Question 1

The certainty equivalent is calculate as the expected value based on the probability distribution of a project's cash flows.

Accepted Answer

A) True 
 B)False

Question 2

The rate of return earned in the market is called the

Accepted Answer

A)  real rate. 
B)  investment risk rate. 
C)  nominal rate. 
D)  inflation rate. 
E)  marginal rate. 
A)  real rate. 
B)  investment risk rate. 
C)  nominal rate. 
D)  inflation rate. 
E)  marginal rate.

Question 3

The differential approach is often considered superior to the total project approach to capital budgeting

Accepted Answer

A)  because it is easier to select the components for the model. 
B)  because it uses only net cash flows instead of gross cash flows. 
C)  for all large investment decisions. 
D)  because it is faster if analyzing fewer than three alternatives. 
E)  because it can more easily accommodate multiple investment opportunities. 
A)  because it is easier to select the components for the model. 
B)  because it uses only net cash flows instead of gross cash flows. 
C)  for all large investment decisions. 
D)  because it is faster if analyzing fewer than three alternatives. 
E)  because it can more easily accommodate multiple investment opportunities.

Question 4

Which of the following methods is not used to adjust for risk in capital budgeting?

Accepted Answer

A)  varying the payback period 
B)  adjusting the required rate of return 
C)  changing the method of depreciation to an accelerated method 
D)  estimating the probability distribution of future cash flows 
E)  adjusting the estimated future cash flows 
A)  varying the payback period 
B)  adjusting the required rate of return 
C)  changing the method of depreciation to an accelerated method 
D)  estimating the probability distribution of future cash flows 
E)  adjusting the estimated future cash flows

Question 5

Use the information below to answer the following question(s).
Barry operates a shop in a resort in an area known for its high inflation rate. The inflation rate for the last few years has been averaging 3 percent a month. His long-term real rate of return is 12 percent, or 1 percent a month. On April 1 he anticipates that real dollar sales during the summer will be as follows:
  
-What will be the sales figures for years one and two, respectively, assuming the owner uses the nominal rate approach and there is no growth in sales?

Accepted Answer

A)  $880,000 and $968,000 
B)  $904,000 and $1,021,520 
C)  $824,000 and $848,720 
D)  $906,400 and $1,026,951 
E)  $906,400 and $1,113,920 
A)  $880,000 and $968,000 
B)  $904,000 and $1,021,520 
C)  $824,000 and $848,720 
D)  $906,400 and $1,026,951 
E)  $906,400 and $1,113,920

Question 6

Use the information below to answer the following question(s).
Barry operates a shop in a resort in an area known for its high inflation rate. The inflation rate for the last few years has been averaging 3 percent a month. His long-term real rate of return is 12 percent, or 1 percent a month. On April 1 he anticipates that real dollar sales during the summer will be as follows:
  
-Assume that in recent years a global economic crisis has produced a very high annual inflation rate of 25 percent. Kenyan Coffee has decided to use a nominal rate to determine capital budgeting decisions. Its traditional real rate of return is 10 percent. What is the company's nominal traditional rate of return?

Accepted Answer

A)  0.100 
B)  0.250 
C)  0.300 
D)  0.350 
E)  0.375 
A)  0.100 
B)  0.250 
C)  0.300 
D)  0.350 
E)  0.375

Question 7

For the capital budgeting decision regarding the acquisition of a new piece of equipment the following is available: investment, $60,000; present value of net cash inflows, $40,000. What is the excess present value index?

Accepted Answer

A)  0.00 
B)  0.67 
C)  1.50 
D)  3.00 
E)  1.00 
A)  0.00 
B)  0.67 
C)  1.50 
D)  3.00 
E)  1.00

Question 8

Sensitivity analysis can be used to assess how vulnerable a proposed capital project is to changes in its estimates.

Accepted Answer

A) True 
 B)False

Question 9

What is the CCA claim in year 1?

Accepted Answer

A)  $3,500 
B)  $7,000 
C)  $8,000 
D)  $16,000 
E)  $18,400 
A)  $3,500 
B)  $7,000 
C)  $8,000 
D)  $16,000 
E)  $18,400

Question 10

Both the total-project approach and the differential approach present a net present value that

Accepted Answer

A)  will always be the same amount. 
B)  will rarely be the same amount. 
C)  will only be the same when net present value is positive. 
D)  will only be the same when net present value is negative. 
E)  will only be the same when nominal cash flows are considered. 
A)  will always be the same amount. 
B)  will rarely be the same amount. 
C)  will only be the same when net present value is positive. 
D)  will only be the same when net present value is negative. 
E)  will only be the same when nominal cash flows are considered.

Question 11

Based on the above data only, what are the tax savings from the CCA of class 10 for year 2?

Accepted Answer

A)  $78,603 
B)  $239,700 
C)  $91,086 
D)  $128,247 
E)  $206,850 
A)  $78,603 
B)  $239,700 
C)  $91,086 
D)  $128,247 
E)  $206,850

Question 12

A capital proposal is projected to result in annual savings of $25,000. What is the after-tax cash flow if the tax rate is 35%?

Accepted Answer

A)  $25,000 
B)  $16,250 
C)  $8,750 
D)  $7,500 
E)  $5,000 
A)  $25,000 
B)  $16,250 
C)  $8,750 
D)  $7,500 
E)  $5,000

Question 13

Some companies adjust the estimated future cash inflows for risks by reducing the estimated future cash inflows of riskier projects.

Accepted Answer

A) True 
 B)False

Question 14

When cash flows are stated in real dollars and discounted using the a nominal rate,

Accepted Answer

A)  this understates the Present Value of the future cash flows. 
B)  this overstates the Present Value of the future cash flows. 
C)  this neither understates nor overstates the Present Value of the future cash flows. 
D)  this increases the payback period and increases the RRR. 
E)  this is a normal adjustment made to account for risky projects. 
A)  this understates the Present Value of the future cash flows. 
B)  this overstates the Present Value of the future cash flows. 
C)  this neither understates nor overstates the Present Value of the future cash flows. 
D)  this increases the payback period and increases the RRR. 
E)  this is a normal adjustment made to account for risky projects.

Question 15

Use the information below to answer the following question(s).
Barry operates a shop in a resort in an area known for its high inflation rate. The inflation rate for the last few years has been averaging 3 percent a month. His long-term real rate of return is 12 percent, or 1 percent a month. On April 1 he anticipates that real dollar sales during the summer will be as follows:
  
-What is the nominal rate of return that the store must earn to achieve the owner's objective?

Accepted Answer

A)  0.160 
B)  0.133 
C)  0.130 
D)  0.103 
E)  0.110 
A)  0.160 
B)  0.133 
C)  0.130 
D)  0.103 
E)  0.110

Question 16

Discuss the ways a company can account for risk in its capital budgeting projects.

Accepted Answer

The three main approaches to incorporate

Question 17

The profitability index

Accepted Answer

A)  measures the profit per dollar invested. 
B)  is also called the excess present value index. 
C)  is useful in determining the risk adjusted rate of return. 
D)  is helpful when assessing projects with different risk. 
E)  measures the profit per dollar invested, and profitable projects are indicated by a profitability index of greater than 100%. 
A)  measures the profit per dollar invested. 
B)  is also called the excess present value index. 
C)  is useful in determining the risk adjusted rate of return. 
D)  is helpful when assessing projects with different risk. 
E)  measures the profit per dollar invested, and profitable projects are indicated by a profitability index of greater than 100%.

Question 18

The half-year rule assumes that all net additions are purchased in the middle of the year, and thus only one-half of the stated CCA rate is allowed in the first year.

Accepted Answer

A) True 
 B)False

Question 19

It is an error when accounting for inflation in capital budgeting to state cash inflows and outflows in real terms and using a nominal discount rate.

Accepted Answer

A) True 
 B)False

Question 20

The nominal rate of return would be .38 if

Accepted Answer

A)  the real rate was .20, and the inflation rate was .18. 
B)  the real rate was .18, and the inflation rate was .20. 
C)  the real rate was .20, and the inflation rate was .15. 
D)  the real rate was .20, and the required rate was .15. 
E)  the real rate was .18 and the inflation rate was .15. 
A)  the real rate was .20, and the inflation rate was .18. 
B)  the real rate was .18, and the inflation rate was .20. 
C)  the real rate was .20, and the inflation rate was .15. 
D)  the real rate was .20, and the required rate was .15. 
E)  the real rate was .18 and the inflation rate was .15.

Exam 22: Capital Budgeting: a Closer Look

The certainty equivalent is calculate as the expected value based on the probability distribution of a project's cash flows.

The rate of return earned in the market is called the

The differential approach is often considered superior to the total project approach to capital budgeting

Which of the following methods is not used to adjust for risk in capital budgeting?

For the capital budgeting decision regarding the acquisition of a new piece of equipment the following is available: investment, $60,000; present value of net cash inflows, $40,000. What is the excess present value index?

Sensitivity analysis can be used to assess how vulnerable a proposed capital project is to changes in its estimates.

What is the CCA claim in year 1?

Both the total-project approach and the differential approach present a net present value that

Based on the above data only, what are the tax savings from the CCA of class 10 for year 2?

A capital proposal is projected to result in annual savings of $25,000. What is the after-tax cash flow if the tax rate is 35%?

Some companies adjust the estimated future cash inflows for risks by reducing the estimated future cash inflows of riskier projects.

When cash flows are stated in real dollars and discounted using the a nominal rate,

Discuss the ways a company can account for risk in its capital budgeting projects.

The profitability index

The half-year rule assumes that all net additions are purchased in the middle of the year, and thus only one-half of the stated CCA rate is allowed in the first year.

It is an error when accounting for inflation in capital budgeting to state cash inflows and outflows in real terms and using a nominal discount rate.

The nominal rate of return would be .38 if

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Job Costing

Activity-Based Costing and Management

Master Budget and Responsibility Accounting

Flexible Budgets, Variances, and Management Control: I

Flexible Budgets, Variances, and Management Control: II

Income Effects of Denominator Level on Inventory Valuation

Quantitative Analyses of Cost Functions

Decision Making and Relevant Information

Pricing Decisions, Product Profitability Decisions, and Cost Management

Strategy, Balanced Scorecard, and Profitability Analysis

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Cost Allocation: Joint Products and Byproducts

Revenue and Customer Profitability Analysis

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Inventory Cost Management Strategies

Capital Budgeting: Methods of Investment Analysis

Transfer Pricing and Multinational Management Control Systems

Multinational Performance Measurement and Compensation

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