 |
| 1 | |
To accurately reflect the costs associated with a project, you should exclude interest expenses in the computation of the operating cash flows. |
| | A) | True |
| | B) | False |
|
|
|
| 2 | |
Side effects such as erosion should be considered in a capital budgeting decision. |
| | A) | True |
| | B) | False |
|
|
|
| 3 | |
The idea behind setting a bid price is to determine the minimum price at which the net present value of a project will still be zero or positive. |
| | A) | True |
| | B) | False |
|
|
|
| 4 | |
An opportunity cost is the most valuable alternative that is given up if a particular investment is undertaken. |
| | A) | True |
| | B) | False |
|
|
|
| 5 | |
A taxable gain occurs when an asset is sold for more than its book value. For capital budgeting purposes, the taxes on the sale are treated as a: |
| | A) | reduction in cash and added to operating cash flow. |
| | B) | noncash event similar to depreciation. |
| | C) | reduction in cash and deducted from the book value of the asset. |
| | D) | reduction in cash and deducted from the taxable gain. |
| | E) | reduction in cash and deducted from the sale price. |
|
|
|
| 6 | |
Pro forma statements: |
| | A) | are generally created by first estimating production costs. |
| | B) | for a proposed project generally consider only the first year of the project. |
| | C) | recap a firm's activities for the past year. |
| | D) | should only be prepared when considering a capital budgeting project. |
| | E) | should use realistic assumptions. |
|
|
|
| 7 | |
You are advising a friend who is attempting to decide whether or not to drop one of the courses they are currently enrolled in. If they do, they will forfeit half of the money spent on tuition. Which of the following conclusions drawn by your friend is consistent with capital budgeting principles? I. Remaining in the class incurs opportunity cost because they have to reduce the number of hours they are gainfully employed.
II. The tuition is irrelevant to the decision because it is a sunk cost.
III. The time and energy put into the course thus far is a sunk cost.
|
| | A) | I only |
| | B) | I and II only |
| | C) | I and III only |
| | D) | II and III only |
| | E) | I, II, and III |
|
|
|
| 8 | |
A firm moves into a higher tax bracket. All else equal, the depreciation tax shield will: |
| | A) | be more valuable. |
| | B) | be less valuable. |
| | C) | remain unchanged since depreciation doesn't change. |
| | D) | remain unchanged because changes in tax rates don't matter once a project is in place. |
| | E) | be either more valuable, less valuable, or unchanged, but it is impossible to tell which without more information. |
|
|
|
| 9 | |
Your company may introduce a new line of tennis shoes. You have been given the following projections: sales = 35,000 units at $40 per unit; variable costs = $25 per unit; fixed costs = $125,000 per year; initial investment = $1,000,000; project life = 10 years. What is the net income for this project if the corporate tax rate is 34 percent? You may assume straight-line depreciation to a zero book value and a discount rate of 12 percent. |
| | A) | $119,000 |
| | B) | $165,000 |
| | C) | $198,000 |
| | D) | $264,000 |
| | E) | $297,000 |
|
|
|
| 10 | |
You are considering investing in a cost cutting proposal. Net income from the project is expected to equal $27.50 each of the three years of the project's life. The process has an initial cost of $125 and will be depreciated straight-line over 3 years to a salvage value of $0. Assume a 34 percent tax bracket and a discount rate of 15 percent. Suppose the equipment is sold at the end of year 3 for $20, pretax. What is the internal rate of return? |
| | A) | 16.3 percent |
| | B) | 29.5 percent |
| | C) | 33.6 percent |
| | D) | 45.8 percent |
| | E) | 62.7 percent |
|
|
.