Last Finance Test Before Final

Which of the statements below is TRUE? A) The increase in working capital accounts necessary to support a project also provides for cost increases at the end of the project. B) Decreases in accounts payable constitute a source of cash flow because you are using your suppliers to help finance your business operations. C) Decreases in accounts receivables constitute a use of cash flow because you are helping your customers finance their purchases. D) An increase in working capital can be brought about by an increase in inventory.

An increase in working capital can be brought about by an increase in inventory.

________ is at the heart of corporate finance, because it is concerned with making the best choices about project selection

Capital Budgeting

Which of the statements below is FALSE? A) Despite all of the advantages of using the NPV model, it is inconsistent with the concept of the time-value-of-money. B) By discounting all future cash flows to the present, adding up all inflows, and subtracting all outflows, we are determining the net present value of the project. C) The greater the NPV of a project, the greater the "bag of money" for doing the project, and more money is better. If a company is short of capital, it would choose those projects that provide the largest "bag of money." D) The net present value decision model is an economically sound model when comparing different projects across a wide variety of products, services, and activities under capital constraint.

Despite all of the advantages of using the NPV model, it is inconsistent with the concept of the time-value-of-money.

Which of the following in NOT a potential problem suffered by the IRR method of capital budgeting?

Disagreement with the NPV as to whether a project with ordinary cash flows is profitable or not

If an asset's ________ is greater than its current book value, a gain on disposal occurs.

Disposal Value

Operating Cash Flow (OCF) is equal to what?

EBIT + Depreciation - Taxes

The advantage of MACRS over straight-line depreciation is that you can write off more of your capital costs in the ________ years.

Earlier

To be considered acceptable, a project must have an NPV greater than 1.0. (T or F)

False

Which is NOT a step in the estimation of after-tax cash flow at disposal?

If book value is less than selling price: Selling Price + Tax Credit on Loss.

________ cash flow is the increase in cash generated by a new project above the current cash flow without the new project.

Incremental

The advantage of ________ over ________ depreciation is that you can write off more of your capital costs in the earlier years.

MACRS; straight-line depreciation

The ________ model is usually considered the best of the capital budgeting decision-making models.

Net Present Value (NPV)

________ involve(s) a cash flow that never occurs, but we need to add it as a cost or outflow of a new project.

Opportunity Costs

The ________ method is simple and fast but economically unsound as it ignores all cash flow after the cutoff date and ignores the time-value of money.

Payback Period

________ is a modification of NPV to produce the ratio of the present value of the benefits (future cash inflow) to the present value of the costs (initial investment).

Profitability Index (PI)

Which method is designed to give the dollar amount of return for every $1.00 invested in the project in terms of current dollars?

Profitability Index Method

________ are an accounting measure of performance during a specific period of time, while ________ is the actual inflow or outflow of money.

Profits; cash flow

________ of a project are those that have already been incurred and cannot be reversed.

Sunk costs

Which of the statements below describes the IRR decision criterion?

The decision criterion is to accept a project if the IRR exceeds the hurdle rate or required return rate.

Which of the statements below is FALSE? A) If the PI is greater than one, the benefits exceed the costs. B) The profitability index (PI) decision criterion states: if PI < 1.0, reject the project. C) The profitability index (PI) decision criterion states: if PI > 1.0, accept the project. D) The profitability index (PI) method multiplies the Present Value of Benefits by Present Value of Costs.

The profitability index (PI) method multiplies the Present Value of Benefits by Present Value of Costs.

The IRR decision criterion is to accept a project if the IRR exceeds the desired or required return rate and to reject the project if the IRR is less than the desired or required rate of return. (T or F)

True

Project A has an NPV of $20,000 and a PI of 1.2. Project B has an NPV of $10,000 and a PI of 1.3. Both projects have equal lives. What should the best decision if we are NOT concerned with capital rationing (that is, we are NOT concerned with being short of funds)?

We should accept both projects

Which of the below statements is FALSE? A) Erosion can provide cost savings. B) Increases in working capital accounts necessary to support a project add upfront costs, but also provide for cost reductions at the end of the project. C) A synergy gain occurs when a new product can be introduced that complements another current product so that sales for this current product increases. D) Whenever a new product competes against a company's already existing products and reduces the sales of other products, opportunity costs occur.

Whenever a new product competes against a company's already existing products and reduces the sales of other products, opportunity costs occur.

At the end of a project's life, we will recover any initial changes in ________ from the beginning of the project.

Working Capital

To project the appropriate anticipated cash flow for a project, we must put all cash flow knowledge together. This includes ________ of the incremental cash flow.

both the amount and timing

If an asset's disposal value is less than its ________, a loss on disposal occurs.

current book value

Whenever a new product competes against a company's already existing products and reduces the sales of those products, ________ occur.

erosion costs

A loss on disposal is recognized when the selling price of the asset is ________ the book value.

less than

The ________ method of capital budgeting is a ratio of the present value of cash inflows divided by the initial investment.

profitability index

The net present value of an investment is ________.

the present value of all benefits (cash inflows) minus the present value of all costs (cash outflows) of the project

The NPV profile of a project is

the project's NPVs at different discount rates.