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Fundamentals of Corporate Finance, 4/c/e

Fundamentals of Corporate Finance, 4/e

Stephen A. Ross, Massachusetts Institute of Technology
Randolph W. Westerfield, University of Southern California
Bradford D. Jordan, University of Kentucky
Gordon S. Roberts, York University

Making Capital Investment Decisions

Quick Quiz 1

After taking this quiz, click 'Submit Answers' for graded results. You'll also have the option of emailing the results to your instructor and/or yourself.


1	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 benefits of depreciation.
		D)	More readily identify the tax benefits of debt financing.
		E)	Start with the bottom line, net income, and work backwards.


2	Which of the following would likely NOT cause erosion? I. A gas station owner expands floor space to make room for a convenience store. II. You begin selling coffee in new, small-sized pouches alongside your regular-sized coffee cans. III. You build a Taco Bell just down the street from your McDonalds franchise.
		A)	III only
		B)	I and II only
		C)	I only
		D)	I and III only
		E)	II and III only


3	When considering mutually exclusive investment projects with different lives that will be replaced once they terminate, it is best to evaluate them using __________.
		A)	the equivalent annual cost rule
		B)	the profitability index rule
		C)	the discounted payback rule
		D)	the internal rate of return rule
		E)	the net present value rule


4	The EAC method for evaluating projects applies when which of the following project characteristics exist? I. The projects are mutually exclusive. II. The projects have different economic lives. III. The projects will be replaced more or less indefinitely.
		A)	I, II, and III
		B)	I and II only
		C)	I and III only
		D)	II and III only
		E)	III only


5	You are advising a friend who is attempting to decide whether or not to drop one of the courses they are currently enrolled in. If they drop, they will forfeit the money spent on tuition. Which of the following regarding the drop decision is consistent with capital budgeting principles? I. Remaining in the class means you must give up your part-time job. II. The tuition cost for the class was outrageous, $1,000 per credit hour. III. If you drop the class, you can sell the textbook now for $30 at the bookstore.
		A)	I only
		B)	I and III only
		C)	I and II only
		D)	II and III only
		E)	I, II, and III


6	Which of the following methods for calculating project operating cash flow do (does) NOT require you to add back noncash deductions such as depreciation? I. Bottom-up approach II. Top-down approach III. Tax-shield approach
		A)	I only
		B)	III only
		C)	II only
		D)	II and III only
		E)	I, II, and III


7	Your company may introduce a new line of tennis shoes. You have been given the following projections: sales = 35,000 units @ $40 per unit; variable costs = $25 per unit; fixed costs = $125,000 per year; initial investment = $1,000,000; interest expense = $50,000 per year; project life = 10 years. What is the net income for this project if the corporate tax rate is 34%? You may assume straight-line depreciation and a discount rate of 12%.
		A)	$119,000
		B)	$264,000
		C)	$198,000
		D)	$165,000
		E)	$297,000


8	Given the following information and assuming straight-line depreciation to zero, what is the NPV of this project? Initial investment = $400,000; life = 5 years; cost savings = $150,000 per year; salvage value = $30,000 in year 5; tax rate = 34%; discount rate = 14%.
		A)	-$149,841
		B)	-$33,117
		C)	$43,538
		D)	$19,800
		E)	$0


9	Given the following information and assuming straight-line depreciation to zero, what is the IRR of this project? Initial investment = $400,000; life = 4 years; cost savings = $125,000 per year; salvage value = $20,000 in year 4; tax rate = 34%; discount rate = 12%.
		A)	6.25%
		B)	10.24%
		C)	8.15%
		D)	9.43%
		E)	7.50%


10	Given the following information and assuming straight-line depreciation to zero, what is the profitability index for this project? Initial investment = $500,000; life = 5 years; cost savings = $160,000 per year; salvage value = $20,000 in year 5; tax rate = 34%; discount rate = 13%.
		A)	0.74
		B)	0.45
		C)	1.65
		D)	0.99
		E)	1.98

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