Mod.3 Concepts
You are considering the purchase of a new machine. Your analysis includes the evaluation of two machines that have differing initial and ongoing costs and differing lives. Whichever machine is purchased will be replaced at the end of its useful life. You should select the machine that has the:
lowest equivalent annual cost.
If a project has a net present value equal to zero, then:
the project earns a return exactly equal to the discount rate.
Which one of the following will decrease the net present value of a project?
Increasing the project's initial cost at time zero
The operating cash flow for a project should exclude which one of the following?
Interest expense
The final decision on which one of two mutually exclusive projects to accept ultimately depends upon which one of the following?
Net present value.
The option that is forgone so that an asset can be utilized by a specific project is referred to as which one of the following?
Opportunity cost
The current book value of a fixed asset that was purchased two years ago is used in the computation of which one of the following?
Tax due on the current salvage value of that asset
The current book value of a fixed asset that was purchased two years ago is used in the computation of which one of the following?
Tax due on the current salvage value of that asset.
Why is payback often used as the sole method of analyzing a proposed small project?
The benefits of payback analysis usually outweigh the costs of the analysis. Correct
Changes in the net working capital requirements:
can affect the cash flows of a project every year of the project's life.
The operating cash flow of a cost-cutting project:
can be positive even though there are no sales.
Net working capital:
can create either an initial cash inflow or outflow.
The IRR that causes the net present value of the differences between two project's cash flows to equal zero is called the:
crossover rate.
Ignoring bonus depreciation, the net book value of equipment will:
decrease slower under straight-line depreciation than under MACRS.
A strength of the average accounting return (AAR) method of project analysis is the fact that AAR:
is easy to calculate.
The internal rate of return:
is easy to understand.
The average accounting rate of return (AAR):
is similar to the return on assets ratio.
Which one of the following statements is correct?
A project can create a positive operating cash flow without affecting sales.
Which one of the following is a project cash inflow? Ignore any tax effects.
Decrease in inventory
Assume you are considering two mutually exclusive machines and need to select one for a cost-cutting project. Which one of these sets of characteristics best indicates the use of the equivalent annual cost method of analysis?
Differing lives and planned replacement at end of life
Dan is comparing three machines to determine which one to purchase. The machines sell for differing prices, have differing operating costs and machine lives, and will be replaced when worn out. Which one of the following computational methods should Dan use as the basis for his decision?
Equivalent annual cost
Which one of the following should not be included in the analysis of a new product?
Money already spent for research and development of the new product
The final decision on which one of two mutually exclusive projects to accept ultimately depends upon which one of the following?
Net present value
The profitability index is most closely related to which one of the following?
Net present value
Which one of the following indicates an accept decision for an independent project with conventional cash flows?
PI greater than 1.0
Which two methods of project analysis are the most biased towards short-term projects?
Payback and discounted payback
Which one of the following methods of analysis provides the best information on the relationship of the benefit of project relative to the cost?
Profitability index
Samuelson Electronics has a required payback period of three years for all of its projects. Currently, the firm is analyzing two independent projects. Project A has an expected payback period of 2.9 years and a net present value of $4,200. Project B has an expected payback period of 3.1 years with a net present value of $26,400. Which project(s) should be accepted based on the payback decision rule?
Project A only
The fact that a proposed project is analyzed based on the project's incremental cash flows is the assumption behind which one of the following principles?
Stand-alone principle
You are considering a project with conventional cash flows, an IRR of 11.63 percent, a PI of 1.04, an NPV of $987, and a payback period of 2.98 years. Which one of the following statements is correct given this information?
The discount rate used in computing the net present value was less than 11.63 percent.
A project has a net present value of zero. Which one of the following best describes this project?
The project's cash inflows equal its cash outflows in current dollar terms.
Graphing the crossover point helps explain:
how decisions concerning mutually exclusive projects are derived.
Pro forma statements for a proposed project should generally do all of the following except:
include interest expense.
The difference between a company's future cash flows if it accepts a project and the company's future cash flows if it does not accept the project is referred to as the project's:
incremental cash flows.
A project's cash flow is equal to the project's operating cash flow:
minus both the project's change in net working capital and capital spending.
A project has a discounted payback period that is equal to the required payback period. Given this, the project:
must have a profitability index that is equal to or greater than 1.0.
The bottom-up approach to computing the operating cash flow applies only when:
the interest expense is equal to zero.
Swenson's is considering two mutually exclusive projects, Projects A and B, and has determined that the crossover rate for these projects is 11.7 percent and the required return for both projects is 9 percent. Given this you know that:
the project that is acceptable at a discount rate of 11 percent should be rejected at a discount rate of 12 percent.