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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 2

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	A firm is considering a project which would increase accounts receivable by $10,000, accounts payable by $35,000, and inventory by $30,000. Which of the following is true?
		A)	This is a net source of cash.
		B)	Sales will increase.
		C)	Payments to creditors will slow.
		D)	Net working capital has decreased.
		E)	Net working capital has increased.


2	The stand alone principal states that:
		A)	Only positive NPV projects should be accepted.
		B)	Only relevant incremental cash flows should be considered when evaluating a proposed project.
		C)	TANSTAAFL.
		D)	Side effects should not be considered when evaluating a proposed project.
		E)	Inflation can safely be ignored in capital budgeting decisions.


3	Opportunity costs:
		A)	Represent the price that was paid for an asset when it was originally purchased.
		B)	Are not relevant for capital budgeting decisions.
		C)	Can be determined directly from the firm's financial statements.
		D)	Can be determined directly from a set of pro forma statements.
		E)	Represent the most valuable alternative use for an asset given up if the firm takes on a project.


4	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)	Whenever sunk costs are involved
		D)	To accommodate unforeseen changes that might occur
		E)	Because ultimately it is the change in a firm's overall future cash flows that matter


5	Which of the following is true about net working capital?
		A)	Changes in net working capital account for differences between accounting sales and costs and actual cash receipts and payments.
		B)	Projects in which a firm expands its operations and sales will generally not lead to changes in net working capital.
		C)	Net working capital is typically an expense at the beginning of a project and an equal revenue source at the end of a project; thus, there is no impact on project NPV.
		D)	Dollar changes in the cash account are generally equal to changes in net working capital.
		E)	Net working capital is not considered an investment of the firm.


6	Which of the following is NOT considered a relevant, incremental cash flow in capital budgeting analysis?
		A)	Opportunity costs
		B)	Sunk costs
		C)	Additions to net working capital
		D)	Erosion costs
		E)	Fixed asset salvage values


7	A machine costs $60 and requires $35 in maintenance for each year of its 3 year life. After 3 years, this machine will be replaced. If the machine is straight-line depreciable to zero and has no salvage value, what is the EAC? Assume a tax rate of 34% and a discount rate of 14%.
		A)	-$39.48
		B)	-$42.14
		C)	-$48.33
		D)	-$59.13
		E)	-$97.84


8	A project costs $40,000, will be depreciated straight-line to zero over its 3 year life, and will require a net working capital investment of $5,000 up-front. The firm has a tax rate of 34% and a required return of 10%. The project generates OCF of $17,000. What is the project's NPV?
		A)	-$2,724
		B)	$2,942
		C)	$1,393
		D)	$2,394
		E)	$1,033


9	You will bid to supply 3 jets per year for each of the next three years to the Navy. To get set up, you will need $10 million in equipment, to be depreciated straight-line to zero over three years, with no salvage value. Total fixed costs per year are $5 million, and variable costs are $7 million per jet. Assuming a tax rate of 30% and a required return of 10%, you should offer to supply the jets at a minimum price of:
		A)	$11 million each.
		B)	$6 million each.
		C)	$9 million each.
		D)	$5 million each.
		E)	$32 million each.


10	Given the following information and assuming straight-line depreciation to zero, what is the payback period for this project? Initial investment = $500,000; life = 5 years; cost savings = $160,000 per year; salvage value = $30,000 in year 5; tax rate = 34%; discount rate = 13%.
		A)	4.4 years
		B)	3.9 years
		C)	3.6 years
		D)	2.5 years
		E)	The payback period is greater than the project's life.

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