Corporate Finance 2

Which one of the following is an example of a sunk cost? Multiple Choice $1,500 of lost sales because an item was out of stock. $1,200 paid to repair a machine last year. $20,000 project that must be forfeited if another project is accepted. $4,500 reduction in current shoe sales if a store commences selling sandals. $1,800 increase in comic book sales if a store ceases selling puzzles.

$1,200 paid to repair a machine last year.

The depreciation tax shield is best defined as the: Multiple Choice Amount of tax that is saved when an asset is purchased. Tax that is avoided when an asset is sold as salvage. Amount of tax that is due when an asset is sold. Amount of tax that is saved because of the depreciation expense. Amount by which the aftertax depreciation expense lowers net income.

Amount of tax that is saved because of the depreciation expense.

Fixed costs: Multiple Choice Change as a small quantity of output produced changes. Are constant over the short-run regardless of the quantity of output produced. Are defined as the change in total costs when one more unit of output is produced. Are subtracted from sales to compute the contribution margin. Can be ignored in scenario analysis since they are constant over the life of a project.

Are constant over the short-run regardless of the quantity of output produced.

The operating cash flow of a cost-cutting project: Multiple Choice Is equal to the depreciation tax shield. Is equal to zero because there is no incremental sales. Can only be analyzed by projecting the sales and costs for a firm's entire operations. Includes any changes that occur in the current accounts. Can be positive even though there are no sales.

Can be positive even though there are no sales

Which one of these is most associated with an IRR of -100 percent? Multiple Choice Degree of operating leverage. Accounting break-even point. Contribution margin. Simulation analysis. Cash break-even point.

Cash Break even Point

Theresa is analyzing a project that currently has a projected NPV of zero. Which one of the following changes that she is considering is most apt to cause that project to produce a positive NPV instead? Consider each change independently. Multiple Choice Decrease the sales price. Increase the materials cost per unit. Decrease the labor hours per unit produced. Decrease the sales quantity. Increase the amount of the initial investment in net working capital.

Decrease the labor hours per unit produced.

Assume both the discount and tax rates are positive values. At the financial break-even point, the: Multiple Choice Payback period equals the project life. NPV is negative. OCF is zero. Contribution margin per unit equals the fixed costs per unit. IRR equals the required return.

IRR equals the required return.

Which one of the following will decrease the net present value of a project? Multiple Choice Increasing the value of each of the project's discounted cash inflows. Moving each of the cash inflows forward to a sooner time period. Decreasing the required discount rate. Increasing the project's initial cost at time zero. Increasing the amount of the final cash inflow.

Increasing the project's initial cost at time zero.

The operating cash flow for a project should exclude which one of the following? Multiple Choice Taxes. Variable costs. Fixed costs. Interest expense. Depreciation tax shield.

Interest expense.

Which of the following are advantages of the payback method of project analysis? Multiple Choice Considers time value of money, liquidity bias. Liquidity bias, arbitrary cutoff point. Liquidity bias, ease of use. Ignores time value of money, ease of use. Ease of use, arbitrary cutoff point.

Liquidity bias, ease of use.

Steve, the sales manager for TL Products, wants to sponsor a one-week "Customer Appreciation Sale" where the firm offers to sell additional units of a product at the lowest price possible without negatively affecting the firm's profits. Which one of the following represents the price that should be charged for the additional units during this sale? Multiple Choice Average variable cost. Average total cost. Average total revenue. Marginal revenue. Marginal cost.

Marginal Cost

Jill's Jello produces 30,000 units and sells those units for $24 each. The company spends $450,000 on rent and machinery, and $15 per unit in materials and labor. A. The marginal revenue per unit is: $ 24 B. The marginal cost per unit is: $ 15 C. The average total cost per unit is: $ 30 D. The marginal profit per unit is: $ 9 E. The total profit for the firm is $ -180,000 F. The rule for profit maximization is that as long as marginal revenue is greater than marginal cost a firm should continue production.

Marginal profit= Marginal Revenue-Marginal Cost

Which one of the following should not be included in the analysis of a new product? Multiple Choice Increase in accounts payable for new product inventory purchases. Reduction in sales for a current product once the new product is introduced. Market value of a machine owned by the firm which will be used to produce the new product. Money already spent for research and development of the new product. Increase in accounts receivable needed to finance sales of the new product.

Money already spent for research and development of the new product.

By definition, which one of the following must equal zero at the accounting break-even point? Multiple Choice Net present value. Internal rate of return. Contribution margin. Net income. Operating cash flow.

Net Income

A project has an initial cost of $27,400 and a market value of $32,600. What is the difference between these two values called? Multiple Choice Net present value. Internal return. Payback value. Profitability index. Discounted payback.

Net present value.

Three years ago, Knox Glass purchased a machine for a three-year project. The machine is being depreciated straight-line to zero over a five-year period. Today, the project ended and the machine was sold. Which one of the following correctly defines the aftertax salvage value of that machine? (T represents the relevant tax rate) Multiple Choice Sale price + (Sale price - Book value) ×T Sale price + (Sale price - Book value) ×(1 - T) Sale price + (Book value - Sale price) ×T Sale price + (Book value - Sale price) ×(1 - T) Sale price ×(1 - T)

Sale price + (Book value - Sale price) ×T

Which one of the following best illustrates erosion as it relates to a hot dog stand located on the beach? Multiple Choice Providing both ketchup and mustard for customers' use. Repairing the roof of the hot dog stand because of water damage. Selling fewer hot dogs because hamburgers were added to the menu. Offering French fries but not onion rings. Losing sales due to bad weather.

Selling fewer hot dogs because hamburgers were added to the menu.

Which one of the following will best reduce the risk of a project by lowering the degree of operating leverage? Multiple Choice Hiring additional employees rather than using temporary outside contractors. Subcontracting portions of the project rather than purchasing new equipment to do all the work in-house. Buying equipment rather than leasing it short-term. Lowering the projected selling price per unit. Changing the proposed labor-intensive production method to a more capital intensive method.

Subcontracting portions of the project rather than purchasing new equipment to do all the work in-house.

Which one of the following will be used in the computation of the best-case analysis of a proposed project? Multiple Choice The lowest expected salvage value that can be obtained for a project's fixed assets. The most likely sales price per unit. The lowest variable cost per unit that can reasonably be expected. The highest level of fixed costs that is actually anticipated. Minimal number of units that are expected to be produced and sold.

The lowest variable cost per unit that can reasonably be expected.

A project has a discounted payback period that is equal to the required payback period. Given this, which of the following statements must be true? Multiple Choice The project will not be acceptable under the payback rule. The project must have a profitability index that is equal to or greater than 1.0. The project must have a zero net present value. The project's internal rate of return must equal the required return. The project will still be acceptable if the discount rate is increased.

The project must have a profitability index that is equal to or greater than 1.0.

Which one of the following characteristics relates to the cash break-even point for a given project? I. The project never pays back.II. The IRR equals the required rate of return.III. The NPV is equal to zero.IV. The operating cash flow is equal to the depreciation expense. Multiple Choice The project never pays back. The discounted payback period equals the project's life. The NPV is equal to zero. The IRR equals the required rate of return. The OCF is equal to the depreciation expense.

The project never pays back.

A project has a net present value of zero. Which one of the following best describes this project? Multiple Choice The project has a zero percent rate of return. The project requires no initial cash investment. The project has no cash flows. The summation of all of the project's cash flows is zero. The project's cash inflows equal its cash outflows in current dollar terms.

The project's cash inflows equal its cash outflows in current dollar terms.

Which one of the following is the best example of two mutually exclusive projects? Multiple Choice Building a furniture store beside a clothing outlet in the same shopping mall. Producing both plastic forks and spoons on the same assembly line. Using an empty warehouse to store both raw materials and finished goods. Promoting two products during the same television commercial. Waiting until a machine finishes molding Product A before being able to mold Product B.

Waiting until a machine finishes molding Product A before being able to mold Product B.

Simulation analysis is based on assigning a _____ and analyzing the results. Multiple Choice Narrow range of values to a single variable. Narrow range of values to multiple variables simultaneously. Wide range of values to a single variable. Wide range of values to multiple variables simultaneously. Single value to each of the variables.

Wide range of values to multiple variables simultaneously.

You are considering two mutually exclusive projects. Project A has cash flows of -$125,000, $51,400, $52,900, and $63,300 for years 0 to 3, respectively. Project B has cash flows of -$85,000, $23,100, $28,200, and $69,800 for years 0 to 3, respectively. Project A has a required return of 9 percent while Project B's required return is 11 percent. Your supervisor has asked that all projects be evaluated using the IRR. What should you recommend to her? Multiple Choice Accept Project A and reject Project B Reject Project A and accept Project B Accept both projects Reject both projects You should not use IRR; use NPV instead.

You should not use IRR; use NPV instead.