Answer Choices:
a. All costs associated with the project that have been incurred prior to the time the analysis is being conducted.
b. Interest on funds borrowed to help finance the project.
c. The end-of-project recovery of any additional net operating working capital required to operate the project.
d. Cannibalization effects, but only if those effects increase the project’s projected cash flows.
e. Expenditures to date on research and development related to the project, provided those costs have already been expensed for tax purposes.
Answer:
c
Question: Which of the following statements is CORRECT?
Answer Choices:
a. In a capital budgeting analysis where part of the funds used to finance the project would be raised as debt, failure to include interest expense as a cost when determining the project’s cash flows will lead to an upward bias in the NPV.
b. In a capital budgeting analysis where part of the funds used to finance the project would be raised as debt, failure to include interest expense as a cost when determining the project’s cash flows will lead to a downward bias in the NPV.
c. The existence of any type of “externality” will reduce the calculated NPV versus the NPV that would exist without the externality.
d. If one of the assets to be used by a potential project is already owned by the firm, and if that asset could be sold or leased to another firm if the new project were not undertaken, then the net proceeds that could be obtained should be charged as a cost to the project under consideration.
e. If one of the assets to be used by a potential project is already owned by the firm but is not being used, then any costs associated with that asset is a sunk cost and should be ignored.
Answer:
d
Question: Which of the following statements is CORRECT?
Answer Choices:
a. Since depreciation is a cash expense, the faster an asset is depreciated, the lower the projected NPV from investing in the asset.
b. Under current laws and regulations, corporations must use straight-line depreciation for all assets whose lives are 5 years or longer.
c. Corporations must use the same depreciation method (e.g., straight line or accelerated) for stockholder reporting and tax purposes.
d. Using accelerated depreciation rather than straight line normally has the effect of speeding up cash flows and thus increasing a project’s forecasted NPV.
e. Using accelerated depreciation rather than straight line normally has the effect of slowing down cash flows and thus reducing a project’s forecasted NPV.
Answer:
d
Question: Other things held constant, which of the following would increase the NPV of a project being considered?
Answer Choices:
a. A shift from straight-line to MACRS depreciation.
b. Making the initial investment in the first year rather than spreading it over the first three years.
c. An increase in the discount rate associated with the project.
d. An increase in required net operating working capital.
e. The project would decrease sales of another product line.
Answer:
a
Question: Which of the following statements is CORRECT?
Answer Choices:
a. If an asset is sold for less than its book value at the end of a project’s life, it will generate a loss for the firm, on an after-tax basis.
Answer:
a
Question: Dalrymple Inc. is considering production of a new product. In evaluating whether to go ahead with the project, which of the following items should NOT be explicitly considered when cash flows are estimated?
Answer Choices:
a. The company will produce the new product in a vacant building that was used to produce another product until last year. The building could be sold, leased to another company, or used in the future to produce another of the firm’s products.
b. The project will utilize some equipment the company currently owns but is not now using. A used equipment dealer has offered to buy the equipment.
c. The company has spent and expensed for tax purposes $3 million on research related to the new product. These funds cannot be recovered, but the research may benefit other projects that might be proposed in the future.
d. The new product will cut into sales of some of the firm’s other products.
e. If the project is accepted, the company must invest an additional $2 million in net operating working capital. However, all of these funds will be recovered at the end of the project’s life.
Answer:
c
Question: Which of the following statements is CORRECT?
Answer Choices:
a. Sensitivity analysis is a good way to measure market risk because it explicitly takes into account diversification effects.
b. One advantage of sensitivity analysis relative to scenario analysis is that it explicitly takes into account the probability of specific effects occurring, whereas scenario analysis cannot account for probabilities.
c. Well-diversified stockholders do not need to consider market risk when determining required rates of return.
d. Market risk is important, but it does not have a direct effect on stock prices because it only affects beta.
e. Simulation analysis is a computerized version of scenario analysis where input variables are selected randomly on the basis of their probability distributions.
Answer:
e
Question: Which of the following statements is CORRECT?
Answer Choices:
a. Using accelerated depreciation rather than straight line would normally have no effect on a project’s total projected cash flows but it would affect the timing of the cash flows and thus the NPV.
b. Under current laws and regulations, corporations must use straight-line depreciation for all assets whose lives are 5 years or longer.
c. Corporations must use the same depreciation method (e.g., straight line or accelerated) for stockholder reporting and tax purposes.
d. Since depreciation is not a cash expense, it has no effect on cash flows and thus no effect on capital budgeting decisions.
e. Under accelerated depreciation, higher depreciation charges occur in the early years, and this reduces the early cash flows and thus lowers a project’s projected NPV.
Answer:
a
Question: Which of the following statements is CORRECT?
Answer Choices:
a. The NPV, IRR, MIRR, and discounted payback (using a payback requirement of 3 years or less) methods always lead to the same accept/reject decisions for independent projects.
b. For mutually exclusive projects with normal cash flows, the NPV and MIRR methods can never conflict, but their results could conflict with the discounted payback and the regular IRR methods.
c. Multiple IRRs can exist, but not multiple MIRRs. This is one reason some people favor the MIRR over the regular IRR.
d. If a firm uses the discounted payback method with a required payback of 4 years, then it will accept more projects than if it used a regular payback of 4 years.
e. The percentage difference between the MIRR and the IRR is equal to the project’s WACC.
Answer:
c
Question: Assume that the economy is enjoying a strong boom, and as a result interest rates and money costs generally are relatively high. The WACC for two mutually exclusive projects that are being considered is 12%. Project S has an IRR of 20% while Project L’s IRR is 15%. The projects have the same NPV at the 12% current WACC. However, you believe that the economy will soon fall into a mild recession, and money costs and thus your WACC will soon decline. You also think that the projects will not be funded until the WACC has decreased, and their cash flows will not be affected by the change in economic conditions. Under these conditions, which of the following statements is CORRECT?
Answer Choices:
a. You should reject both projects because they will both have negative NPVs under the new conditions.
b. You should delay a decision until you have more information on the projects, even if this means that a change in economic conditions reduces the cost advantages of the projects’ cash flows.
Answer:
b
Question: Which of the following statements is CORRECT?
Answer Choices:
a. The MIRR and NPV decision criteria can never conflict.
b. The IRR method can never be subject to the multiple IRR problem, while the MIRR method can be.
c. One reason some people prefer the MIRR to the regular IRR is that the MIRR is based on a generally more reasonable reinvestment rate assumption.
d. The higher the WACC, the shorter the discounted payback period.
e. The MIRR method assumes that cash flows are reinvested at the crossover rate.
Answer:
c
Question: For planning purposes, managers must forecast the total capital budget because the amount of capital raised affects the WACC.
Answer Choices:
a. True
b. False
Answer:
a. True
Question: If debt is to be used to finance a project, then when cash flows for a project are estimated, interest payments should be included in the analysis.
Answer Choices:
a. True
b. False
Answer:
b. False