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1 | |
Preferably, cash flows for a project are estimated as: |
| | A) | Cash flows before taxes |
| | B) | Cash flows after taxes |
| | C) | Earnings before taxes |
| | D) | Earnings after taxes |
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2 | |
The following cash flows should be treated as incremental flows when deciding whether to go ahead with an electric car except: |
| | A) | The consequent deduction in sales of the company's existing gasoline models |
| | B) | The expenditure on new plants and equipment |
| | C) | The value of tools that can be transferred from the company's existing plants |
| | D) | Interest payment on debt |
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3 | |
Money that a firm has already spent or committed to spend regardless of whether a project is taken is called: |
| | A) | Sunk costs |
| | B) | Opportunity costs |
| | C) | Fixed costs |
| | D) | None of the above |
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4 | |
A firm owns a building with a book value of $100,000 and a market value of $250,000. If the building is utilized for a project, then the opportunity cost ignoring taxes is: |
| | A) | $100,000 |
| | B) | $150,000 |
| | C) | $250,000 |
| | D) | None of the above |
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5 | |
Which of the following statements is true? |
| | A) | Nominal cash flows are discounted using nominal discount rate |
| | B) | Nominal cash flows are discounted using the real discount rate |
| | C) | Real cash flows are discounted using the nominal discount rate |
| | D) | None of the above statements are true |
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6 | |
The real rate of interest is 3 % and the inflation is 4%. What is the nominal rate of interest? |
| | A) | 3% |
| | B) | 4% |
| | C) | 7.12% |
| | D) | 7% |
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7 | |
Real cash flow occurring in year 2 is 50,000. If the inflation rate is 10% per year, calculate nominal cash flow for year 2. |
| | A) | 60,500 |
| | B) | 50,000 |
| | C) | 55,000 |
| | D) | None of the above |
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8 | |
The NPV value obtained by discounting nominal cash flows using the nominal discount rate is: |
| | A) | The same as the NPV value obtained by discounting real cash flows using the real discount rate |
| | B) | The same as the NPV value obtained by discounting real cash flows using the nominal discount rate |
| | C) | The same as the NPV value obtained by discounting nominal cash flows using the real discount rate |
| | D) | None of the above |
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9 | |
A capital equipment costing $200,000 today has 50,000 salvage value at the end of 5 years. If the straight-line depreciation method is used, what is the book value of the equipment at the end of 2 years? |
| | A) | $200,000 |
| | B) | $170,000 |
| | C) | $140,000 |
| | D) | $50,000 |
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10 | |
For project A in year 2, inventories increase by $10,000 and accounts payable by $4,000. Calculate the increase or decrease in net working capital for year2. |
| | A) | Increases by $12,000 |
| | B) | Decreases by $12,000 |
| | C) | Increases by $16,000 |
| | D) | Decreases by $16,000 |
| | E) | None of the above |
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11 | |
If the depreciation amount is $100,000 and the marginal tax rate is 30%, then the tax shield due to depreciation is: |
| | A) | $333,333 |
| | B) | $100,000 |
| | C) | $30,000 |
| | D) | None of the above |
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12 | |
The projects have the following NPVs and project lives.| Project | NPV | Life | | Project A | $5,000 | 4 years | | Project B | $7,000 | 7 years |
If the cost of capital is 12%, which project would you accept? |
| | A) | A |
| | B) | B |
| | C) | Both A and B |
| | D) | Reject both A and B |
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13 | |
Opportunity costs should not be included as they are missed opportunities. |
| | A) | True |
| | B) | False |
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14 | |
Do not forget to include interest and dividend payments when calculating the project's cash flow. |
| | A) | True |
| | B) | False |
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15 | |
An investment should be postponed as long as the opportunity cost of capital is less than the growth rate of the value of the project. |
| | A) | True |
| | B) | False |
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