Question 1

Which of the following best defines incremental earnings?

Accepted Answer

A)  cash flows arising from a particular investment decision 
B)  the amount by which a firm's earnings are expected to change as a result of an investment decision 
C)  the earnings arising from all projects that a company plans to undertake in a fixed time span 
D)  the net present value (NPV) of earnings that a firm is expected to receive as the result of an investment decision 
A)  cash flows arising from a particular investment decision 
B)  the amount by which a firm's earnings are expected to change as a result of an investment decision 
C)  the earnings arising from all projects that a company plans to undertake in a fixed time span 
D)  the net present value (NPV) of earnings that a firm is expected to receive as the result of an investment decision

Question 2

The term "cannibalization" refers to ________.

Accepted Answer

A)  decrease in the sales of current project caused by the launching of new project 
B)  decrease in the sunk cost caused by launching of new project 
C)  decrease in overhead expenses incurred due to launch of new project 
D)  cost of using a resource for the best value it could provide in its best alternative 
A)  decrease in the sales of current project caused by the launching of new project 
B)  decrease in the sunk cost caused by launching of new project 
C)  decrease in overhead expenses incurred due to launch of new project 
D)  cost of using a resource for the best value it could provide in its best alternative

Question 3

A maker of computer games expects to sell 475,000 games at a price of $48 per game. These units cost $10 to produce. Selling, general, and administrative expenses are $1.0 million and depreciation is $280,000. What is the EBIT break-even point for the number of games sold in this case?

Accepted Answer

A)  $26,667 
B)  $26,316 
C)  $100,000 
D)  $33,684 
A)  $26,667 
B)  $26,316 
C)  $100,000 
D)  $33,684

Question 4

Which of the following is an example of cannibalization?

Accepted Answer

A)  A toothpaste manufacturer adds a new line of toothpaste (that contains baking soda) to its product line. 
B)  A grocery store begins selling T-shirts featuring the local university's mascot. 
C)  A basketball manufacturer adds basketball hoops to its product line. 
D)  A convenience store begins selling pre-paid cell phones. 
A)  A toothpaste manufacturer adds a new line of toothpaste (that contains baking soda) to its product line. 
B)  A grocery store begins selling T-shirts featuring the local university's mascot. 
C)  A basketball manufacturer adds basketball hoops to its product line. 
D)  A convenience store begins selling pre-paid cell phones.

Question 5

Which of the following statements regarding real options is NOT correct?

Accepted Answer

A)  Real options should only be exercised when they increase the NPV of a project. 
B)  Real options enhance the forecast of a project's expected future cash flows by incorporating, at the start of the project, the effect of decisions that will be made at a later date. 
C)  Real options give owners the right, but not the obligation, to exercise these opportunities at a later date. 
D)  Real options build greater flexibility into a project and thus increase its net present value (NPV). 
A)  Real options should only be exercised when they increase the NPV of a project. 
B)  Real options enhance the forecast of a project's expected future cash flows by incorporating, at the start of the project, the effect of decisions that will be made at a later date. 
C)  Real options give owners the right, but not the obligation, to exercise these opportunities at a later date. 
D)  Real options build greater flexibility into a project and thus increase its net present value (NPV).

Question 6

A textile company invests $10 million in an open-end spinning machine. This was depreciated using the seven-year MACRS schedule shown above. If the company sold it immediately after the end of year 3 for $7 million, what would be the after-tax cash flow from the sale of this asset, given a tax rate of 40%?

Accepted Answer

A)  $1,550,400 
B)  $3,124,000 
C)  $3,876,000 
D)  $5,449,600 
A)  $1,550,400 
B)  $3,124,000 
C)  $3,876,000 
D)  $5,449,600

Question 7

What do you understand by break-even analysis?

Accepted Answer

Break-even analysis is an exte

Question 8

The Sisyphean Company is considering a new project that will have an annual depreciation expense of $3.6 million. If Sisyphean's marginal corporate tax rate is 35% and its average corporate tax rate is 30%, then what is the value of the depreciation tax shield on the company's new project?

Accepted Answer

A)  $1,080,000 
B)  $1,260,000 
C)  $1,890,000 
D)  $1,134,000 
A)  $1,080,000 
B)  $1,260,000 
C)  $1,890,000 
D)  $1,134,000

Question 9

CathFoods will release a new range of candies which contain antioxidants. New equipment to manufacture the candy will cost $2 million, which will be depreciated by straight-line depreciation over four years. In addition, there will be $5 million spent on promoting the new candy line. It is expected that the range of candies will bring in revenues of $4 million per year for four years with production and support costs of $1.5 million per year. If CathFoods' marginal tax rate is 35%, what are the incremental free cash flows in the second year of this project?

Accepted Answer

A)  $1.800 million 
B)  $1.400 million 
C)  $2.000 million 
D)  $0.700 million 
A)  $1.800 million 
B)  $1.400 million 
C)  $2.000 million 
D)  $0.700 million

Question 10

Panjandrum Industries, a manufacturer of industrial piping, is evaluating whether it should expand into the sale of plastic fittings for home garden sprinkler systems. It has made the above estimates of free cash flows resulting from such a decision. There are concerns of the sensitivity of this project to changes in the cost of capital. For what cost of capital does this project break-even?

Accepted Answer

A)  8% 
B)  10% 
C)  12% 
D)  14% 
A)  8% 
B)  10% 
C)  12% 
D)  14%

Question 11

If available, should MACRS be preferred to straight-line depreciation?

Accepted Answer

Yes, MACRS should be preferred

Question 12

Which of the following statements is FALSE?

Accepted Answer

A)  We can use scenario analysis to evaluate alternative pricing strategies for our project. 
B)  Scenario analysis considers the effect on net present value (NPV) of changing multiple project parameters. 
C)  The difference between the internal rate of return (IRR) of a project and the cost of capital tells you how much error in the cost of capital it would take to change the investment decision. 
D)  Scenario analysis breaks the net present value (NPV) calculation into its component assumptions and shows how the net present value (NPV) varies as each one of the underlying assumptions changes. 
A)  We can use scenario analysis to evaluate alternative pricing strategies for our project. 
B)  Scenario analysis considers the effect on net present value (NPV) of changing multiple project parameters. 
C)  The difference between the internal rate of return (IRR) of a project and the cost of capital tells you how much error in the cost of capital it would take to change the investment decision. 
D)  Scenario analysis breaks the net present value (NPV) calculation into its component assumptions and shows how the net present value (NPV) varies as each one of the underlying assumptions changes.

Question 13

A firm is considering investing in a new machine that will cost $400,000 and will be depreciated straight-line over five years. If the firm's marginal tax rate is 39%, what is the annual depreciation tax shield of purchasing the machine?

Accepted Answer

A)  $80,000 
B)  $31,200 
C)  $28,080 
D)  $156,000 
A)  $80,000 
B)  $31,200 
C)  $28,080 
D)  $156,000

Question 14

The ultimate goal of the capital budgeting process is to ________.

Accepted Answer

A)  determine how the consequences of making a particular decision affects the firm's revenues and costs 
B)  list the projects and investments that a company plans to undertake in the future 
C)  forecast the consequences of a list of future projects for the firm 
D)  determine the effect of the decision to accept or reject a project on the firm's cash flows 
A)  determine how the consequences of making a particular decision affects the firm's revenues and costs 
B)  list the projects and investments that a company plans to undertake in the future 
C)  forecast the consequences of a list of future projects for the firm 
D)  determine the effect of the decision to accept or reject a project on the firm's cash flows

Question 15

Which of the following adjustments should NOT be made when computing free cash flow from incremental earnings?

Accepted Answer

A)  adding depreciation 
B)  adding all non-cash expenses 
C)  subtracting increases in Net Working Capital 
D)  subtracting depreciation expenses from taxable earnings 
A)  adding depreciation 
B)  adding all non-cash expenses 
C)  subtracting increases in Net Working Capital 
D)  subtracting depreciation expenses from taxable earnings

Question 16

After research into where to place a new restaurant, Burger Billies, a small fast-food chain, plans to open a new store near a small college. The anticipated customer base is students attending the college. They learn that a major fast food chain will be opening a franchise within the college, which leads the owners of Burger Billies to revise their estimate of sales to one below the break-even point. Which of the following is most likely the best real option for Burger Billies to take with regard to the proposed restaurant site?

Accepted Answer

A)  option to delay 
B)  option to expand 
C)  option to abandon 
D)  option to switch 
A)  option to delay 
B)  option to expand 
C)  option to abandon 
D)  option to switch

Question 17

Luther Industries has outstanding tax loss carryforwards of $72 million from losses over the past four years. If Luther earns $15 million per year in pre-tax income from now on, in how many years will Luther first pay taxes?

Accepted Answer

A)  7 years 
B)  2 years 
C)  4 years 
D)  5 years 
A)  7 years 
B)  2 years 
C)  4 years 
D)  5 years

Question 18

Visby Rides, a livery car company, is considering buying some new luxury cars. After extensive research, they come up with the above estimates of free cash flow from this project. Visby learns that a competitor is thinking of offering similar services, thus reducing Visby's sales. By how much could sales fall before the net present value (NPV) was zero, given that the cost of capital is 8%, and that cost of goods sold is 45% of revenues?

Accepted Answer

A)  28% 
B)  34% 
C)  45% 
D)  56% 
A)  28% 
B)  34% 
C)  45% 
D)  56%

Question 19

A maker of kitchenware is planning on selling a new chef-quality kitchen knife. The manufacturer expects to sell 1.6 million knives at a price of $120 each. These knives cost $80 each to produce. Selling, general, and administrative expenses are $500,000. The machinery required to produce the knives cost $1.4 million, depreciated by straight-line depreciation over five years. The maker determines that the EBIT break-even point for units sold and sale price is less than these estimates and that the EBIT break-even point for costs per unit, SG&A, and depreciation are greater than these estimates, so decides to go ahead with manufacturing the knife. Was this the correct decision?

Accepted Answer

A)  No, since the cost per unit should be greater than the EBIT break-even point for cost of goods if the project is to have a positive EBIT. 
B)  Yes, since if the estimates for each parameter are correct, the EBIT will be positive. 
C)  Yes, since a positive EBIT ensures that the project will have a positive net present value (NPV). 
D)  It cannot be determined whether the decision was correct, since other factors contributing to the project's net present value (NPV), such as the upfront investment, have not been included in the analysis. 
A)  No, since the cost per unit should be greater than the EBIT break-even point for cost of goods if the project is to have a positive EBIT. 
B)  Yes, since if the estimates for each parameter are correct, the EBIT will be positive. 
C)  Yes, since a positive EBIT ensures that the project will have a positive net present value (NPV). 
D)  It cannot be determined whether the decision was correct, since other factors contributing to the project's net present value (NPV), such as the upfront investment, have not been included in the analysis.

Question 20

What is the most important function of sensitivity analysis?

Accepted Answer

Sensitivity analysis shows how

Which of the following best defines incremental earnings?

The term "cannibalization" refers to ________.

A maker of computer games expects to sell 475,000 games at a price of $48 per game. These units cost $10 to produce. Selling, general, and administrative expenses are $1.0 million and depreciation is $280,000. What is the EBIT break-even point for the number of games sold in this case?

Which of the following is an example of cannibalization?

Which of the following statements regarding real options is NOT correct?

What do you understand by break-even analysis?

The Sisyphean Company is considering a new project that will have an annual depreciation expense of $3.6 million. If Sisyphean's marginal corporate tax rate is 35% and its average corporate tax rate is 30%, then what is the value of the depreciation tax shield on the company's new project?

If available, should MACRS be preferred to straight-line depreciation?

Which of the following statements is FALSE?

A firm is considering investing in a new machine that will cost $400,000 and will be depreciated straight-line over five years. If the firm's marginal tax rate is 39%, what is the annual depreciation tax shield of purchasing the machine?

The ultimate goal of the capital budgeting process is to ________.

Which of the following adjustments should NOT be made when computing free cash flow from incremental earnings?

Luther Industries has outstanding tax loss carryforwards of $72 million from losses over the past four years. If Luther earns $15 million per year in pre-tax income from now on, in how many years will Luther first pay taxes?

What is the most important function of sensitivity analysis?

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

Time Value of Money: an Introduction

Time Value of Money: Valuing Cash Flow Streams

Interest Rates

Bonds

Stock Valuation

Investment Decision Rules

Stock Valuation: a Second Look

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

The Cost of Capital

Raising Equity Capital

Debt Financing

Capital Structure

Payout Policy

Financial Modeling and Pro Forma Analysis

Working Capital Management

Short-Term Financial Planning

Option Applications and Corporate Finance

Mergers and Acquisitions

International Corporate Finance

Leasing

Insurance and Risk Management

Corporate Governance

Filters

Exam 9: Fundamentals of Capital Budgeting

Which of the following best defines incremental earnings?

The term "cannibalization" refers to ________.

A maker of computer games expects to sell 475,000 games at a price of $48 per game. These units cost $10 to produce. Selling, general, and administrative expenses are $1.0 million and depreciation is $280,000. What is the EBIT break-even point for the number of games sold in this case?

Which of the following is an example of cannibalization?

Which of the following statements regarding real options is NOT correct?

What do you understand by break-even analysis?

The Sisyphean Company is considering a new project that will have an annual depreciation expense of $3.6 million. If Sisyphean's marginal corporate tax rate is 35% and its average corporate tax rate is 30%, then what is the value of the depreciation tax shield on the company's new project?

If available, should MACRS be preferred to straight-line depreciation?

Which of the following statements is FALSE?

A firm is considering investing in a new machine that will cost $400,000 and will be depreciated straight-line over five years. If the firm's marginal tax rate is 39%, what is the annual depreciation tax shield of purchasing the machine?

The ultimate goal of the capital budgeting process is to ________.

Which of the following adjustments should NOT be made when computing free cash flow from incremental earnings?

Luther Industries has outstanding tax loss carryforwards of $72 million from losses over the past four years. If Luther earns $15 million per year in pre-tax income from now on, in how many years will Luther first pay taxes?

What is the most important function of sensitivity analysis?

Corporate Finance and the Financial Manager

Introduction to Financial Statement Analysis

Time Value of Money: an Introduction

Time Value of Money: Valuing Cash Flow Streams

Interest Rates

Bonds

Stock Valuation

Investment Decision Rules

Stock Valuation: a Second Look

Risk and Return in Capital Markets

Systematic Risk and the Equity Risk Premium

The Cost of Capital

Raising Equity Capital

Debt Financing

Capital Structure

Payout Policy

Financial Modeling and Pro Forma Analysis

Working Capital Management

Short-Term Financial Planning

Option Applications and Corporate Finance

Mergers and Acquisitions

International Corporate Finance

Leasing

Insurance and Risk Management

Corporate Governance

Filters