Finance Exam III

The decision rule for the Profitability Index is which of the following? (Assume the rule is consistent with the NPV decision rule.)

If PI is greater than 1, accept the project

Which one of the following statements is correct?

If the internal rate of return equals the required return, the net present value will equal zero.

Which of the following create cash inflows from net working capital?

Increase in accounts payable and decrease in inventory

Which one of the following is an indicator that an investment is acceptable? Assume cash flows are conventional.

Internal rate of return that exceeds the required return

Valley Forge and Metal purchased a truck five years ago for local deliveries. Which one of the following costs related to this truck is the best example of a sunk cost? Assume the truck has a usable life of five years.

Money spent last month repairing a damaged front fender

The Shoe Box is considering adding a new line of winter footwear to its product lineup. When analyzing the viability of this addition, the company should include all of the following in its analysis with the exception of:

the research and development costs to produce the current winter footwear samples.

If an investment is producing a return that is equal to the required return, the investment's net present value will be:

zero.

Ted has analyzed a proposed expansion project and determined that the IRR is lower than the firm desires. which one of the following changes would be most expected to increase the project's IRR? A. condensing the firms cash flows into fewer years without lowering the amount of those inflows B. decrease the required discount rate C. decreasing the amount of the final cash inflow D. Increasing the initial investment of fixed assets E. eliminating the salvage value

A. condensing the firms cash flows into fewer years without lowering the amount of those inflows

Which of the following statements is/are true? A. In order to compute the internal rate of return, you need to know the relevant cash flows and the required rate of return (or discount rate). B. In order to compute the payback period, you need to know the relevant cash flows only.

B

Which of the following statements is/are true? A. The net present value is not impacted by the timing of the cash flows of an investment. B. The payback method does not take into account the time value of money. C. The net present value will decrease if there is an increase in the required rate of return.

B and C are true

The analysis of a new project should exclude:

sunk costs

Erosion

the cash flows of a new project that come at the expense of a firm's existing projects

scenario analysis

the determination of what happens to NPV estimates when we ask what-if questions

Which one of the following will increase the operating cash flow as computed using the tax shield approach?

Decrease in fixed costs

Which one of the following indicates that a project is expected to create value for its owners?

Positive net present value

Which one of the following indicates that a project should be rejected? Assume the cash flows are normal, i.e., the initial cash flow is negative.

Profitability index less than 1.0

Kate is analyzing a proposed project to determine how changes in the sales quantity would affect the project's net present value. What type of analysis is being conducted?

Sensitivity analysis

Which one of the following principles refers to the assumption that a project will be evaluated based on its incremental cash flows?

Stand-alone principle

The Corner Market has decided to expand its retail store by building on a vacant lot it currently owns. This lot was purchased four years ago at a cost of $299,000, which the firm paid in cash. To date, the firm has spent another $38,000 on land improvements, all of which was also paid in cash. Today, the lot has a market value of $329,000. What value should be included in the analysis of the expansion project for the cost of the land?

The current market value of the land

Which one of the following will occur when the internal rate of return equals the required return?

The profitability index will equal 1.0.

A proposed project will increase a firm's accounts payables. This increase is generally:

a cash inflow at Time zero and a cash outflow at the end of the project.

Sunk Cost

a cost that has already been committed and cannot be recovered therefore it should not be considered in an investment decision

NPV > 0

accept the project

Pay back period < Predetermined time limit (set by management)

accept the project.

The amount by which a firm's tax bill is reduced as a result of the depreciation expense is referred to as the depreciation:

tax shield.

The pro forma income statements for a proposed investment should include all of the following except:

changes in net working capital.

The net present value of an investment represents the difference between the investment's:

cost and its market value.

The internal rate of return is the:

discount rate that results in a zero net present value for the project.

Jamie is analyzing the estimated net present value of a project under various conditions by revising the sales quantity, sales price, and the cost estimates. The type of analysis that Jamie is doing is best described as:

scenario analysis

Weston Steel purchased a new coal furnace six years ago at a cost of $2.2 million. Last year, the government changed the emission requirements and this furnace cannot meet those standards. Thus, the company can no longer use the furnace, nor has it been able to locate anyone willing to purchase the furnace. Given the current situation, the furnace is best described as which type of cost?

sunk cost

Net present value involves discounting an investment's:

future cash flows.

Assume an all-equity firm has positive net earnings. The operating cash flow of this firm:

increases when the tax rate decreases.

Any changes to a firm's projected future cash flows that are caused by adding a new project are referred to as:

incremental cash flows.

The profitability index reflects the value created per dollar:

invested.

sensitivity analysis

investigation of what happens to net present value when only one variable is changed

Scenario analysis is best described as the determination of the:

reasonable range of project outcomes.