Fin test 3

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

recoup its initial cost

The amount by which a firm's tax bill is reduced as a result of the depreciation expense is referred to as the depreciation: Multiple Choice credit. opportunity cost. adjustment. tax shield. erosion.

tax shield

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

B

The internal rate of return (IRR) is the: Multiple Choice A - discount rate that causes a project's aftertax income to equal zero. B - project's current market rate of return. C - rate of return required by the project's investors. D - discount rate that results in a zero net present value for the project. E - discount rate that results in a net present value equal to the project's initial cost.

D

Which on of the following methods of analysis is most appropriate to use when two investments are mutually exclusive? A - Modified Internal rate of return B - Profitability index C - Net present value D - internal rate of return E - average accounting return

C - net present value

Net present value involves discounting an investment's: Multiple Choice liabilities. future profits. costs. future cash flows. Correct assets.

Future Cash Flows

Assume a firm has positive net earnings. The operating cash flow of this firm: Multiple Choice -increases when the tax rate decreases. -must be negative. -is equal to net income minus depreciation. -ignores both depreciation and taxes. -is unaffected by the depreciation expense.

Increases when the tax rate decreases

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? Multiple Choice Sensitivity analysis Scenario analysis Benefit-cost analysis Opportunity cost analysis Erosion planning

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 a(n): Multiple Choice sunk cost. variable cost. forgotten cost. fixed cost. opportunity cost.

Sunk Cost

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 a(n): Multiple Choice forgotten cost. fixed cost. sunk cost. variable cost. opportunity cost.

Sunk cost

The Shoe Box is considering adding a new line of winter footwear to its product lineup. When analyzing the viability of this addition, the company should include all of the following in its analysis with the exception of: Multiple Choice -the research and development costs to produce the current winter footwear samples. -increased taxes from winter footwear profits. -the expected revenue from winter footwear sales. -any expected changes in the sales levels of current products caused by adding the new product line. -cost of new display counters for the additional winter footwear.

the research and development costs to produce the current winter footwear samples.