Principles of Finance Exam 3

A decrease in which one of the following will increase the accounting break-even quantity? Assume straight-line depreciation is used and ignore taxes. a. Sales price per unit b. Management salaries c. Variable labor costs per unit d. Initial fixed asset purchases e. Fixed costs

a. Sales price per unit

Which one of the following is the relationship between the percentage change in operating cash flow and the percentage change in quantity sold? a. Degree of sensitivity b. Degree of operating leverage c. Accounting break-even d. Cash break-even e. Contribution margin

b. Degree of operating leverage

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? a. Depreciation tax shield b. Tax due on the current salvage value of that asset c. Current year's operating cash flow d. Change in net working capital e. MACRS depreciation for the current year

b. Tax due on the current salvage value of that asset

A project has a discounted payback period that is equal to the required payback period. Given this, the project: a. will not be acceptable under the payback rule. b. must have a profitability index that is equal to or greater than 1.0. c. must have a zero net present value. d. must have an internal rate of return equal to the required return. e. will still be acceptable if the discount rate is increased.

b. must have a profitability index that is equal to or greater than 1.0.

Which two methods of project analysis are the most biased towards short-term projects? a. Net present value and internal rate of return b. Internal rate of return and profitability index c. Payback and discounted payback d. Net present value and discounted payback e. Discounted payback and profitability index

c. Payback and discounted payback

Frank's is a furniture store that is considering adding appliances to its offerings. Which one of the following is the best example of an incremental cash flow related to the appliances? a. Moving furniture to provide floor space for the appliances b. Paying the rent for the store c. Selling furniture to appliance customers d. Having the current store manager oversee appliance sales e. Using the store's billing system for appliance sales

c. Selling furniture to appliance customers

Why is payback often used as the sole method of analyzing a proposed small project? a. Payback considers the time value of money. b. All relevant cash flows are included in the payback analysis. c. The benefits of payback analysis usually outweigh the costs of the analysis. d. Payback is the most desirable of the various financial methods of analysis. e. Payback is focused on the long-term impact of a project.

c. The benefits of payback analysis usually outweigh the costs of the analysis.

Western Beef Exporters is considering a project that has an NPV of $32,600, an IRR of 15.1 percent, and a payback period of 3.2 years. The required return is 14.5 percent and the required payback period is 3.0 years. Which one of the following statements correctly applies to this project? a. The net present value indicates accept while the internal rate of return indicates reject. b. Payback indicates acceptance. c. The payback decision rule could override the accept decision indicated by the net present value. d. The payback rule will automatically be ignored since both the net present value and the internal rate of return indicate an accept decision. e. The net present value decision rule is the only rule that matters when making the final decision.

c. The payback decision rule could override the accept decision indicated by the net present value.

A project's average net income divided by its average book value is referred to as the project's average: a. net present value. b. internal rate of return. c. accounting return. d. profitability index. e. payback period.

c. accounting return.

The operating cash flow for a project should exclude which one of the following? a. Taxes b. Variable costs c. Fixed costs d. Interest expense e. Depreciation tax shield

d. Interest expense

Which one of the following should not be included in the analysis of a new product? a. Increase in accounts payable for inventory purchases of the new product b. Reduction in sales for a current product once the new product is introduced c. Market value of a machine owned by the firm which will be used to produce the new product d. Money already spent for research and development of the new product e. Increase in accounts receivable needed to finance sales of the new product

d. Money already spent for research and development of the new product

Which of the following variables will be forecast at their highest expected level under a best-case scenario? a. Fixed costs and units value b. Variable costs and sales price c. Fixed costs and sales price d. Salvage value and units sold e. Initial cost and variable costs

d. Salvage value and units sold

The key means of defending against forecasting risk is to: a. rely primarily on the net present value method of analysis. b. increase the discount rate assigned to a project. c. shorten the life of a project. d. identify sources of value within a project. e. ignore any potential salvage value that might be realized.

d. identify sources of value within a project.

Which one of these combinations must increase the contribution margin? a. Increasing both the sales price and the variable cost per unit b. Increasing the sales quantity and increasing the variable cost per unit c. Decreasing the sales price and increasing the sales quantity d. Decreasing both fixed costs and depreciation expense e. Increasing the sales price and decreasing the variable cost per unit

e. Increasing the sales price and decreasing the variable cost per unit

Which one of the following methods of analysis provides the best information on the relationship of the benefit of project relative to the cost? a. Net present value b. Payback c. Internal rate of return d. Average accounting return e. Profitability index

e. Profitability index

You are considering the purchase of a new machine. Your analysis includes the evaluation of two machines that have differing initial and ongoing costs and differing lives. Whichever machine is purchased will be replaced at the end of its useful life. You should select the machine that has the: a. longest life. b. highest annual operating cost. c. lowest annual operating cost. d. highest equivalent annual cost. e. lowest equivalent annual cost.

e. lowest equivalent annual cost.