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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 five years. If the straight line depreciation method is used, what is the book value of the equipment at the end of two 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 year 2. |
| | A) | Increases by $12,000 |
| | B) | Decreases by $12,000 |
| | C) | Increases by $6,000 |
| | D) | Decreases by $6,000 |
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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.
| i. Project NPV | Life | | ii. Project A | $5,000 four years | | iii. Project B | $7,000 seven 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 | |
The perpetuity growth formula cannot value a project when the growth rate is above the opportunity cost of capital. |
| | A) | True |
| | B) | False |
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16 | |
When deciding what discount for NPV calculations: |
| | A) | Only cash flow is relevant |
| | B) | Always estimate cash flow on an incremental basis |
| | C) | Be consistent in treatment of inflation |
| | D) | All of the above |
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17 | |
You should always make sure cash flows are recorded when the work is undertaken or a liability is incurred and not when they occur. |
| | A) | True |
| | B) | False |
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18 | |
Which of the following is not included in working capital? |
| | A) | Cash |
| | B) | Raw material and finished goods inventories |
| | C) | Plants and equipment |
| | D) | Accounts payable |
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19 | |
A new manufacturing project uses land which could otherwise be sold. This land is an example of |
| | A) | Sunk cost |
| | B) | Opportunity cost |
| | C) | Incremental cost |
| | D) | Working capital |
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20 | |
In the first year of a project inventories decrease by $50,000, accounts payables decrease by $20,000 and accounts receivables increase by $30,000. What is the change in working capital? |
| | A) | $0 |
| | B) | $10,000 |
| | C) | $40,000 |
| | D) | $100,000 |
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21 | |
What is the present value of $1,200,000 depreciated over six years? Assume straight-line depreciation and a tax rate of 35% and a discount rate of 20%. |
| | A) | $232,786 |
| | B) | $401,878 |
| | C) | $578,899 |
| | D) | None of the above |
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22 | |
When discounting cash flow in foreign currencies, you must always use that foreign currency cost of capital. |
| | A) | True |
| | B) | False |
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23 | |
Equivalent annual cost is the annual cash flow sufficient to recover a capital investment, including the cost of capital for that investment within its payback period. |
| | A) | True |
| | B) | False |
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