a.Determine the expected value of each project's annual cash flow.
b.Determine each project's risk-adjusted net present value.

Accepted Answer

The answer of John Q.Enterprises is considering two potential investments.The...

Question 20

One method of accounting for systematic risk for a project involves identifying a publicly traded firm that is engaged in the same business as that project and using its required rate of return to evaluate the project.This method is referred to as

Accepted Answer

A)  the accounting beta method. 
B)  scenario analysis. 
C)  the pure play method. 
D)  sensitivity analysis. 
A)  the accounting beta method. 
B)  scenario analysis. 
C)  the pure play method. 
D)  sensitivity analysis.

Reducing the probability of bankruptcy is a benefit of diversification.

If the cash flows of an accepted investment project are negatively correlated with the average cash flow of the firm's existing assets,then the company's total exposure to risk can decrease.

Using simulation provides the financial manager with a probability distribution of an investment's net present value or internal rate of return.

Increases in inventory and accounts receivable expected to occur if a proposed advertising campaign is undertaken are examples of sunk costs.

Which of the following should be excluded in an analysis of a new project's cash flows?

A project's annual free cash flow is the change in operating cash flow less any change in net working capital and less any change in capital spending.

The initial outlay includes the cost of purchasing the asset and getting it operational,including the purchase price,shipping and installation,and any training costs for employees who will be operating the equipment,and any increases in working capital requirements.

According to the CAPM,systematic risk is the only relevant risk for capital budgeting purposes.

To be included in a capital budgeting analysis,all incremental free cash flows must be expensed on the company's books,otherwise generally accepted accounting principles will be violated.

Depreciation expense produces a cash inflow equal to the depreciation expense multiplied by the firm's marginal tax rate.

A project's annual free cash flow is the change in operating cash flow less any change in net working capital and less any change in capital spending.

Operating cash flow is equal to the change in EBIT less the change in interest expense,less the change in taxes,plus the change in depreciation.

Accounting profits,adjusted for taxes and differences in accounting methods,provide the best measure of relevant cash flows for capital budgeting purposes.

One method of accounting for systematic risk for a project involves identifying a publicly traded firm that is engaged in the same business as that project and using its required rate of return to evaluate the project.This method is referred to as

An Introduction to the Foundations of Financial Management

The Financial Markets and Interest Rates

Understanding Financial Statements and Cash Flows

Evaluating a Firms Financial Performance

The Time Value of Money

The Meaning and Measurement of Risk and Return

The Valuation and Characteristics of Bonds

The Valuation and Characteristics of Stock

The Cost of Capital

Capital-Budgeting Techniques and Practice

Determining the Financing Mix

Dividend Policy and Internal Financing

Short-Term Financial Planning

Working-Capital Management

Current Asset Management

International Business Finance

Filters

Exam 11: Cash Flows and Other Topics in Capital Budgeting

Reducing the probability of bankruptcy is a benefit of diversification.

If the cash flows of an accepted investment project are negatively correlated with the average cash flow of the firm's existing assets,then the company's total exposure to risk can decrease.

Using simulation provides the financial manager with a probability distribution of an investment's net present value or internal rate of return.

Increases in inventory and accounts receivable expected to occur if a proposed advertising campaign is undertaken are examples of sunk costs.

Which of the following should be excluded in an analysis of a new project's cash flows?

A project's annual free cash flow is the change in operating cash flow less any change in net working capital and less any change in capital spending.

The initial outlay includes the cost of purchasing the asset and getting it operational,including the purchase price,shipping and installation,and any training costs for employees who will be operating the equipment,and any increases in working capital requirements.

According to the CAPM,systematic risk is the only relevant risk for capital budgeting purposes.

To be included in a capital budgeting analysis,all incremental free cash flows must be expensed on the company's books,otherwise generally accepted accounting principles will be violated.

Depreciation expense produces a cash inflow equal to the depreciation expense multiplied by the firm's marginal tax rate.

A project's annual free cash flow is the change in operating cash flow less any change in net working capital and less any change in capital spending.

Operating cash flow is equal to the change in EBIT less the change in interest expense,less the change in taxes,plus the change in depreciation.

Accounting profits,adjusted for taxes and differences in accounting methods,provide the best measure of relevant cash flows for capital budgeting purposes.

One method of accounting for systematic risk for a project involves identifying a publicly traded firm that is engaged in the same business as that project and using its required rate of return to evaluate the project.This method is referred to as

An Introduction to the Foundations of Financial Management

The Financial Markets and Interest Rates

Understanding Financial Statements and Cash Flows

Evaluating a Firms Financial Performance

The Time Value of Money

The Meaning and Measurement of Risk and Return

The Valuation and Characteristics of Bonds

The Valuation and Characteristics of Stock

The Cost of Capital

Capital-Budgeting Techniques and Practice

Determining the Financing Mix

Dividend Policy and Internal Financing

Short-Term Financial Planning

Working-Capital Management

Current Asset Management

International Business Finance

Filters