exam 2 corporate finance

If the cash flows for project A are C0 = -3,000, C1 = +500; C2 = +1,500; and C3 = +5,000, calculate the NPV of the project using a 15 percent discount rate. a) $3,201 b) $1,857 c) 2,352 d) 5,000

1,857

Your firm expects to receive a cash flow in two years of $10,816 in nominal terms. If the real rate of interest is 2 percent and the inflation rate is 4% whst is the real cash flow for year 2 a) 9,246 b) 10,716 c) 10,000 d) 11,236

10,000

If depreciation is $600,000 and the marginal tax rate is 21 percentm then the tax shield to depreciation is a) cannot be determined b) 126,000 c) 600,000 d) 390,000

126,000

What is the profitability index of an investment with cash flows in years 0-4 of -340, 120,130, 153, and 166 and a discoubt rate of 16 percent a) 42 b) 35 c) 22 d) 15

15

Capital equiptment costing $250,000 today has $50,000 salvage vakue at the end of 5 years, If the straight line depreciation method is used what is the book value of the equiptment at the end of 2 years? a) 140,000 b) 200,000 c) 170,000 d) 150,000

170,000

if the sign of the cash flows for a project changes two times, then the project likely has a) one IRR b) no IRR c) 2 IRR d) three IRR

2 IRR

If depreciatiib is $100,000 and the marginal tax rate is 21 percent, then the tax shield due to depreciation is a) 100,000 b) cannot be determined c) 21,000 65,000

21,000

If the cash flows for Project M are C0 = -1,000; C1 = +200; C2 = +700; and C3 = +698, calculate the IRR for the project. a) 19 percent b) 17 percent c) 21 percent d) 23 percent

23 percent

driscoll company is considering investing in a new project. The project will need an inital investment of $2,400,000 and will generate $1,200,000 (after tax cash flow for three years. Calculate IRR a) 23.4 percent b) 14.5 percent c) 20.2 percent d) 16.1 percent

23.4 percent

the following table gives the available projects (in millions) for a firm If the firm has a limit of $210 million to invest. what is the maximum NPV the company can obtain? a) 200 b) 307 c) 347 d) 283

307

The cost of a new machine is $250,000. The machine has a five year life and no salvage value. If the CFs each year is equal to 25% of the cost of the machine. Calculate payback period

4 years

the following table gives the available projects (in $millions) for a firm The firm only has $20 million to invest. What is the maximum pvp that comoany can obtain A) 5.0 B) 4.5 C) 3.5 D) 4.0

4.5

A firm has a general purpose machine, which has a book value of 300,000 and is worth 500,000 in the market. If the tax rate is 21 percent. What is the opportunity cost a) 300,000 b) 200,000 c) 458,000 d) 500,000

458,000

a project requires an investment of 900 today. It can generate sales of 1,100 per year forever. Costs are 600 for the first year and will increase by 20 percent per year, The project can be terminated at any time without cost, Ignore taxes and calculate the NPV of the project at aa 12 % discount rate a ) 65 b) 100 c) cannot be determined d) 57.51

57.51

The real cash flow occuring in year 2 is $60,000. If the inflation rate is 5% per year and the real rate of interest is 2 percent per year, calculate the nominal cash flow for year 2 a) 63,654 b) 62,424 c) 66,150 d) 60,000

66,150

The real rate of interest is 3% and inflation is 4%, What is the nominal rate of interest a) -1% b) 3% c) 1 % d)7.12%

7.12

The survey of CFOs indicated that the IRR method is used for evaluating investment projects by approximately a) 20 percent of firms b) 76 percent of firms c) 57 percent of firms d) 12 percent of firms

76 percent

The real interest rate is 3 percent and the inflation rate is 5 %. What is the nominal interest rate a) 3% b) 8.15 % c) 2 % d) 5 %

8.15%

Which of the following methids if evaluating capital investments projects incorporated the time value of money concept a) payback period, discounted payback period, net present value (NPV), and internal rate of return b) NEt PResent Value (NPV) and internal rate of return only c) Discounted payback period, net present value (NPV), and internal rate of return only d) Payback period, discounted payback period, and net present value onlu

Discounted payback period, Net Present value (NPV) and Internal rate of return only

The following are some of the shortcomings of the IRR method except a) IRR is conceptually easy to communicate b) it is very cumbersome to evaluate mutually exclusing projects using the IRR concept c) IRR cannot distinguish between a borrowing and a lending project d) projects can have multipe IRRs

Irr is conceptually easy to communicate

Accountants do not depreciate investments in Net working capital because a) it is recovered during or at the ned of the projects, that it is not a depreciating asset b) it is not a cash flow c) working captial appears on the balance sheet, not the income statemnt d) it is a sunk cost

It is recovered during or at the end of the project, thus it is not a depreciating asset

The profitability index is the ratio of the a) NPV of the cash flows to IRR b) present balue of CFs to IRR c) FV of cash flows to investment d) NPV of cash flows to investment

NPV of cash flows to investment

The denominator of the profitability index is the PV of the investment A) true B) false

True

The discounted payback method discounts cash flows as the opportunity cost of capital and then calculates the payback period a) true b) false

True

The principal short term assets are a) accounts payable only b) cash only c) cash and accounts payable only d) cash, accounts receivable, and inventories

cash, accounts receivable, and inventories

Which of the follwing investment rules has the value additive property? a) the internal rate of return method b) the payback period method c) the book rate of return method d) the net present value method

d) the net present value method

Internal rate of return (IRR) method is also called the a) discounted payback period method b) modified internal rate of return (MIRR) method c) discounted cash flow (DCF) rate of return method d) book rate of return method

discounted cash flow (DCF) rate of return method

Proper treatment of inflation in NPV calucations include a) disocunting real cash flows by the discount rate bO disocounting nominal cash flows by the nominal discount rate c) discounting nominal cash flows by the nominal discount rate and discounting real cost flows by the real disocunt rate d) discounting nominal cash flows by the real disocunt rate

discounting nominal cash flows by the nominal discount rate and discounting real cash flows by the real discount rate

Suppose a firm has $100 million in excess cash cash. It could a) buy another firm B) invest the finds in projects with positive NPVs C) do all of the options D) pay high dividends to the shareholders

do all of the options

Project X has the following cash flows: C0 = 2,000 C1=- 1150 and C2 = -1,150. If the IRR of the project is 9.85 percent and the cost of capital is 12 percent. You would A) accept the project B) reject the project

except the project

By undertaking an analysis in real terms the financial manager avoids having to forcast inflation true false

false

Opportunity costs should not be included in project analysis as they are missed opportunity costs true false

false

The equivalent annual cash flow technique is primarily used whenever the lives of two different projects are the same a) true b) flase

false

The internal rate of return is the discount rate that makes the PV of a project's cash inflows equal to zero a) true b) false

false

The rule for comparing machines with different lives is to select the machine with the greatest equivalent annual cost (EAC) true false

false

There can never be more than one value of the IRR for any sequence of cash flows. a) true b) false

false

The quickest way to calculate the internal rate of return (IRR) of a project is by a) doubling the opportunity cost of capital b) using a financial calcuator c) using the graphical method d) trial and error

financial calc

For project A in year 2, inventories increase by 12,000 and accounts payable increase by 2000. Accounts receivable remain the same. Calc the increase or decrease in Net working capital for year 2 a) dec by 14,000 b) dec by 10,000 c) inc by 14,000 d) inc by 10,000

inc by 10,000

a reduction in the sales of existing products caused by the introduction of a new product is an example of a) allocated overhead costs b) opportunity costs c) incidental effects d) sunk costs

incidental costs

When a firm has the opportunity to add a project that will utilize excess factory capacity (That is not currently being used), which cost should be used to help determine if the added project should be undertaken a) average cost b) sunk cost c) incremental cost d) allocated overhead cost

incremental costs

The following are disadvantages of using the payback rule except the rule a) ignores all cashflow after the cut off date b) does not use the Time value of money cO is easy to calculate and use d) does not have the value additivity property

is easy to calculate and use

The main advantage of the payback rule is that it a) adjusts for uncertainty of early cash flows b) does not discount cash flows c) is simple to use d) better accounts for salvage

is simple to use

The payback period rule accepts all projects for which the payback period is a) positive b) greater than the cut-off value c) an integer d) less than the cut-off value

less than the cut off value

The payback period rule accepts all projects for which the payback period is a) greater than the cut off value b) positive c) an interger d) less than the cut off value

less than the cut off value

an analyst wishes to determine the value of resources used by a proposed project. Which values should the analyst use to approximate opportunity costs a) market values b) historical costs c)accounting values plus an inflation adjustment d) book values

market values

The cost of a resource that may be relevant to an investment decision even when no cash changes hands is called an opportunity cost average cost depreciation cost sunk cost

opportunity cost

The current market value of a previously purchased machine proposed for use in a project is an example of a) opportunity cost b) inventoriable cost c) fixed cost d) sunk cost

opportunity cost

The net present value of a project depends on a) companys profitability index b) managers tastes and preferences c) companys choice of accounting method d) projects cash flows and opportunity costs of capital

projects cash flows and opportunity cost of capital

Investment in investories includes investments in a) raw materials, work in progress, finished goods b) finished goods c) raw materiaks and work in progress d) raw materials

raw materials, work in progress, and finished goods

The payback period rule a) verifies the cut off point with the interest rate and requires an arbitrary choice of a cut-off point b) requires an arbitrary choice of a cut off point c) veries the cut off point with the interest rate d) determines a cutt off point that all projects accepted by the NPV rule will be accepted by the payback period

requires an arbitrary choice of a cut off point

The payback period rule a) varies the cut-off point with the interest rate and requires an arbitrary choice of a cut-off period b) requires an arbitrary choice of a cut-off period c) varies the cut-off point with the interest rate d) determines a cut-off point so that all projects by the NPV rule will be accepted by the play back period rule

requires an arbitrary choice of cut off point

Net working capital is best represented as a) short term assets only b) long term assets and short term assets C) long term assets and long term liabilities d) short term assets and short term liabilities

short term assets and short term liabilities

Germany allows firms to choose the dereciation methods of a) straight line methods and declining balance sheet b) declining balance only cO germany allows a very different system d) straight line only

straight line methods and declining balance sheet

Costs incurred as a result of past irrevocable decisions and irrelevent to future decisions are called a) sunk costs b) incremental costs c) opportunity costs d) marginal costs

sunk costs

Which of the following statements regarding the discounted payback period measure is true? a) the discount payback measure considers all cash flows b) the discount payback measure uses the TMV concept c) the discount payback measure is better than the NPV rule d) the discounted payback measure exhibits the value additive property

the discount payback measure uses the TMV concept

IRR is defined as a) the difference between the cost of capital and the present value of the cash flow b) the discount rate used in the NPV method c) the discount rate that makes a project's NPV equal to zero d) the discount rate used in the discounted payback period method

the discount rate that makes a project's NPV equal to zero

The IRR is defined as a) the discount rate used in the NPV method b) the disocunt rate used in the discounted packback period methods c) the discount rate that makes a projects NPV equal to zero d) the difference between the cost of capital and the PV of cash flows

the discount rate that makes a projects NPV equal to zero

Which of the following investment rules does not use the time value of money concept? a) profitability index b) NPV c) IRR d) the playback period

the playback period

A project will have only one IRR if a) the NPV is positive b) there is a one sign change in the cash flows c) the NPV is nagative d) the cash flows decline over the life of the project

there is a one sign change in the cash flows

a project will have only one internal rate of return if a) the cash flows decline over the life of the project b) the net present value is positive c) the net present value is negative d) there is a one-sign change in the cash flows

there is a one-sign change in the cash flows

A finanical analyst can use the equvilant annual cash flow approach to determine the year in which an existing machine can be profitably replaced with a new machine true falseMos

true

Depreciation expense acts as a tax shield in reducing taxes a) true b) false

true

Most large U.S. corporations keep two separate sets of books, one for stockholders and one for the Internal Revenue Service. true false

true

Present values have the value additive property a) true b) false

true

The benefit-cost ratio is equal to the profitability index plus one a) true b) false

true

The discounted payback method will never accept a negative NPV projects true false

true

The profitability index is always less than 1 a) true b) false

true

Working capital is needed for additional investment within a project and should be included within cash flow estimates true false

true

Working capital is one of the most common sources of mistakes in estimating project cash flows a ) true b) false

true

You should replace a machine when the eac of continuing to operate it exceeds the eac of the new machines true fakse

true

when evaluating mutally exclusive projects with prisutuve NPV but different life spans, the proper technique to employ is the equivalent annual cash flow approach a) true b) false

true

When calucukatubg cash flows, one should consider them on an incremental basis a ) true b) false

true`

One can use the profitability index most usefully for which situation a) evaluation of execptionally long projects b) when capital rationing exists c) when a project has unusually high cafh flow uncertaintly d) evaluation of nonnormal projects

when capital rationing exists

if an investment project (Normal project) has an IRR equal to the cost of capital, the NPV for that project is a) zero b) negative c) unable to determine d) positive

zero