Question 1

Since the CCA deducted each year is a proportion of the undepreciated capital cost (UCC),UCC will gradually become ________.

Accepted Answer

A)   zero
B)   a small negative number
C)   a small positive number
D)   none of the above C

Question 2

Which of the following statements is correct?

Accepted Answer

A)   Capital Cost Allowance (CC
A)   is a cash expense that is paid by the firm.
B)   Capital Cost Allowance (CC
A)   is used for calculating total operating cost.
C)   Capital Cost Allowance (CC
A)   is used to calculate financial cost that paid for capital budget.
D)   Capital Cost Allowance (CC
A)   is a cash expense that should be allocated for tax purposes. D

Question 3

Which of the following cash flows are relevant incremental cash flows for a project that you are currently considering investing in?

Accepted Answer

A)   The tax savings brought about by the project's depreciation expense
B)   The cost of a marketing survey you conducted to determine demand for the proposed project
C)   Interest payments on debt used to finance the project
D)   Research and development expenditures you have made A

Question 4

When Canadian firms need to determine the asset class and the relevant CCA rate,they can find the necessary information from

Accepted Answer

A)   the Canadian Generally Accepted Accounting Principles (GAAP) .
B)   the Canadian Revenue Agency (CR
A)  .
C)   the respective provincial government's office.
D)   the International Financial Report Standard (IFRS) .

Question 5

Break-even analysis determines the level of a parameter that makes the project's NPV equal to

Accepted Answer

A)   a positive number.
B)   zero.
C)   a negative number.
D)   none of the above.

Question 6

To calculate the annual Capital Cost Allowance (CCA),Canadian firms must first determine the

Accepted Answer

A)   earning year.
B)   fiscal year.
C)   budgeting year.
D)   tax year.

Question 7

Which of the following statements is false?

Accepted Answer

A)   Depreciation is not a cash expense paid by the firm.
B)   Net Working Capital = Cash + Inventory + Payables - Receivables.
C)   Since 1997, companies can "carry back" losses for two years and "carry forward" losses for 20 years.
D)   Earnings do not represent real profits.

Question 8

________ considers the effect of changing multiple parameters simultaneously.

Accepted Answer

A)   Break-even analysis
B)   Scenario analysis
C)   Sensitivity analysis
D)   Cost benefit analysis

Question 9

You are considering investing $600,000 in a new automated inventory system that will provide after-tax cost savings of $50,000 next year.These cost savings are expected to grow at the same rate as sales.If sales are expected to grow at 5% per year and your cost of capital is 10%,then what is the NPV of the automated inventory system?

Accepted Answer

A)   $400,000
B)   $500,000
C)   -$100,000
D)   $1,000,000

Question 10

Use the information for the question(s) below.
The Sisyphean Corporation is considering investing in a new cane manufacturing machine that has an estimated life of three years. The cost of the machine is $30,000 and the machine will be depreciated straight line over its three-year life to a residual value of $0.
The cane manufacturing machine will result in sales of 2,000 canes in year 1. Sales are estimated to grow by 10% per year each year through year three. The price per cane that Sisyphean will charge its customers is $18 each and is to remain constant. The canes have a cost per unit to manufacture of $9 each.
Installation of the machine and the resulting increase in manufacturing capacity will require an increase in various net working capital accounts. It is estimated that the Sisyphean Corporation needs to hold 2% of its annual sales in cash, 4% of its annual sales in accounts receivable, 9% of its annual sales in inventory, and 5% of its annual sales in accounts payable. The firm is in the 35% tax bracket, and has a cost of capital of 10%.
-Calculate the total Free Cash Flows for each of the three years for the Sisyphean Corporation's new project.

Accepted Answer

The answer of Use the information for the question(s) below.
The...

Question 11

Which of the following statements is false?

Accepted Answer

A)   The terminal of continuation value of the project represents the market value (as of the last forecast period)  of the free cash flow from the project at all future dates.
B)   The incremental effect of a project on the firm's available cash is the project's free cash flow.
C)   (1 - τc)  × Depreciation is called the depreciation tax shield.
D)   To evaluate a capital budgeting decision, we must determine its consequences for the firm's available cash.

Question 12

Your firm is considering building a new office complex.Your firm already owns land suitable for the new complex.The current book value of the land is $100,000,however a commercial real estate agent has informed you that an outside buyer is interested in purchasing this land and would be willing to pay $650,000 for it.When calculating the NPV of your new office complex,ignoring taxes,the appropriate incremental cash flow for the use of this land is:

Accepted Answer

A)   $650,000
B)   $0
C)   $100,000
D)   $750,000

Question 13

How does scenario analysis differ from sensitivity analysis?

Accepted Answer

The answer of How does scenario analysis differ from sensitivity...

Question 14

A company has experienced a steady decline in the sale of its existing products due to unavoidable competition. It is introducing a new product to stabilize this decline in market share. In the analysis of the strategy for the new product,

Accepted Answer

A)   the lost sales should be treated as a sunk cost and not included in the analysis.
B)   the lost sales should be included along with the sales forecast for the new product.
C)   the present value of the lost sales should be included in the cashflow analysis.
D)   the sales forecast should include either the anticipated revenue from the new product or the present value of the lost sales, whichever is greater.

Question 15

Use the information for the question(s) below.
The Sisyphean Corporation is considering investing in a new cane manufacturing machine that has an estimated life of three years. The cost of the machine is $30,000 and the machine will be depreciated straight line over its three-year life to a residual value of $0.
The cane manufacturing machine will result in sales of 2,000 canes in year 1. Sales are estimated to grow by 10% per year each year through year three. The price per cane that Sisyphean will charge its customers is $18 each and is to remain constant. The canes have a cost per unit to manufacture of $9 each.
Installation of the machine and the resulting increase in manufacturing capacity will require an increase in various net working capital accounts. It is estimated that the Sisyphean Corporation needs to hold 2% of its annual sales in cash, 4% of its annual sales in accounts receivable, 9% of its annual sales in inventory, and 5% of its annual sales in accounts payable. The firm is in the 35% tax bracket, and has a cost of capital of 10%.
-The incremental unlevered net income in the first year for the Sisyphean Corporation's project is closest to:

Accepted Answer

A)   $8,000
B)   $18,000
C)   $5,200
D)   $11,700

Question 16

According to the Canadian Revenue Agency (CRA),the "half year rule" in Capital Cost Allowance is only applied in

Accepted Answer

A)   the whole life of the assets after they are purchased.
B)   the first year after the assets are purchased.
C)   every year after the assets are purchased.
D)   the last year of the life of the assets.

Question 17

Which of the following statements is false?

Accepted Answer

A)   The ultimate goal in capital budgeting is to determine the effect of the decision to take a particular project on the firm's cash flows.
B)   To the extent that overhead costs are fixed and will be incurred in any case, they are incremental to the project and should be included in the capital budgeting analysis.
C)   Unlevered Net Income = (Revenue - Costs - Depreciation)  × (1 - τc) .
D)   Earnings are not cash flows.

Question 18

Which of the following statements is false?

Accepted Answer

A)   Most projects will require the firm to invest in net working capital.
B)   The main components of net working capital are cash, inventory, receivables, and property, plant and equipment.
C)   ΔNWCt = NWCt - NWCt - 1.
D)   In the final year of a project, the firm ultimately recovers the investment in net working capital.

Question 19

An analysis that breaks the NPV calculation into its component assumptions and shows how the NPV varies as one of the underlying assumptions is changed is called

Accepted Answer

A)   scenario analysis.
B)   IRR analysis.
C)   accounting break-even analysis.
D)   sensitivity analysis.

Question 20

To calculate the Capital Cost Allowance (CCA),Canadian firms must determine the

Accepted Answer

A)   variable asset class.
B)   operating asset class.
C)   capital asset class.
D)   none of the above.

Exam 9: Fundamentals of Capital Budgeting

Since the CCA deducted each year is a proportion of the undepreciated capital cost (UCC) ,UCC will gradually become ________.

Which of the following statements is correct?

Which of the following cash flows are relevant incremental cash flows for a project that you are currently considering investing in?

When Canadian firms need to determine the asset class and the relevant CCA rate,they can find the necessary information from

Break-even analysis determines the level of a parameter that makes the project's NPV equal to

To calculate the annual Capital Cost Allowance (CCA) ,Canadian firms must first determine the

Which of the following statements is false?

________ considers the effect of changing multiple parameters simultaneously.

Which of the following statements is false?

How does scenario analysis differ from sensitivity analysis?

A company has experienced a steady decline in the sale of its existing products due to unavoidable competition. It is introducing a new product to stabilize this decline in market share. In the analysis of the strategy for the new product,

According to the Canadian Revenue Agency (CRA) ,the "half year rule" in Capital Cost Allowance is only applied in

Which of the following statements is false?

Which of the following statements is false?

An analysis that breaks the NPV calculation into its component assumptions and shows how the NPV varies as one of the underlying assumptions is changed is called

To calculate the Capital Cost Allowance (CCA) ,Canadian firms must determine the