FIN exam 3

______________ would usually represent a net cash inflow at the beginning or during the life of a project and an equal net cash outflow upon completion of the project a. an increase in payables b. an increase in inventory c. an increase in receivables d. an increase in fixed assets e. an increase in receivables coupled with an identical increase in payables

a

it is important to identify and use only incremental cash flows in capital investment decisions a. because they are the simplest to identify b. only when the stand alone principle fails to hold c. because ultimately it is the change in a firm's overall future cash flows that matter d. in order to accommodate unforeseen changes that might occur e. whenever sunk costs are involved

c

the incremental cash flows related to a capital investment project are easiest to identify when A. sunk cost exist b. opportunity costs are significant c. the stand alone principle holds d. erosion of cash flow is expected to occur e. the project has no impact on total fixed assets

c

you are to calculate operating cash flows using the following information: sales, net income, depreciation, and net initial investment. if interest expense is zero, it would likely be easiest for you to use the _________ approach a. conventional b. tax shield c. bottom up d. top down e. depreciation first

c

by using the tax shield approach for computing operating cash flows we can a. obtain more accurate results than with the customary methods b. more readily verify what cash flows would be without interest expenses c. more readily identify the tax shield from interest deductions d. more readily identify the tax benefits of depreciation e. start with the bottom line, net income, and work backwards

d

the government has been trying to decide whether or not to purchase any of the new advanced missiles it has developed. one of the arguments in favor of purchasing the missiles is that so much money has been spent on their development that it would be a waste of money not buy any. what is the major problem with this argument? A. it ignores the opportunity cost of the money that has been spent b. it includes opportunity costs in decision c. it includes changes in net working capital d. it includes sunk costs in the decision e. it includes financing costs in the decision

d

which of the following is not correct? a. NPV is one of the two or three most important concepts in finance b. NPV is always just the difference between the market value of an asset or project and its cost c. the financial manager acts in the shareholder's best interests by identifying and taking positve NPV projects D. NPV's van normally be directly observed in the market e. Investment criteria other than NPV provide additional information about whether or not a project truly has a positive NPV

d

a taxable gain occurs when an asset is sold for more than its book value. for capital budgeting purposes, the taxes on the sale______. A. are treated as a reduction in cash and added to operating cash flow b. are treated as a non cash and deducted from the book value of the asset C. are treated as a reduction in cash and deducted from the book value of the asset d. are treated as a reduction in cash and deducted from the taxable gain e. are treated as a reduction in cash and are deducted from the sale price

e

when you set NPV equal to zero in calculating a bid price you a. going to earn net income of zero on the project b. appropriately including opportunity costs in your analysis c. certain to be lowest bidder since, if any firm bids lower the will be bidding based on them taking a negative NPV project, which they shouldn't do d. assured of earning your firm's highest possible IRR e. finding the price at which you expect to create zero wealth for your stockholders

e

which of the following projects would increase net working capital the most a. making a purchase of land for a new baseball manufacturing plant b. decreasing the amount of sales your firm makes on credit c. decreasing the number of product lines your firm carries d. converting a manufacturing process so that you produce goods only after a customer order has been received e. using long term bank credit to reduce payables

e

for projects with conventional cash flows and for positve discount rates, the payback period will be shorter than the discounted payback period

false

if a project has conventional cash flows, it may also have more than one IRR

false

in investment funds are limited and the projects under consideration are independent from one another, the IRR should be used to rank projects to determine which ones should be accepted.

false

the only advantage of the average accounting return is that the information needed to compute it will usually be available

false

very few large U.S. firms use the payback rule when making capital budgeting decisions

false

the essence of _______________ is determining whether a proposed investment or project will generate wealth for the owners of the firm once it is in place

strategic asset allocation

An investment should be accepted if the net present value is positive

true

an investment is acceptable if the IRR exceeds the required return

true

both the IRR and the profitability index decision rules may lead to incorrect decisions in comparisons of mutually exclusive investments

true