FIN 3060 Chp. 8&9
Which one of the following terms is most commonly used to describe the cash flows of a new project that are simply an offset of reduced cash flows for a current project? A. Opportunity cost B. Sunk cost C. Erosion D. Replicated flows E. Pirated flows
C. Erosion
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: A. sensitivity analysis. B. erosion planning. C. scenario analysis. D. benefit planning. E. opportunity evaluation.
C. scenario analysis.
If an investment is producing a return that is equal to the required return, the investment's net present value will be: A. positive. B. greater than the project's initial investment. C. zero. D. equal to the project's net profit. E. less than, or equal to, zero.
C. zero.
The payback method of analysis ignores which one of the following? A. Initial cost of an investment B. Arbitrary cutoff point C. Cash flow direction D. Time value of money E. Timing of each cash inflow
D. Time value of money
Which of the following should be included when compiling pro forma statements for a proposed investment? I. forecasted sales II. start-up costs III. aftertax salvage value of any assets sold IV. anticipated changes in net working capital A. I only B. II and IV only C. I, II, and III only D. II, III, and IV only E. I, II, III, and IV
E. I, II, III, and IV
Which one of the following is a correct value to use if you are conducting a best case scenario analysis? A. Sales price that is most likely to occur B. Lowest expected level of sales quantity C. Lowest expected salvage value D. Highest expected need for net working capital E. Lowest expected value for fixed costs
E. Lowest expected value for fixed costs
Which one of the following is specifically designed to compute the rate of return on a project that has a multiple negative cash flows that are interrupted by one or more positive cash flows? A. Average accounting return B. Profitability index C. Internal rate of return D. Indexed rate of return E. Modified internal rate of return
E. Modified internal rate of return
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? A. Payback B. Profitability index C. Accounting rate of return D. Internal rate of return E. Net present value
E. Net present value
Turner Industries started a new project three months ago. Sales arising from this project are exceeding all expectations. Given this, which one of the following is management most apt to implement? A. Option to wait B. Soft rationing C. Strategic option D. Option to abandon E. Option to expand
E. Option to expand
Forecasting risk is best defined as: A. reality risk. B. value risk. C. potential risk. D. management risk. E. estimation risk.
E. estimation risk.
Which one of the following analytical methods is based on net income? A. Profitability index B. Internal rate of return C. Average accounting return D. Modified internal rate of return E. Payback
C. Average accounting return
Which of the following should be included in the analysis of a proposed investment? I. erosion effects II. opportunity costs III. sunk costs IV. side effects A. I only B. II only C. I and IV only D. I, II, and IV only E. I, II, III, and IV
D. I, II, and IV only
The net present value profile illustrates how the net present value of an investment is affected by which one of the following? A. Project's initial cost B. Discount rate C. Timing of the project's cash inflows D. Inflation rate E. Real rate of return
B. Discount rate
Which one of the following is the primary advantage of payback analysis? A. Incorporation of the time value of money concept B. Ease of use C. Research and development bias D. Arbitrary cutoff point E. Long-term bias
B. Ease of use
An investment has conventional cash flows and a profitability index of 1.0. Given this, which one of the following must be true? A. The internal rate of return exceeds the required rate of return. B. The investment never pays back. C. The net present value is equal to zero. D. The average accounting return is 1.0. E. The net present value is greater than 1.0.
C. The net present value is equal to zero.
Which one of the following refers to a method of increasing the rate at which an asset is depreciated? A. Non-cash expense B. Straight-line depreciation C. Depreciation tax shield D. Accelerated cost recovery system E. Market based depreciation
D. Accelerated cost recovery system
Which one of the following indicates that a project is expected to create value for its owners? A. Profitability index less than 1.0 B. Payback period greater than the requirement C. Positive net present value D. Positive average accounting rate of return E. Internal rate of return that is less than the requirement
C. Positive net present value
Which one of the following statements is correct? A. The internal rate of return is the most reliable method of analysis for any type of investment decision. B. The payback method is biased toward short-term projects. C. The modified internal rate of return is most useful when projects are mutually exclusive. D. The average accounting return is the most difficult method of analysis to compute. E. The net present value method is applicable only if a project has conventional cash flows.
B. The payback method is biased toward short-term projects.
Which one of the following methods of analysis is most appropriate to use when two investments are mutually exclusive? A. Internal rate of return B. Profitability index C. Net present value D. Modified internal rate of return E. Average accounting return
C. Net present value
Weston Steel purchased a new coal furnace six years ago at a cost of $2.2 million. Last year, the government changed the emission requirements and this furnace cannot meet those standards. Thus, Weston's can no longer use the furnace nor have they been able to locate anyone willing to purchase the furnace. Given the current situation, the furnace is best described as which type of cost? A. Erosion B. Book C. Sunk D. Market E. Opportunity
C. Sunk
Which one of the following statements is correct when a firm faces hard rationing? A. All positive net present value projects will be accepted. B. Each division within a firm will be allocated an amount for capital expenditures that will be less than the total value of its positive net present value projects. C. The firm does not have funds to finance any new projects. D. The firm will fund only those projects that create value for its shareholders. E. The firm will only finance the projects which have the highest profitability index values.
C. The firm does not have funds to finance any new projects.
You are using a net present value profile to compare Projects A and B, which are mutually exclusive. Which one of the following statements correctly applies to the crossover point between these two? A. The internal rate of return for Project A equals that of Project B, but generally does not equal zero. B. The internal rate of return of each project is equal to zero. C. The net present value of each project is equal to zero. D. The net present value of Project A equals that of Project B, but generally does not equal zero. E. The net present value of each project is equal to the respective project's initial cost.
D. The net present value of Project A equals that of Project B, but generally does not equal zero.
The average net income of a project divided by the project's average book value is referred to as the project's: A. required return. B. market rate of return. C. internal rate of return. D. average accounting return. E. discounted rate of return.
D. average accounting return.
Assume a firm has positive net earnings. The operating cash flow of this firm: A. ignores both depreciation and taxes. B. is unaffected by the depreciation expense. C. must be negative. D. increases when tax rates decrease. E. is equal to net income minus depreciation.
D. increases when tax rates decrease.
A pro forma financial statement is a financial statement that: A. expresses all values as a percentage of either total assets or total sales. B. compares actual results to the budgeted amounts. C. compares the performance of a firm to its industry. D. projects future years' operations. E. values all assets based on their current market values.
D. projects future years' operations.
The net working capital invested in a project is generally: A. a sunk cost. B. an opportunity cost. C. recouped in the first year of the project. D. recouped at the end of the project. E. depreciated to a zero balance over the life of the project.
D. recouped at the end of the project.
Which of the following have the potential to increase the net present value of a proposed investment? I. ability to immediately shut down a project should the project become unprofitable II. ability to wait until the economy improves before making the investment III. option to place the investment on hold until a more favorable discount rate becomes available IV. option to increase production beyond that initially projected A. I only B. I and IV only C. II and III only D. I, II, and IV only E. I, II, III, and IV
E. I, II, III, and IV
Steve owns a store that caters primarily to men and their hobbies. He is contemplating greatly expanding the hunting and fishing section of the store. If he does this, he expects his fishing and hunting sales will increase, his camping gear sales will increase, and his model train sales will decrease. Which of the following should Steve include in his revenue projection for the expansion project? I. increase in fishing and hunting sales II. increase in camping gear sales III. decrease in model train sales A. I only B. II only C. I and III only D. II and III only E. I, II, and III
E. I, II, and III
Which one of the following is most closely related to the net present value profile? A. Internal rate of return B. Average accounting return C. Profitability index D. Payback E. Discounted payback
A. Internal rate of return
Generally speaking, payback is best used to evaluate which type of projects? A. Low-cost, short-term B. High-cost, short-term C. Low-cost, long-term D. High-cost, long-term E. Any size of long-term project
A. Low-cost, short-term
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? A. Mutually exclusive B. Conventional C. Multiple choice D. Dual return E. Crosswise
A. Mutually exclusive
Which one of the following indicates that an independent project is definitely acceptable? A. Profitability index greater than 1.0 B. Negative net present value C. Modified internal rate return that is lower than the requirement D. Zero internal rate of return E. Positive average accounting return
A. Profitability index greater than 1.0
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? A. Sensitivity analysis B. Erosion planning C. Scenario analysis D. Cost-benefit analysis E. Opportunity cost analysis
A. Sensitivity analysis
Marcos Enterprises has three separate divisions. The firm allocates each division $1.5 million per year for capital purchases. Which one of the following terms applies to this allocation process? A. Soft rationing B. Hard rationing C. Opportunity cost D. Sunk cost E. Strategic planning
A. Soft rationing
Which one of the following refers to the option to expand into related businesses in the future? A. Strategic option B. Contingency option C. Soft rationing D. Hard rationing E. Capital rationing option
A. Strategic option
Which one of the following is true if the managers of a firm accept only projects that have a profitability index greater than 1.5? A. The firm should increase in value each time it accepts a new project. B. The firm is most likely steadily losing value. C. The price of the firm's stock should remain constant. D. The net present value of each new project is zero. E. The internal rate of return on each new project is zero.
A. The firm should increase in value each time it accepts a new project.
The net present value: A. decreases as the required rate of return increases. B. is equal to the initial investment when the internal rate of return is equal to the required return. C. method of analysis cannot be applied to mutually exclusive projects. D. ignores cash flows that are distant in the future. E. is unaffected by the timing of an investment's cash flows.
A. decreases as the required rate of return increases.
The profitability index reflects the value created per dollar: A. invested. B. of sales. C. of net income. D. of taxable income. E. of shareholders' equity.
A. invested.
The average accounting return: A. measures profitability rather than cash flow. B. discounts all values to today's dollars. C. is expressed as a percentage of an investment's current market value. D. will equal the required return when the net present value equals zero. E. is used more often by CFOs than the internal rate of return.
A. measures profitability rather than cash flow.
The amount by which a firm's tax bill is reduced as a result of the depreciation expense is referred to as the depreciation: A. tax shield. B. credit. C. erosion. D. opportunity cost. E. adjustment.
A. tax shield.
Kyle Electric has three positive net present value opportunities. Unfortunately, the firm has not been able to find financing for any of these projects. Which one of the following terms best describes the firm's situation? A. Sensitivity analysis B. Capital rationing C. Soft rationing D. Contingency planning E. Sunk cost
B. Capital rationing
Bruce Moneybags owns several restaurants and hotels near a local interstate. One restaurant, Beef and More, needs modernized. He is trying to decide whether to accept an offer and sell Beef and More as is for the offer price of $1.1 million or renovate the restaurant himself. The projected renovation cost is $1.3 million. The restaurant would need to be shut down completely during the renovation which would cause a net operating cash flow loss of $210,000 in today's dollars. The estimated present value of the cash inflows from the renovated restaurant are $3.2 million. When analyzing the renovation project, what opportunity cost, if any should be included for the current restaurant? Assume the restaurant is totally paid for and any future costs will be paid in cash. A. There is no opportunity cost since the current restaurant is owned free and clear. B. The opportunity cost is the value of the current offer to buy the restaurant. C. The opportunity cost is the cost of the needed improvements. D. The opportunity cost is the present value of the loss of operating cash flows while the restaurant is closed for renovation. E. The opportunity cost is the cost of the renovations plus the loss of the operating cash flows during the renovation.
B. The opportunity cost is the value of the current offer to buy the restaurant.
Which one of the following will occur when the internal rate of return equals the required return? A. The average accounting return will equal 1.0. B. The profitability index will equal 1.0. C. The profitability index will equal 0. D. The net present value will equal the initial cash outflow. E. The profitability index will equal the average accounting return.
B. The profitability index will equal 1.0.
Scenario analysis asks questions such as: A. How will changing the number of units sold affect the outcome of this project? B. What is the best outcome that should reasonably be expected? C. How much will a $1 increase in the variable cost per unit change the net present value? D. Will the net present value increase or decrease if the quantity sold increases by 100 units? E. How will the operating cash flow change if the depreciation method is changed?
B. What is the best outcome that should reasonably be expected?
The internal rate of return is the: A. discount rate that causes a project?s aftertax income to equal zero. B. discount rate that results in a zero net present value for the project. C. discount rate that results in a net present value equal to the project's initial cost. D. rate of return required by the project's investors. E. project's current market rate of return.
B. discount rate that results in a zero net present value for the project.
Sensitivity analysis: A. looks at the most reasonably optimistic and pessimistic results for a project. B. helps identify the variable within a project that presents the greatest forecasting risk. C. is used for projects that cannot be analyzed by scenario analysis because the cash flows are unconventional. D. is generally conducted prior to scenario analysis just to determine if the range of potential outcomes is acceptable. E. illustrates how an increase in operating cash flow caused by changing both the revenue and the costs simultaneously will change the net present value for a project.
B. helps identify the variable within a project that presents the greatest forecasting risk.
The ability to delay an investment: A. is commonly referred to as the best case scenario. B. is valuable provided there are conditions under which the investment will have a positive net present value. C. ensures that the investment will have an expected net present value that is positive. D. offsets the need to conduct sensitivity analysis. E. is referred to as the option to abandon.
B. is valuable provided there are conditions under which the investment will have a positive net present value.
The opportunities that a manager has to modify a project once it has started are called: A. sensitivity choices. B. managerial options. C. scenario adjustments. D. restructuring options. E. erosion control measures.
B. managerial options.
Ignoring the option to wait: A. may overestimate the internal rate of return on a project. B. may underestimate the net present value of a project. C. ignores the ability of a manager to increase output after a project has been implemented. D. is the same as ignoring all strategic options. E. ignores the value of discontinuing a project early.
B. may underestimate the net present value of a project.
Scenario analysis is best described as the determination of the: A. most likely outcome for a project. B. reasonable range of project outcomes. C. variable which has the greatest effect on a project's outcome. D. effect that a project's initial cost has on the project's net present value. E. change in a project's net present value given a stated change in projected sales.
B. reasonable range of project outcomes.
The modified internal rate of return is specifically designed to address the problems associated with: A. mutually exclusive projects. B. unconventional cash flows. C. long-term projects. D. negative net present values. E. crossover points.
B. unconventional cash flows.
Which one of the following methods of analysis ignores cash flows? A. Profitability index B. Payback C. Average accounting return D. Modified internal rate of return E. Internal rate of return
C. Average accounting return
Which one of the following methods of analysis is most similar to computing the return on assets (ROA)? A. Internal rate of return B. Profitability index C. Average accounting return D. Net present value E. Payback
C. Average accounting return
The managers of H.R Construction are considering remodeling plans for an old building the firm currently owns. The building was purchased 8 years ago for $689,000. Over the past 8 years, the firm rented out the building and used the rent to pay off the mortgage. The building is now owned free and clear and has a current market value of $898,000. The firm is considering remodeling the building into a conference centre and sandwich bar at an estimated cost of $1.7 million. The estimated present value of the future income from this centre is $2.9 million. Which one of the following defines the opportunity cost of the remodeling project? A. Initial cost of the building B. Cost of the remodeling C. Current market value of the building D. Initial cost of the building plus the remodeling costs E. Current market value of the building plus the remodeling costs
C. Current market value of the building
Nu Tek is comprised of four separate operating divisions. For this year, the firm has decided to allocate capital funds using a soft rationing approach. Which one of the following applies to this situation? A. Division managers will be limited to accepting a single new project each. B. Division managers are being given blanket approval to accept all positive net present value projects. C. Divisions managers will vie with each other for additional capital allocations. D. Division managers will not receive any funding for new projects but will be allowed to expand current operations. E. Division managers will not receive capital funding for any project.
C. Divisions managers will vie with each other for additional capital allocations.
Isabella is considering three mutually exclusive options for the additional space she just added to her specialty women's store. The cost of the expansion was $127,000. She can use this additional space to add a fabric and quilting section, add an exclusive gifts department, or expand into imported decorator items for the home. She estimates the present value of these options at $114,000 for fabric and quilting, $163,000 for exclusive gifts, and $138,000 for decorator items. Which option(s), if any, should Isabella accept? A. None of the options B. Fabric and quilting only C. Exclusive gifts only D. Exclusive gifts and decorator items only E. All three options
C. Exclusive gifts only
The Blackwell Group is unable to obtain financing for any new projects under any circumstances. Which term best applies to this situation? A. Contingency planning B. Soft rationing C. Hard rationing D. Sensitivity analysis E. Scenario analysis
C. Hard rationing
Which of the following are cash inflows from net working capital? I. increase in accounts payable II. increase in inventory III. decrease in accounts receivable IV. decrease in fixed assets A. II only B. III only C. I and III only D. III and IV only E. I, II, and III only
C. I and III only
Lake City Plastics currently produces plastic plates and silverware. The company is considering expanding its product offerings to include plastic serving trays. Which of the following are cash flows relevant to the new product? I. molds needed to form the serving trays II. projected increase in plate and silverware sales if the trays are produced III. a portion of the production manager's current annual salary of $75,000 IV. raw materials used in the production of the serving trays A. I and IV only B. III and IV only C. I, II, and IV only D. I, III, and IV only E. I, II, III, and IV
C. I, II, and IV only
Any changes to a firm's projected future cash flows that are caused by adding a new project are referred to as which one of the following? A. Eroded cash flows B. Deviated projections C. Incremental cash flows D. Directly impacted flows E. Assumed flows
C. Incremental cash flows
Based on the most recent survey information presented in your textbook, CFOs tend to use which two methods of investment analysis the most frequently? A. Payback and net present value B. Payback and internal rate of return C. Internal rate of return and net present value D. Net present value and profitability index E. Profitability index and internal rate of return
C. Internal rate of return and net present value
Which one of the following is an indicator that an investment is acceptable? Assume cash flows are conventional. A. Modified internal rate of return that is equal to zero B. Profitability index of zero C. Internal rate of return that exceeds the required return D. Payback period that exceeds the required period E. Negative average accounting return
C. Internal rate of return that exceeds the required return
Valley Forge and Metal purchased a truck five years ago for local deliveries. Which one of the following costs related to this truck is the best example of a sunk cost? Assume the truck has a usable life of eight years. A. New tires that will be purchased this winter B. Costs of repairs needed so the truck can pass inspection next month C. Money spent last month repairing a damaged front fender D. Engine tune-up that is scheduled for this afternoon E. Cost for a truck driver for the remainder of the truck's useful life
C. Money spent last month repairing a damaged front fender
Which one of the following can be defined as a benefit-cost ratio? A. Net present value B. Internal rate of return C. Profitability index D. Accounting rate of return E. Modified internal rate of return
C. Profitability index
Which one of the following statements is correct? A. A longer payback period is preferred over a shorter payback period. B. The payback rule states that you should accept a project if the payback period is less than one year. C. The payback period ignores the time value of money. 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.
C. The payback period ignores the time value of money.
Which one of the following statements is correct? Assume cash flows are conventional. A. If the IRR exceeds the required return, the profitability index will be less than 1.0. B. The profitability index will be greater than 1.0 when the net present value is negative. C. When the internal rate of return is greater than the required return, the net present value is positive. D. Projects with conventional cash flows have multiple internal rates of return. E. If two projects are mutually exclusive, you should select the project with the shortest payback period.
C. When the internal rate of return is greater than the required return, the net present value is positive.
The net present value of an investment represents the difference between the investment's: A. cash inflows and outflows. B. cost and its net profit. C. cost and its market value. D. cash flows and its profits. E. assets and liabilities.
C. cost and its market value.
Scenario analysis: A. determines the impact a $1 change in sales has on the internal rate of return. B. determines which variable has the greatest impact on a project's net present value. C. helps determine the reasonable range of expectations for a project's anticipated outcome. D. evaluates a project's net present value while sensitivity analysis evaluates a project's internal rate of return. E. determines the absolute worst and absolute best outcome that could ever occur.
C. helps determine the reasonable range of expectations for a project's anticipated outcome.
The possibility that more than one discount rate can cause the net present value of an investment to equal zero is referred to as: A. duplication. B. the net present value profile. C. multiple rates of return. D. the AAR problem. E. the dual dilemma
C. multiple rates of return.
Firm A uses straight-line depreciation. Firm B uses MACRS depreciation. Both firms bought $60,000 worth of equipment last year. Both firms are in the 35 percent tax bracket. The operating cash flows for each firm are identical except for the depreciation effects. Given this, you know the: A. depreciation expense for Firm A will be greater than Firm B's expense every year. B. equipment has a higher value on Firm B's books than on Firm A's at the end of year two. C. operating cash flow of Firm A is less than that of Firm B for year two. D. market value of Firm A's equipment is greater than the market value of Firm B's equipment. E. market value of Firm B's equipment is greater than the market value of Firm A's equipment.
C. operating cash flow of Firm A is less than that of Firm B for year two.
Which one of the following will increase the operating cash flow as computed using the tax shield approach? A. Decrease in depreciation B. Decrease in sales C. Increase in variable costs D. Decrease in fixed costs E. Increase in the tax rate
D. Decrease in fixed costs
The Shoe Box is considering adding a new line of winter footwear to its product line-up. Which of the following are relevant cash flows for this project? I. decreased revenue from products currently being offered if this new footwear is added to the lineup II. revenue from the new line of footwear III. money spent to date looking for a new product line to add to the store's offerings IV. cost of new counters to display the new line of footwear A. I and IV only B. II and IV only C. II and III only D. I, II, and IV only E. II, III, and IV only
D. I, II, and IV only
Which one of the following statements is correct? A. The net present value is a measure of profits expressed in today's dollars. B. The net present value is positive when the required return exceeds the internal rate of return. C. If the initial cost of a project is increased, the net present value of that project will also increase. D. If the internal rate of return equals the required return, the net present value will equal zero. E. Net present value is equal to an investment's cash inflows discounted to today's dollars.
D. If the internal rate of return equals the required return, the net present value will equal zero.
Mary has just been asked to analyze an investment to determine if it is acceptable. Unfortunately, she is not being given sufficient time to analyze the project using various methods. She must select one method of analysis and provide an answer based solely on that method. Which method do you suggest she use in this situation? A. Internal rate of return B. Payback C. Average accounting rate of return D. Net present value E. Profitability index
D. Net present value
Which one of the following terms refers to the best option that was foregone when a particular investment is selected? A. Side effect B. Erosion C. Sunk cost D. Opportunity cost E. Marginal cost
D. Opportunity cost
Which one of the following methods of analysis ignores the time value of money? A. Net present value B. Internal rate of return C. Discounted cash flow analysis D. Payback E. Profitability index
D. Payback
You were recently hired by a firm as a project analyst. The owner of the firm is unfamiliar with financial analysis and wants to know only what the expected dollar return is per dollar spent on a given project. Which financial method of analysis will provide the information that the owner requests? A. Internal rate of return B. Modified internal rate of return C. Net present value D. Profitability index E. Payback
D. Profitability index
Which one of the following indicates that a project should be rejected? Assume the cash flows are normal, i.e., the initial cash flow is negative. A. Average accounting return that exceeds the requirement B. Payback period that is shorter than the requirement period C. Positive net present value D. Profitability index less than 1.0 E. Internal rate of return that exceeds the required return
D. Profitability index less than 1.0
The Corner Market has decided to expand its retail store by building on a vacant lot it currently owns. This lot was purchased four years ago at a cost of $299,000, which the firm paid in cash. To date, the firm has spent another $38,000 on land improvements, all of which was also paid in cash. Today, the lot has a market value of $329,000. What value should be included in the analysis of the expansion project for the cost of the land? A. The sum of the cash paid to date for both the lot and the improvements B. The original purchase price only C. The current market value of the land plus the cash paid for the improvements D. The current market value of the land E. Zero because the land and the improvements were purchased with cash
D. The current market value of the land
The internal rate of return is unreliable as an indicator of whether or not an investment should be accepted given which one of the following? A. One of the time periods within the investment period has a cash flow equal to zero. B. The initial cash flow is negative. C. The investment has cash inflows that occur after the required payback period. D. The investment is mutually exclusive with another investment of a different size. E. The cash flows are conventional.
D. The investment is mutually exclusive with another investment of a different size.
Contingency planning focuses on the: A. opportunity costs involved with a project. B. sunk costs related to a project. C. economic effects on a project's profitability. D. managerial options implicit in a project. E. optional capital requirements of a project.
D. managerial options implicit in a project.
Lakeside Rides is adding a new roller coaster to its amusement park. The firm expects this addition to increase its overall ticket sales and increase attendance at its park. In particular, the firm expects to sell more tickets for its current roller coaster and experience extremely high demand for its new coaster. Sales for its boat ride are expected to decline but food and beverage sales are expected to increase significantly. Which of the following are considered side effects associated with the new roller coaster? I. ticket sales for the new roller coaster II. change in ticket sales for the existing coaster III. change in ticket sales for the boat ride IV. change in food and beverage sales A. I only B. III only C. II and III only D. I, II, and III only E. II, III, and IV only
E. II, III, and IV only
In which one of the following situations would the payback method be the preferred method of analysis? A. A long-term capital-intensive project B. Two mutually exclusive projects C. A proposed expansion of a firm's current operations D. Different-sized projects E. Investment funds available only for a limited period of time
E. Investment funds available only for a limited period of time
Which one of the following methods of analysis has the greatest bias toward short-term projects? A. Net present value B. Internal rate of return C. Average accounting return D. Profitability index E. Payback
E. Payback
Which one of the following indicators offers the best assurance that a project will produce value for its owners? A. PI equal to zero B. Negative rate of return C. Positive AAR D. Positive IRR E. Positive NPV
E. Positive NPV
Which one of the following principles refers to the assumption that a project will be evaluated based on its incremental cash flows? A. Forecast assumption principle B. Base assumption principle C. Fallacy principle D. Erosion principle E. Stand-alone principle
E. Stand-alone principle
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? A. Fixed B. Forgotten C. Variable D. Opportunity E. Sunk
E. Sunk
A proposed project will increase a firm's accounts payables. This increase is generally: A. treated as an erosion cost. B. treated as an opportunity cost. C. a sunk cost and should be ignored. D. a cash outflow at time zero and a cash inflow at the end of the project. E. a cash inflow at time zero and a cash outflow at the end of the project.
E. a cash inflow at time zero and a cash outflow at the end of the project.
The reinvestment approach to the modified internal rate of return: A. individually discounts each separate cash flow back to the present. B. reinvests all the cash flows, including the initial cash flow, to the end of the project. C. discounts all negative cash flows to the present and compounds all positive cash flows to the end of the project. D. discounts all negative cash flows back to the present and combines them with the initial cost. E. compounds all of the cash flows, except for the initial cash flow, to the end of the project.
E. compounds all of the cash flows, except for the initial cash flow, to the end of the project.
Net present value involves discounting an investment's: A. assets. B. future profits. C. liabilities. D. costs. E. future cash flows.
E. future cash flows.
If a project with conventional cash flows has a profitability index of 1.0, the project will: A. never pay back. B. have a negative net present value. C. have a negative internal rate of return. D. produce more cash inflows than outflows in today's dollars. E. have an internal rate of return that equals the required return.
E. have an internal rate of return that equals the required return.
The operating cash flows of a project: A. are unaffected by the depreciation method selected. B. are equal to the project's total projected net income. C. decrease when net working capital increases. D. include any aftertax salvage values. E. include erosion effects.
E. include erosion effects.
The tax shield approach to computing the operating cash flow, given a tax-paying firm: A. ignores both interest expense and taxes. B. separates cash inflows from cash outflows. C. considers the changes in net working capital resulting from a new project. D. is based on the fact that depreciation does not affect the operating cash flows. E. recognizes that depreciation creates a cash inflow.
E. recognizes that depreciation creates a cash inflow.
The payback period is the length of time it takes an investment to generate sufficient cash flows to enable the project to: A. produce a positive annual cash flow. B. produce a positive cash flow from assets. C. offset its fixed expenses. D. offset its total expenses. E. recoup its initial cost.
E. recoup its initial cost.
