Corporate Finance
The degree of operating leverage is equal to
1 +FC/OCF
Which one of the following statements is correct?
A project can create a positive operating cash flow without affecting sales.
Which one of the following statements is correct in relation to independent projects?
A project with investing type cash flows is acceptable if its internal rate of return exceeds the required return.
Which one of the following is the depreciation method which allows accelerated write-offs of property under various lifetime classifications?
ACRS
In actual practice, managers frequently
Average accounting return method AND internal rate of return AND net present value
Which one of the following correctly applies to the average accounting rate of return?
It can be compared to return on assets ratio.
Why is payback often used as the sole method of analyzing a proposed small project?
It is the only method where the benefits of the analysis outweigh the costs of that analysis.
If a firm accepts Project A it will not be feasible to also accept Project B because both projects would require the simultaneous and exclusive use of the same piece of machinery.
Mutually exclusive
Which one of the following is a correct method for computing the operating cash flow of a project assuming that the interest expense is equal to zero?
NI + D
Which one of the following statements related to payback and discounted payback is correct?
Payback is used more frequently even though discounted payback is a better method.
Samuelson Electronics has a required payback period of three years for all of its projects... Which projects should be accepted based on the payback decision rle?
Project A only
Allof the following are related to a proposed project. Which of these should be included in the case flow at time zero?
Purchase of $1,400 of parts inventory needed to support the project AND $6,500 of equipment needed to commence the project
Which one of the following statements related to the internal rate of return (IRR) is correct?
The IRR is equal to the required return when the net present value is equal to zero.
A project has a required payback period of three years. Which one of the following statements is correct concerning the payback analysis of this project?
The cash flow in year two is valued just as highly as the cash flow in year one.
The bid price always assumes which one of the following?
The net present value of the project is zero.
Dexte Smith co. is replacing a machine simply because it has worn out... which of the following statements is correct?
The new machine will generate positive operating cash flows, at least in the first few years of its life.
Western Beef Exporters... Which one of the following statements correctly applies to this project?
The payback decision rule could override the accept decision indicated by the net present value.
Which one of the following statements would generally be considered as accurate given independent projects with conventional cash flows?
The payback decision rule could override the net present value decision rule should cash availability be limited.
a project has a discounted payback period that is equal to the required payback period. Given this which of the following statements must be true?
The projec tmust also be acceptable under the payback rule AND The project must have a profitability index that is equal to or greater than 1
Which of the following characteristics relate to the cash break-even point for a given project?
The project never pays back AND the NPV is negative and equal to the initial cash outlay
a project has a net present value of zero. Which one of the following best describes this project?
The project's cash inflows equal its cash outflows in current dollar terms.
Danielle's is a furniture store that is considering adding appliances to its offerings...
Utilizing the cred offered by a supplier to purchase the appliance inventory AND benefiting from increased furniture sales to appliance customers AND purchasing parts for inventory to handle any appliance repairs that might be necessary
Douglass Interiors is consideringtwo mutually exclusive projects and have determined that the crossover rates for these projects is 11.7 percent.
You cannot determine which project should be accepted given the information provided.
a project with financing type cash flows is typified by a project that has which one of the following characteristics?
a cash inflow at time zero
Which one of the following statements is correct concerning bid prices?
a firm can submit a bid that is higher than the computed bid price and still break even.
When the present value of the cash inflows exceeds the initial cost of a project, then the project should be:
accepted because the profitability index is greater than 1.
A project's average net income divided by its average book value is referred to as the project's average:
accounting return
Forecasting risk emphasizes the point that the correctness of any decision to accept or reject a project is highly dependent upon the:
accuracy of the projected cash flows.
The depreciation tax shield is best defined as the:
amount of tax that is saved because of the depreciation expense.
Which one of the following would make a project unacceptable?
an equivalent annual cost that exceeds that of an alternative project
Which one of the following increases the net present value of a project?
an increase in the aftertax salvage value of the fixed assets
Which one of the following will increase a bid price?
an increase in the required rate of return
Roger's Meat Market is considering two independent projects... This result most likely does which on of the following?
assumes the firm has sufficient funds to undertake both projects
Pro forma statements for a proposed project should:
be compiled on a stand-alone basis AND include all the incremental cash flows related to the project AND generally exclude interest expense AND include all project-related fixed asset acquisitions and disposals
Mutually exclusive projects are best defined as competing projects which:
both require the total use of the same limited resource.
Changes in the net working capital requirements
can affect the cash flows of a project every year of the project's life.
the operating cash flow of a cost cutting project:
can be positive even though there are no sales
Net working capital:
can create either a cash inflow or a cash outflow at time zero of a project
When the operating cash flow of a project is equal to zero, the project is operating at the:
cash break-even point.
Rossiter Restaurants is analyzing a project that requires $180,000 of fixed assets.... how is the $45,000 salvage vale handled when computing the net present value of the project?
cash inflow in the final year of the project
Tedder Mining has analyzed a proposed expansion project and determined that the internal rate of return is lower than the firms desires. Which one of the following changes to project would be most expected to increase the project's internal rate of return?
condensing the firm's cash inflows into fewer years without lowering the total amount of those inflows
Which one of the following is a project cash inflow?
decrease in accounts receivable
The net book value of equipment will:
decrease slower under straight-line depreciation that under MACRS.
Which one of the following is the relationship between the percentage change in operating cash flow and the percentage change in quantity sold?
degree of operating leverage
Increasing which one of the following will increase the operating cash flow assuming that the bottom-up approach is used to compute the operating cash flow?
depreciation expense
The internal rate of return is defined as the:
discount rate which causes the net present value of a project to equal zero
Which one of the following methods of project analysis is defined as computing the value of a project based upon the present value of the project's anticipated cash flows?
discounted cash flow valuation
The length of time a firm must wait to recoup, in present value terms, the money it has in invested in a project is referred to as the:
discounted payback period.
Which one of the following is an advantage of the average accounting return method of analysis?
easy availability of information needed for the computation
Dan is comparing three machines to determine which one to purchase...
equivalent annual cost
The annual annuity stream of payments that has the same present value as a project's costs is referred to as which one of the following?
equivalent annual cost
decreasing which one of the following will increase the acceptability of a project
equivalent annual cost
Which of the following are considered weaknesses in the average accounting return method of project analysis?
exclusion of time value of money considerations AND need of a cutoff rate AND based on accounting values
Which one of the following is defined as the sales level that corresponds to a zero NPV?
financial break-even
Which one of the following represents the level of output where a project produces a rate of return just equal to its requirement?
financial break-even
Which one of the following best describes pro forma financial statements?
financial statements showing projected values for future tie periods
There are two distinct discount rates at which a particular project will have a zero net present value. In this situation, the project is said to:
have multiple rates of return
Kelley's Baskets makes handmade baskets for distribution to upscale retail outlets...Which one of the following is the best example of an incremental operating cash flow related to the wreath project?
hiring additional employees to handle the increase workload should the accept the wreath project
Graphing the crossover point helps explain:
how decisions concerning mutually exclusive projects are derived.
Scenario analysis is best suited to accomplishing which one of the following when analyzing a project?
identifying the potential range of reasonable outcomes
The top-down approach to computing the operating cash flow
ignores noncash expenses
Forecasting risk is defined as the possibly that:
incorrect decisions will be made due to erroneous cash flow projections
Which one of the following will decrease the net present value of a project?
increasing the project's initial cost at time zero
The stand-aloe principle advocates that project analysis should should be based solely on which one of the following cost?
incremental
The difference between a firm's future cash flows if it accepts a project and the firm's future cash flow if it does not accept the project is referred to as the project's:
incremental cash flows
The operating cash flow for a project should exclude which one of the following?
interest expense
Which two methods of project analysis were the most widely used by CEO's as of 1999?
internal rate of return and net present value
The internal rate of return:
is easy to understand.
Webster Iron Works started a new project last year. As it turns out,the project has been operating at its...Given this, you know that the project:
is operating at a higher level than if it were operating at its cash break-even level
Net present value:
is the best method of analyzing mutually exculsive projects
Which of the following are advantages of the payback method of project analysis?
liquidity bias AND ease of use
Which one of the following is a project acceptance indicator given an independent project with investing type cash flows?
modified internal rate of return that exceeds the required return
A project has an initial cost of $27,400 and a market value of $32,600. What is the difference between these two value called?
net present value
Southern Chicken is considering two projects.... When trying to decide which project to accept,the firm should rely most heavily on which one of the following methods?
net present value
The profitability index is most closely related to which one of the following?
net present value
Which one of the following methods determines the amount of change a proposed project will have on the value of a firm?
net present value
The option that is foregone so that an asset can be utilized by a specific project is referred to as which one of the following?
opportunity cost
Kristi wants to start training her most junior assistant....Which method is Kristi most apt to ask Amy to use in making her initial decisions?
payback
Which two methods of project analysis are the most biased towards short-term projects?
payback and discounted payback
The length of time a firm must wait to recoup the it has invested in a project is called the:
payback period
Which of the following are definite indicators of an accept decision for an independent project with conventional cash flows?
positive net present value AND internal rate of return greater than the required rate
The present value of an investment's future cash flows divided by the initial cost of the investment is called the
profitability idex
Which one of the following methods of analysis provides the best information on the cost-benefit aspects of a project?
profitability index
The final decision on one of two mutually exclusive projects to accept ultimately depends upon which one of the following?
required rate of return
The equivalent annual cost considers which of the following?
required rate of return AND operating cost AND need for replacement AND economic life
Three years ago,Knox Glass purchased a machine for a 3-year project...Which one of the following correctly defines the aftertax salvage value of that machine?
sale price + (book value - sale price) x T
Which one of the following best illustrates erosion as it relates to a hot dog stand located on the beach?
selling fewer hot dogs because hamburgers were added to the menu
Brubaker & Goss has received requests for capital investment funds for next year from each of its five devisions....
soft rationing
Applying the discounted payback decision rule to all projects may cause
some positive net present value projects to be rejected.
The fact that a proposed project is analyzed based on the project's incremental cash flow is the assumption behind which one of the following principles?
stand-alone principle
Which one of the following will best reduce the risk of a project by lowering the degree of operating leverage?
subcontracting portions of the project rather than purchasing new equipment to do all the work in-house
G&L Plastic Molders spent $1,200 last week repairing a machine...
sunk
Which one of the following cost was incurred in the past and cannot be recouped?
sunk
The current book value of a fixed asset that was purchased two years ago is used in the computation of which one of the following?
tax due on the salvage value of that asset
The internal rate of return is;
tedious to compute without the use of either a financial calculator or a computer.
Which one of the following best describes the concept of erosion?
the cash flows of a new project that come at the expense of a firm's existing cash flows
The bottom-up approach to computing the operating cash flow applies only when:
the interest expense is equal to zero.
Which one of the following will be used in the computation of the best-case analysis of a proposed project?
the lowest variable cost per unit that can reasonably be expected
The bid price is:
the minimum price you should charge if you want to earn a target return on investment.
Which of the following statements are identified with financial break-even point?
the present value of the cash inflows exactly offsets the initial cash outflow AND the NPV is zero AND the discounted payback period equals the life of the project
If a project has a net present value equal to zero, then:
the project earns a return exactly equal to the discount rate
Sensitivity analysis is based :on
varying a single variable and measuring the resulting change in the NPV of a project.
Which one of the following is the best example of two mutually exclusive projects?
waiting until a machine finishes molding A before being able to mold B
The equivalant annual cost method is useful in determining
which one of two machines should be purchased when the machines are mutually exclusive, have different machine lives, and will be replaced once they are worn out.
Simulation analysis is based on assigning a ________ and analyzing the results.
wide range of values to multiple variables simultaneously
a company that utilizes the MACRS system of depreciation
will have a greater taxs shield in year two of a project than it would have if the firm had opted for straight-line depreciation
When you assign the lowest anticipated sales price and the highest anticipated cost to a project, you are analyzing the project under the condition known as:
worst case scenario analysis.