 |
| 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 |
|
|
|
| 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 reduction in sales of the company's existing gasoline models |
| | B) | The expenditure on new plant, property, and equipment |
| | C) | New spare parts inventory |
| | D) | Interest payment on debt |
|
|
|
| 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 |
|
|
|
| 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 |
|
|
|
| 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 |
|
|
|
| 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% |
|
|
|
| 7 | |
Suppose a 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 |
|
|
|
| 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 |
|
|
|
| 9 | |
Capital equipment costing $200,000 today has salvage value of $50,000 at the end of 5 years. If straight line depreciation is used, what is the book value of the equipment at the end of year 2? |
| | A) | $200,000 |
| | B) | $170,000 |
| | C) | $140,000 |
| | D) | $50,000 |
|
|
|
| 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 |
|
|
|
| 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 |
|
|
|
| 12 | |
Two machines, A and B, which perform the same functions, have the following costs and lives. | PV of Costs | Life | | Machine A | 6,000 | 8 | | Machine B | 8,000 | 12 |
Which machine would you choose? The two machines are mutually exclusive and the cost of capital is 10%. |
| | A) | B because the EAC is 667 |
| | B) | A because the EAC is 1,125 |
| | C) | B because the EAC is 1,174 |
| | D) | A because the PV of Costs is 6,000 |
|
|
|
| 13 | |
Opportunity costs should not be included as they are missed opportunities. |
| | A) | True |
| | B) | False |
|
|
|
| 14 | |
Do not forget to include interest and dividend payments when calculating the project's cash flow. |
| | A) | True |
| | B) | False |
|
|
|
| 15 | |
Depreciation acts as a tax shield in reducing taxes |
| | A) | True |
| | B) | False |
|
|
|
| 16 | |
For NPV calculations: |
| | A) | Only cash flows are relevant |
| | B) | Always estimate cash flows on an incremental basis |
| | C) | Be consistent in the treatment of inflation |
| | D) | All of the above |
|
|
|
| 17 | |
A reduction in the sales of existing products caused by the introduction of a new product is an example of an opportunity cost. |
| | A) | True |
| | B) | False |
|
|
|
| 18 | |
Which of the following is not included in working capital? |
| | A) | Cash |
| | B) | Raw material and finished goods inventories |
| | C) | Plant, property, and equipment |
| | D) | Accounts payable |
|
|
|
| 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 |
|
|
|
| 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 |
|
|
|
| 21 | |
If the depreciable investment is $500,000 and the MACRS 5-Year class schedule is: Year 1: 20% ; Year 2: 32%; Year 3: 19.2%; Year 4: 11.5%; Year 5: 11.5% and Year 6: 5.8%. Calculate the depreciation tax shield for Year 2 using a tax rate of 30%. |
| | A) | $80,000 |
| | B) | $30,000 |
| | C) | $48,000 |
| | D) | $17,250 |
|
|
|
| 22 | |
Suppose you own a company based in Germany. When discounting cash flows for projects in Germany, you should recognize that prices and costs will be influenced by German inflation rates. |
| | A) | True |
| | B) | False |
|
|
|
| 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 |
|
|
.