Corp Finance Chauncey Exam 1

All of the following cash flows are related to a proposed project. Which one of these should be included in the cash flow at Time 0? Loan obtained to finance the project Initial investment in inventory to support the project Annual depreciation tax shield Aftertax salvage value of the new assets Net working capital recovery

Initial investment in inventory to support the project

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 Discounted payback Internal rate of return Profitability index Payback

Net present value

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? Underlying value principle Stand-alone principle Equivalent cost principle Salvage principle Fundamental principle

Stand-alone principle

Which one of the following types of costs was incurred in the past and cannot be recouped? Incremental Side Sunk Opportunity Erosion

Sunk

Which one of these statements related to growing annuities and perpetuities is correct? You can compute the present value of a growing annuity but not a growing perpetuity. In computing the present value of a growing annuity, you discount the cash flows using the growth rate as the discount rate. The future value of an annuity will decrease if the growth rate is increased. An increase in the rate of growth will decrease the present value of an annuity. The present value of a growing perpetuity will decrease if the discount rate is increased.

The present value of a growing perpetuity will decrease if the discount rate is increased.

The depreciation tax shield is best defined as the: 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.

The interest rate that is most commonly quoted by a lender is referred to as the: annual percentage rate. compound rate. effective annual rate. simple rate. common rate.

annual percentage rate.

Which one of the following statements correctly defines a time value of money relationship? a. Time and future values are inversely related, all else held constant. b. Interest rates and time are positively related, all else held constant. c. An increase in a positive discount rate increases the present value. d. An increase in time increases the future value given a zero rate of interest. e. Time and present value are inversely related, all else held constant.

e. Time and present value are inversely related, all else held constant.

The length of time a firm must wait to recoup the money it has invested in a project is called the: internal return period. payback period. profitability period. discounted cash period. valuation period.

payback period.

A project has a net present value of zero. Given this information: 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 will decrease the net present value of a project? Increasing the value of each of the project's discounted cash inflow Moving each cash inflow forward one time period, such as from Year 3 to Year 2 Decreasing the required discount rate Increasing the project's initial cost at Time 0 Increasing the amount of the final cash inflow

Increasing the project's initial cost at Time 0

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

Incremental

Which one of the following best illustrates erosion as it relates to a snack stand located on the beach? Providing free ice and condiments for customers Repairing the canopy over the snack stand because of wind damage Selling fewer cookies because ice cream was added to the menu Offering french fries but not onion rings Losing sales due to bad weather

Selling fewer cookies because ice cream was added to the menu

Cerda Diagnostics spent $5,000 last week repairing equipment. This week the company is trying to decide whether the equipment could be better utilized by assigning it to a proposed project. When analyzing the proposed project, the $5,000 should be treated as which type of cost? Opportunity Fixed Incremental Erosion Sunk

Sunk

Which one of the following statements related to annuities and perpetuities is correct? a. An ordinary annuity is worth more than an annuity due given equal annual cash flows for 10 years at 7 percent interest compounded annually b. A perpetuity comprised of $100 monthly payments is worth more than an annuity of $100 monthly payments provided the discount rates are equal. c. Most loans are a form of a perpetuity. d. The present value of a perpetuity cannot be computed but the future value can. e. Perpetuities are finite but annuities are not.

b. A perpetuity comprised of $100 monthly payments is worth more than an annuity of $100 monthly payments provided the discount rates are equal.

Changes in the net working capital requirements: can affect the cash flows of a project every year of the project's life. only affect the initial cash flows of a project. only affect the initial and final cash flows of a project. are generally excluded from project analysis due to their irrelevance to the total project. are excluded from project analysis as long as they are recovered when the project ends.

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

An ordinary annuity is best defined as: increasing payments paid for a definitive period of time. increasing payments paid forever. equal payments paid at the end of regular intervals over a stated time period. equal payments paid at the beginning of regular intervals for a limited time period. equal payments that occur at set intervals for an unlimited period of time.

equal payments paid at the end of regular intervals over a stated time period.

Pro forma statements for a proposed project should generally do all of the following, except: be compiled on a stand-alone basis. include all project-related fixed asset acquisitions and disposals. include all the incremental cash flows related to the project. include taxes. include interest expense.

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. internal cash flows. external cash flows. erosion effects. financing cash flows.

incremental cash flows.