Scribd
Upload
50 views

Quiz FM Final

This document contains 20 multiple choice and calculation questions related to capital budgeting and investment decision making. Several questions address factors that should and should not be included when estimating cash flows for investment projects, such as consideration of research costs, cannibalization effects, and depreciation. Other questions cover concepts like net present value (NPV), internal rate of return (IRR), payback period, tax shields, and evaluation of mutually exclusive projects.

Uploaded by

Tú Đoàn
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
50 views

Quiz FM Final

This document contains 20 multiple choice and calculation questions related to capital budgeting and investment decision making. Several questions address factors that should and should not be included when estimating cash flows for investment projects, such as consideration of research costs, cannibalization effects, and depreciation. Other questions cover concepts like net present value (NPV), internal rate of return (IRR), payback period, tax shields, and evaluation of mutually exclusive projects.

Uploaded by

Tú Đoàn
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 2

1) What is the possible cost of capital rationing?

=> The firm may miss out on positive NPV opportunities

2) Which of the following investment criteria takes the time value of money into
consideration?
=> Profitability index, internal rate of return, and net present value

3 )Which one of the following is least likely to influence the opportunity cost of an
asset?
=>Its current book value

4. A polisher costs $10,000 and will cost $20,000 a year to operate and maintain. If
the discount rate is 10% and the polisher will last for 5 years, what is the equivalent
annual cost of the tool? $22,187.84

5. Dalrymple Inc. is considering production of a new product. In evaluating whether


to go ahead with the project, which of the following items should NOT be explicitly
considered when cash flows are estimated?
=>The company has spent and expensed for tax purposes $3 million on research
related to the new detergent. These funds cannot be recovered, but the research may
benefit other projects that might be proposed in the future.

6. Under the MACRS:


=>assets are assumed to be purchased and sold midyear.

7. Lew's Metals has a machine sitting idle in its warehouse. The machine originally
cost $213,000, has a current book value of $32,300, has a scrap metal value of
$13,000, and a market value of $46,900. The machine is totally paid for. What value
should be placed on this machine if it is used for a new project?
=>$46,900

8. Which one of the following would NOT result in incremental cash flows and thus
should NOT be included in the capital budgeting analysis for a new product?
=> The cost of a study relating to the market for the new product that was completed
last year. The results of this research were positive, and they led to the tentative
decision to go ahead with the new product. The cost of the research was incurred and
expensed for tax purposes last year.

9. Which of the following factors should be included in the cash flows used to
estimate a project's NPV?
=>Cannibalization effects, but only if those effects increase the project's projected
cash flows.

10. Clemson Software is considering a new project whose data are shown below. The
required equipment has a 3-year tax life, after which it will be worthless, and it will be
depreciated by the straight-line method over 3 years. Revenues and other operating
costs are expected to be constant over the project's 3-year life. What is the project's
Year 1 cash flow? Equipment cost (depreciable basis)
=> . $30,333
11. Which of the following should be considered when a company estimates the cash
flows used to analyze a proposed project?
=>The new project is expected to reduce sales of one of the company's existing
products by 5%.

12. What is the NPV of a 6-year project that costs $100,000, has annual revenues of
$50,000 and costs of $15,000? Assume the investment can be depreciated for tax
purposes straight-line over 6 years, the corporate tax rate is 35%, and the discount rate
is 14%.
=> $11,151.08

13. Which one of the following would NOT result in incremental cash flows and thus
should NOT be included in the capital budgeting analysis for a new product?
=>A firm has spent $2 million on R&D associated with a new product. These costs
have been expensed for tax purposes, and they cannot be recovered regardless
rejected.

14. As a member of UA Corporation's financial staff, you must estimate the Year 1
cash flow for a proposed project with the following data. What is the Year 1 cash
flow?
=>

15. A project's payback period is determined to be 4 years. If it is later discovered that


additional cash flows will be generated in years 5 and 6, then the project's payback
period will:
=>the project's payback period will be unchanged.

16. How many IRRs are possible for the following set of cash flows? CF0 = −$1,000,
C1 = $500, C2 = −$300, C3 = $1,000, C4 = $200.
=> 3

17. An investment of $120,000 can be depreciated for tax purposes straight line over 6
years. The corporate tax rate is 40%. When calculating cash flow:
=> the company should add a depreciation tax shield of $8,000 a year to after-tax
(revenues less cash expenses)

18. One advantage of the payback method for evaluating potential investments is that
it provides information about a project's liquidity and risk.
=> True

19. The NPV and IRR methods, when used to evaluate two independent and equally
risky projects, will lead to different accept/reject decisions and thus capital budgets if
the projects' IRRs are greater than their costs of capital.
=> False

20. Which mutually exclusive project would you select, if both are priced at $1,000
and your required return is 15%: Project A with three annual cash flows of $1,000; or
Project B, with 3 years of zero cash flow followed by 3 years of $1,500 annually?
=> Project A NPVA = -$1,000 + $1,000[(1/0.15) - 1/0.15(1.15)3] = $1,283.23 NPVB
= -$1,000 + {$1,500[(1/0.15) - 1/0.15(1.15)3]}/1.153 = $1,251.89

You might also like