fin 125 exam review

Which of the following are advantages of the payback method of project analysis

Liquidity bias, ease of use

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

Which one of the following best describes the concept of erosion?

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

The length of time a firm must wait to recoup, in present value terms, the money it has invested in a project is referred to as the:

discounted payback period

Which one of the following is an example of a sunk cost?

$1,200 paid to repair a machine last year

Pro forma statements for a proposed project should generally do all of the following except

include interest expense

If a project has a net present value equal to zero, then:

the project earns a return exactly equal to the discount rate.

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

Which one of the following best illustrates erosion as it relates to a hot dog stand located on the beach?

Selling fewer hot dogs because hamburgers were added to the menu

Dependable Motors just purchased some MACRS five-year property at a cost of $216,000. The MACRS rates are .2, .32, and .192 for Years 1 to 3, respectively. Assume the firm opted to forego any bonus depreciation. Which one of the following will correctly give you the book value of this equipment at the end of Year 2?

$216,000(1 − .2 − .32)

Which one of the following will decrease the net present value of a project?

Increasing the project's initial cost at time zero

A project's average net income divided by its average book value is referred to as the project's average:

accounting return

Changes in the net working capital requirements

can affect the cash flows of a project every year of the project's life

The average accounting rate of return (AAR

is similar to the return on assets ratio

Net present value

is the best method of analyzing mutually exclusive projects

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

The length of time a firm must wait to recoup the money it has invested in a project is called the

payback period

Rossiter Restaurants is analyzing a project that requires $180,000 of fixed assets. When the project ends, those assets are expected to have an aftertax salvage value of $45,000. How is the $45,000 salvage value handled when computing the net present value of the project?

Cash inflow in the final year of the project

Which one of the following is a project cash inflow? Ignore any tax effects

Decrease in inventory

Which one of the following methods of project analysis is defined as computing the value of a project based on the present value of the project's anticipated cash flows?

Discounted cash flow valuation

Which one of these statements related to discounted payback is correct?

Discounted payback is biased towards short-term projects.

Kelley's Baskets makes handmade baskets and is currently considering making handmade wreaths as well. Which one of the following is the best example of an incremental operating cash flow related to the wreath project?

Hiring additional employees to handle the increased workload should the firm accept the wreath project

The stand-alone principle advocates that project analysis should be based solely on which one of the following costs?

Incremental

All of the following are related to a proposed project. Which one of these should be included in the cash flow at Time 0?

Initial investment in inventory to support the project

A project has an initial cost of $31,800 and a market value of $29,600. What is the difference between these two values called?

Net present value

Which one of the following methods predicts the amount by which the value of a firm will change if a project is accepted?

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

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

Frank's is a furniture store that is considering adding appliances to its offerings. Which one of the following is the best example of an incremental cash flow related to the appliances?

Selling furniture to appliance customers

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

GL Plastics spent $1,200 last week repairing a machine. This week the company is trying to decide if the machine could be better utilized if they assigned it a proposed project. When analyzing the proposed project, the $1,200 should be treated as which type of cost?

Sunk

Which one of the following costs was incurred in the past and cannot be recouped?

Sunk

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

A project has a required payback period of three years. Which one of the following statements is correct concerning the payback analysis of this project?

The cash flow in Year 2 is valued just as highly as the cash flow in Year 1.

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

Net working capital

can create either an initial cash inflow or outflow.

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

Pro forma financial statements can best be described as financial statements

showing projected values for future time periods.

Applying the discounted payback decision rule to all projects may cause

some positive net present value projects to be rejected.

The net present value of a project will increase if

the aftertax salvage value of the fixed assets increases