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Multiple Choice Quiz
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1

A taxable gain occurs when an asset is sold for more than its book value. For capital budgeting purposes, the taxes on the sale _____________.
A)are treated as a reduction in cash and added to operating cash flow
B)are treated as a noncash event similar to depreciation
C)are treated as a reduction in cash and deducted from the book value of the asset
D)are treated as a reduction in cash and deducted from the taxable gain
E)are treated as a reduction in cash and are deducted from the sale price
2

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 shield from interest deductions
D)more readily identify the tax benefits of depreciation
E)start with the bottom line, net income, and work backwards
3

The government has been trying to decide whether or not to purchase any of the new, advanced missiles it has developed. One of the arguments in favor of purchasing the missiles is that so much money has been spent on their development that it would be a waste of money not to buy any. What is the major problem with this argument?
A)It ignores the opportunity cost of the money that has been spent
B)It includes sunk costs in the decision
C)It includes opportunity costs in the decision
D)It includes changes in net working capital
E)It includes financing costs in the decision
4

You are to calculate operating cash flows using the following information: sales, net income, depreciation, and net initial investment. If interest expense is zero, it would likely be easiest for you to use the __________ approach.
A)conventional
B)tax shield
C)bottom-up
D)top-down
E)depreciation first
5

Which of the following projects would increase net working capital the most?
A)Making a purchase of land for a new baseball manufacturing plant
B)Decreasing the amount of sales your firm makes on credit
C)Decreasing the number of product lines your firm carries
D)Converting a manufacturing process so that you produce goods only after a customer order has been received
E)Using long-term bank credit to reduce payables
6

When you set NPV equal to zero in calculating a bid price you are
A)going to earn net income of zero on the project
B)appropriately including opportunity costs in your analysis
C)certain to be the lowest bidder since, if any firm bids lower, they will be bidding based on them taking a negative NPV project, which they shouldn't do
D)assured of earning your firm's highest possible IRR
E)finding the price at which you expect to create zero wealth for your stockholders
7

Your company is considering three different methods of producing its product: purchase production equipment, lease production equipment, or contract with a supplier to purchase the product from them. The methods have differing lives and cash flow streams. You are responsible for choosing one of the methods. Of the following, the best statement of your objective is to
A)choose the method that will least affect the balance sheet of the company
B)choose the method that maximizes future cash inflows
C)choose the method that will result in the highest accounting net income
D)choose the method that minimizes initial cash outflows
E)choose the method that maximizes shareholder wealth
8

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)because ultimately it is the change in a firm's overall future cash flows that matter
D)in order to accommodate unforeseen changes that might occur
E)whenever sunk costs are involved
9

The incremental cash flows related to a capital investment project are easiest to identify when _____________.
A)sunk costs exist
B)opportunity costs are significant
C)the stand alone principle holds
D)erosion of cash flow is expected to occur
E)the project has no impact on total fixed assets
10

______________ would usually represent a net cash inflow at the beginning or during the life of a project and an equal net cash outflow upon completion of the project.
A)An increase in payables
B)An increase in inventory
C)An increase in receivables
D)An increase in fixed assets
E)An increase in receivables coupled with an identical increase in payables







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