FIN 2400 Final

The net present value profile illustrates how the net present value of an investment is affected by which one of the following? Inflation rate Discount rate Project's initial cost Real rate of return Timing of the project's cash inflows

Discount Rate

Which one of the following defines the internal rate of return for a project? -Discount rate that creates a zero cash flow from assets -Discount rate that results in a net present value equal to the project's initial cost -Discount rate that results in a zero net present value for the project -The project's current market rate of return -Rate of return required by the project's investors

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

Based on the most recent survey information presented in your textbook, CFOs tend to use which two methods of investment analysis the most frequently? Payback and net present value Internal rate of return and net present value Net present value and profitability index Profitability index and internal rate of return Payback and internal rate of return

IRR and NPV

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? Profitability index Accounting rate of return Internal rate of return Net present value Payback

NPV

A debt-free firm has net income of $228,400, taxes of $46,200, and depreciation of $21,300. What is the operating cash flow? $103,500 $249,700 $295,900 $107,100 $182,200

Operating cash flow = $228,400 + $21,300 = $249,700

A debt-free firm has net income of $228,400, taxes of $46,200, and depreciation of $21,300. What is the operating cash flow? $295,900 $182,200 $103,500 $249,700 $107,100

Operating cash flow = $228,400 + $21,300 = $249,700

Which of the following indicates that a project should be rejected? -Positive net present value -Internal rate of return that exceeds the required return -Average accounting return that exceeds the requirement -Payback period that is shorter than the requirement period -Profitability index less than 1.0

Profitability index less than 1.0

IRR definition/ when to reject project

The IRR is defined as the interest rate that makes the NPV equal zero. The project should be rejected because the IRR is less than the required rate.

Which one of the following statements is correct? The payback period considers the timing and amount of all of a project's cash flows. A longer payback period is preferred over a shorter payback period. The payback rule is biased in favor of long-term projects. The payback period ignores the time value of money. 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 Tattle Teller has a printing press sitting idly in its back room. The press has no market value to another printer because the machine utilizes old technology. The firm could get $250 for the press as scrap metal. The press is six years old and originally cost $148,000. The current book value is $2,570. The president of the firm is considering a new project and feels he can use this press for that project. What value, if any, should be assigned to the press as an initial cost of the new project? $250 $2,495 $0 $2,245 $2,570

The relevant cost is the opportunity cost of $250.

he Tattle Teller has a printing press sitting idly in its back room. The press has no market value to another printer because the machine utilizes old technology. The firm could get $250 for the press as scrap metal. The press is six years old and originally cost $148,000. The current book value is $2,570. The president of the firm is considering a new project and feels he can use this press for that project. What value, if any, should be assigned to the press as an initial cost of the new project? $0 $250 $2,245 $2,495 $2,570

The relevant cost is the opportunity cost of $250.

Which of the following statements is true: -If the IRR exceeds the required return, the profitability index will be less than 1.0. -When the internal rate of return is greater than the required return, the net present value is positive. -If two projects are mutually exclusive, you should select the project with the shortest payback period. -The profitability index will be greater than 1.0 when the net present value is negative. -Projects with conventional cash flows have multiple internal rates of return.

When the internal rate of return is greater than the required return, the net present value is positive.

The net present value: -is equal to the initial investment when the internal rate of return is equal to the required return. -method of analysis cannot be applied to mutually exclusive projects. -decreases as the required rate of return increases. -is directly related to the discount rate. -is unaffected by the timing of an investment's cash flows.

decreases as the required rate of return increases

Scenario analysis (definition)

determination of what happens to NPV estimates when we ask what-if questions (worst case vs. best case scenario)

Future Cash Flows

discounted CF valuation is the process of discounting an investment's

If a project with conventional cash flows has a profitability index of 1.0, the project will: -have a negative net present value. -have an internal rate of return that equals the required return. -have a negative internal rate of return. -produce more cash inflows than outflows in today's dollars. -never pay back.

have an internal rate of return that equals the required return

Both Projects A and B are acceptable as independent projects. However, the selection of either one of these projects eliminates the option of selecting the other project. Which one of the following terms best describes the relationship between Project A and Project B? Multiple choice Mutually exclusive Crosswise Dual return Conventional

mutually exclusive

Net CF formula

net cf= SV- tax rt(SV-BV)

Which one of the following terms refers to the best option that was foregone when a particular investment is selected? Erosion Marginal cost Side effect Sunk cost Opportunity cost

opportunity cost

Which of the following indicates that a project is expected to create value to its owners? -Profitability index less than 1.0 -Positive average accounting rate of return -Positive net present value -Internal rate of return that is less than the requirement -Payback period greater than the requirement

positive NPV

A pro forma financial statement is a financial statement that: compares the performance of a firm to its industry. compares actual results to the budgeted amounts. values all assets based on their current market values. projects future years' operations. expresses all values as a percentage of either total assets or total sales.

projects future years' operations.

The payback period is the length of time it takes an investment to generate sufficient cash flows to enable the project to: offset its fixed expenses. recoup its initial cost. offset its total expenses. produce a positive annual cash flow. produce a positive cash flow from assets.

recoup its initial cost

Jamie is analyzing the estimated net present value of a project under various what if scenarios. The type of analysis that Jamie is doing is best described as: scenario analysis. opportunity evaluation. benefit planning. sensitivity analysis. erosion planning.

scenario analysis

Mark is analyzing a proposed project to determine how changes in the variable costs per unit would affect the project's net present value. What type of analysis is Mark conducting? Erosion planning Benefit-cost analysis Sensitivity analysis Opportunity cost analysis Scenario analysis

sensitivity analysis

A cost that should be ignored when evaluating a project because that cost has already been incurred and cannot be recouped is referred to as which type of cost? Fixed Forgotten Opportunity Sunk Variable

sunk

A cost that should be ignored when evaluating a project because that cost has already been incurred and cannot be recouped is referred to as which type of cost? Fixed Sunk Forgotten Opportunity Variable

sunk

sensitivity analysis (definition)

what happens to NPV when only 1 variable is changed

If an investment is producing a return that is equal to the required return, the investment's net present value will be: zero. less than, or equal to, zero. greater than the project's initial investment. positive. equal to the project's net profit.

zero

book value formula

BV= initial cost x (1-MACRS %'s for yrs of asset)

Ronnie's Custom Cars purchased some fixed assets two years ago for $105,000. The assets are classified as 5-year property for MACRS. Ronnie is considering selling these assets now so he can buy some newer fixed assets which utilize the latest in technology. Ronnie has been offered $54,500 for his old assets. What is the net cash flow from the salvage value if the tax rate is 34 percent? $54,500.00 $50,400.00 $42,138.96 $53,106.00 $46,251.60

Book value = $105,000 × (1 - 0.20 - 0.32) = $50,400 Net cash flow = $54,500 - 0.34 × ($54,500 - $50,400) = $53,106.00