Finc 311 Practice Problems Multiple Choice

Which one of the following is generally considered to be the best form of analysis if you have to select a single method to analyze a variety of investment opportunities?

NPV

China Importers would like to spend $215,000 to expand its warehouse. However, the company has a loan outstanding that must be repaid in 2.5 years and thus will need the $215,000 at that time. The warehouse expansion project is expected to increase the cash inflows by $60,000 in the first year, $140,000 in the second year, and $150,000 a year for the following 2 years. Should the firm expand at this time? Why or why not?

Yes; because the money will be recovered in 2.10 years

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

cost and its market value

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?

current market value of the land

The internal rate of return is the:

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

Ed owns a store that caters primarily to men. Each of the answer options represents an item related to a planned store expansion. Each of these items should be included in the expansion analysis with the exception of the cost: of the property insurance premium increase. of the exterior landscaping that will be required once the expansion is complete. of the additional sales person that will be required. of the inventory required to fill the additional retail space. of the blueprints that have been drawn of the expansion area.

e

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

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 from fender

Which one of the following statements is correct? A longer payback period is preferred over a shorter payback period. The payback rule states that you should accept a project if the payback period is less than one year. The payback period ignores the time value of money. The payback rule is biased in favor of long-term projects. The payback period considers the timing and amount of all of a project's cash flows.

payback period ignores the time value of money

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

positive NPV

cenario analysis is best described as the determination of the:

reasonable range of project outcomes

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

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

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

The analysis of a new project should exclude:

sunk costs

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