Question 1

The depreciation tax shield equals the amount of the depreciation expense multiplied by the firm's tax rate.

Accepted Answer

A) True 
 B)False

Question 2

Capital budgeting decisions can only involve mutually exclusive projects.

Accepted Answer

A) True 
 B)False

Question 3

The profitability index measures the present value of benefits received for each dollar invested.

Accepted Answer

A) True 
 B)False

Question 4

The profitability index is also sometimes referred to as the benefit/cost ratio.

Accepted Answer

A) True 
 B)False

Question 5

The first step in the capital budgeting process is

Accepted Answer

A) implementation 
B) selection 
C) follow-up 
D) identification 
A) implementation 
B) selection 
C) follow-up 
D) identification

Question 6

The method that calculates the ratio of the present value of the positive cash flows of a project to the absolute value of the present value of the negative cash flows is called the: Awkwardly worded.#98 is phrased more clearly.

Accepted Answer

A) internal rate of return 
B) profitability index 
C) net present value 
D) payback period 
A) internal rate of return 
B) profitability index 
C) net present value 
D) payback period

Question 7

All of the following are considered stages in the capital budgeting process EXCEPT:

Accepted Answer

A) invention 
B) development 
C) implementation 
D) selection 
E) all are included 
A) invention 
B) development 
C) implementation 
D) selection 
E) all are included

Question 8

Whenever the net present value of a project is positive, the profitability index is greater or equal to 1.0.

Accepted Answer

A) True 
 B)False

Question 9

All of the following statements are correct except:

Accepted Answer

A) The NPV and IRR methods will only sometimes agree on whether a project enhances or harms shareholder wealth. 
B) If a project has a positive NPV, its IRR will always be less than the cost of capital. 
C) If a project has a negative NPV, its IRR will always be greater than the cost of capital. 
D) There is always a conflict between NPV and IRR in the case of mutually exclusive projects. 
E) none of the above are correct 
A) The NPV and IRR methods will only sometimes agree on whether a project enhances or harms shareholder wealth. 
B) If a project has a positive NPV, its IRR will always be less than the cost of capital. 
C) If a project has a negative NPV, its IRR will always be greater than the cost of capital. 
D) There is always a conflict between NPV and IRR in the case of mutually exclusive projects. 
E) none of the above are correct

Question 10

Two years ago, a company spent $450,000 on a consulting study that focused on the technology of the firm's operations.Now it appears that technology is noncompliant with existing regulations.New technology must replace the old project.The $450,000 would represent:

Accepted Answer

A) an opportunity cost 
B) an operating expenditure 
C) a sunk cost 
D) none of the above 
A) an opportunity cost 
B) an operating expenditure 
C) a sunk cost 
D) none of the above

Question 11

When the net present value for a project is negative, the internal rater of return is _________ the cost of capital.

Accepted Answer

A) greater than 
B) greater than or equal to 
C) less than 
D) equal to 
A) greater than 
B) greater than or equal to 
C) less than 
D) equal to

Question 12

A higher-risk project needs to be evaluated using a lower required rate of return.

Accepted Answer

A) True 
 B)False

Question 13

To maximize shareholder wealth, a financial manager needs to find capital budgeting projects that have positive net present values.

Accepted Answer

A) True 
 B)False

Question 14

A firm is evaluating a proposal which has an initial investment of $50,000 and has cash flows of $15,000 per year for five years.The payback of the project is:

Accepted Answer

A) 1.5 years 
B) 2 years 
C) 3.3 years 
D) 4 years 
E) none of the above 
A) 1.5 years 
B) 2 years 
C) 3.3 years 
D) 4 years 
E) none of the above

Question 15

The internal rate of return measures the return on the project's initial cost.

Accepted Answer

A) True 
 B)False

Question 16

The corporate planning tool that develops project plans that fit well with the firm's plans is often referred to by the following acronym:

Accepted Answer

A) MOGS. 
B) SMOG. 
C) OMGS. 
D) GOMS. 
E) none of the above statements are correct 
A) MOGS. 
B) SMOG. 
C) OMGS. 
D) GOMS. 
E) none of the above statements are correct

Question 17

A capital budgeting project's cash flows, including the total up-front cost of the project, are typically known with certainty before the project starts.

Accepted Answer

A) True 
 B)False

Question 18

Shanghai Shipping is considering investing in a project that requires an after-tax initial investment of 156 million and is expected to produce after-tax cash inflows of $40 million for each of the next five years.The firm's cost of capital is 10%.Based on this information, the NPV of the project is _________ million and the firm should _________ the project.

Accepted Answer

A) $151.63; accept 
B) -$151.63, reject 
C) $4.37, accept 
D) -$4.37, reject 
E) none of the above 
A) $151.63; accept 
B) -$151.63, reject 
C) $4.37, accept 
D) -$4.37, reject 
E) none of the above

Question 19

A NPV profile shows how NPV varies given alternative IRRs.

Accepted Answer

A) True 
 B)False

Question 20

What is the NPV for the following project if its cost of capital is 12% and its initial after-tax cost is $5,000,000 and it is expected to provide after-tax operating cash flows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3, and ($1,300,000) in year 4?

Accepted Answer

A) ($1,494,336) 
B) $1,494,336 
C) greater than zero 
D) two of the above 
A) ($1,494,336) 
B) $1,494,336 
C) greater than zero 
D) two of the above

The depreciation tax shield equals the amount of the depreciation expense multiplied by the firm's tax rate.

Capital budgeting decisions can only involve mutually exclusive projects.

The profitability index measures the present value of benefits received for each dollar invested.

The profitability index is also sometimes referred to as the benefit/cost ratio.

The first step in the capital budgeting process is

The method that calculates the ratio of the present value of the positive cash flows of a project to the absolute value of the present value of the negative cash flows is called the: Awkwardly worded.#98 is phrased more clearly.

All of the following are considered stages in the capital budgeting process EXCEPT:

Whenever the net present value of a project is positive, the profitability index is greater or equal to 1.0.

All of the following statements are correct except:

Two years ago, a company spent $450,000 on a consulting study that focused on the technology of the firm's operations.Now it appears that technology is noncompliant with existing regulations.New technology must replace the old project.The $450,000 would represent:

When the net present value for a project is negative, the internal rater of return is _________ the cost of capital.

A higher-risk project needs to be evaluated using a lower required rate of return.

To maximize shareholder wealth, a financial manager needs to find capital budgeting projects that have positive net present values.

A firm is evaluating a proposal which has an initial investment of $50,000 and has cash flows of $15,000 per year for five years.The payback of the project is:

The internal rate of return measures the return on the project's initial cost.

The corporate planning tool that develops project plans that fit well with the firm's plans is often referred to by the following acronym:

A capital budgeting project's cash flows, including the total up-front cost of the project, are typically known with certainty before the project starts.

A NPV profile shows how NPV varies given alternative IRRs.

What is the NPV for the following project if its cost of capital is 12% and its initial after-tax cost is $5,000,000 and it is expected to provide after-tax operating cash flows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3, and ($1,300,000) in year 4?

The Financial Environment

Money and the Monetary System

Banks and Other Financial Institutions

Federal Reserve System

Policy Makers and the Money Supply

International Finance and Trade

Savings and Investment Process

Interest Rates

Time Value of Money

Bonds and Stocks: Characteristics and Valuation

Securities Markets

Financial Return and Risk Concepts

Business Organization and Financial Data

Financial Analysis and Long-Term Financial Planning

Managing Working Capital

Short-Term Business Financing

Capital Structure and the Cost of Capital

Filters

Exam 17: Capital Budgeting Analysis

The depreciation tax shield equals the amount of the depreciation expense multiplied by the firm's tax rate.

Capital budgeting decisions can only involve mutually exclusive projects.

The profitability index measures the present value of benefits received for each dollar invested.

The profitability index is also sometimes referred to as the benefit/cost ratio.

The first step in the capital budgeting process is

The method that calculates the ratio of the present value of the positive cash flows of a project to the absolute value of the present value of the negative cash flows is called the: Awkwardly worded.#98 is phrased more clearly.

All of the following are considered stages in the capital budgeting process EXCEPT:

Whenever the net present value of a project is positive, the profitability index is greater or equal to 1.0.

All of the following statements are correct except:

Two years ago, a company spent $450,000 on a consulting study that focused on the technology of the firm's operations.Now it appears that technology is noncompliant with existing regulations.New technology must replace the old project.The $450,000 would represent:

When the net present value for a project is negative, the internal rater of return is _________ the cost of capital.

A higher-risk project needs to be evaluated using a lower required rate of return.

To maximize shareholder wealth, a financial manager needs to find capital budgeting projects that have positive net present values.

A firm is evaluating a proposal which has an initial investment of $50,000 and has cash flows of $15,000 per year for five years.The payback of the project is:

The internal rate of return measures the return on the project's initial cost.

The corporate planning tool that develops project plans that fit well with the firm's plans is often referred to by the following acronym:

A capital budgeting project's cash flows, including the total up-front cost of the project, are typically known with certainty before the project starts.

A NPV profile shows how NPV varies given alternative IRRs.

What is the NPV for the following project if its cost of capital is 12% and its initial after-tax cost is $5,000,000 and it is expected to provide after-tax operating cash flows of $1,800,000 in year 1, $1,900,000 in year 2, $1,700,000 in year 3, and ($1,300,000) in year 4?

The Financial Environment

Money and the Monetary System

Banks and Other Financial Institutions

Federal Reserve System

Policy Makers and the Money Supply

International Finance and Trade

Savings and Investment Process

Interest Rates

Time Value of Money

Bonds and Stocks: Characteristics and Valuation

Securities Markets

Financial Return and Risk Concepts

Business Organization and Financial Data

Financial Analysis and Long-Term Financial Planning

Managing Working Capital

Short-Term Business Financing

Capital Structure and the Cost of Capital

Filters