Question 1

In most cases, asset lives are shorter under MACRS depreciation than they would be with straight-line depreciation.

Accepted Answer

A) True 
 B)False

Question 2

Even though one project may have superior cash flows, top management may sometimes choose a project that inflates earnings instead of cash flow.

Accepted Answer

A) True 
 B)False

Question 3

Stone Inc. is evaluating a project with an initial cost of $9,500. Cash inflows are expected to be $1,500, $1,500, and $10,000 in the three years over which the project will produce cash flows. If the discount rate is 6%, what is the net present value of the project?

Accepted Answer

A)   $11,150
B)   $26,930
C)   $8,430
D)   $1,650E) A) and B)
F) All of the above

Question 4

We add depreciation to net income to arrive at a true earnings picture.

Accepted Answer

A) True 
 B)False

Question 5

Investors discount the later years of a long-term project at a lower rate because they are generally less precise.

Accepted Answer

A) True 
 B)False

Question 6

Which statement(s)  are true about depreciation?

Accepted Answer

A)   Depreciation is a non-cash expense that provides tax shield benefits.
B)   The greater the depreciation expenses in earlier years, the higher the present value of the project.
C)   For tax purposes, the MACRS depreciation schedules supersede the old methods of sum-of-the-years' digits, double declining balance, and so on.
D)   All of these are true.E) None of the above
F) A) and D)

Question 7

Suppose that interest rates (and, therefore, the firm's weighted average cost of capital)  increase. This WOULD NOT CHANGE the capital budgeting choices a firm would make if it

Accepted Answer

A)   uses payback method analysis.
B)   uses net present value analysis.
C)   uses internal rate of return analysis.
D)   uses profitability indices.E) None of the above
F) A) and B)

Question 8

Elective expensing has the following characteristic:

Accepted Answer

A)   It is primarily beneficial to large businesses.
B)   It is exclusively used for financial reporting.
C)   It allows a more rapid write-off than MACRS depreciation.
D)   It is primarily beneficial to large businesses and it allows a more rapid write-off than MACRS depreciation.E) None of the above
F) All of the above

Question 9

In a replacement decision, a book loss on an old asset can be a valuable feature.

Accepted Answer

A) True 
 B)False

Question 10

Project XYZ has a cost of $200,000 and provides the following annual cash inflows: year 1 $35,000; year 2 $25,000; year 3 $175,000; and year 4 $10,000. What is the net present value of this investment, assuming the discount rate is 8%?

Accepted Answer

A)   $135
B)   $4,687
C)   $101,050
D)   $200,135E) A) and B)
F) A) and C)

Question 11

Technology Corp. is considering a $238,160 investment in a new marketing campaign that it anticipates will provide annual cash flows of $52,000 for the next five years. The firm has a 6% cost of capital. What should the analysis indicate to the firm's managers?

Accepted Answer

A)   IRR is 8%. Accept the project.
B)   IRR is 3%. Reject the project.
C)   IRR is 4%. Reject the project.
D)   IRR is 6%. Accept the project.E) None of the above
F) B) and D)

Question 12

The payback method is not really a theoretically correct approach.

Accepted Answer

A) True 
 B)False

Question 13

All of the following is information required to create a net present value profile except for which one?

Accepted Answer

A)   NPV at a 0 discount rate
B)   NPV at the risk-free rate
C)   NPV at the cost of capital
D)   IRR of investmentE) C) and D)
F) B) and D)

Question 14

Capital rationing

Accepted Answer

A)   is a way of preserving the assets of the firm over the long term.
B)   is a less than optimal way to arrive at capital budgeting decisions.
C)   assures stockholder wealth maximization.
D)   assures maximum potential profitability.E) A) and D)
F) B) and C)

Question 15

Which of the following is not a time-adjusted method for ranking investment proposals?

Accepted Answer

A)   The net present value method
B)   The payback method
C)   The internal rate of return method
D)   All of these options are time-adjusted methods.E) A) and B)
F) A) and C)

Question 16

When using accelerated depreciation, the present value of future cash flows increases.

Accepted Answer

A) True 
 B)False

Question 17

A firm utilizes a strategy of capital rationing, which is currently $375,000 and is considering the following two projects: Project A has a cost of $335,000 and the following cash flows: year 1 $140,000; year 2 $150,000; and year 3 $100,000. Project B has a cost of $365,000 and the following cash flows: year 1 $220,000; year 2 $110,000; and year 3 $150,000. Using a 6% cost of capital, which decision should the financial manager make?

Accepted Answer

A)   Select project A.
B)   Select project B.
C)   Do not select either project.
D)   Select both projects.E) C) and D)
F) All of the above

Question 18

For acceptable investments, the reinvestment assumption under the internal rate of return is generally

Accepted Answer

A)   higher acceptance than under the net present value method.
B)   lower acceptance than under the net present value method.
C)   at the cost of capital.
D)   below the cost of capital.E) None of the above
F) B) and C)

Question 19

An appropriate capital budgeting process requires that the following steps be taken in which order?
a. Collection of data
b. Reevaluation and adjustment
c. Evaluation and decision making
d. Search for and discovery of investment opportunities

Accepted Answer

A)   d, a, c, b
B)   d, a, b, c
C)   d, b, a, c
D)   b, d, a, cE) B) and D)
F) A) and C)

Question 20

It is the difference in the reinvestment assumptions that can be significant in determining when to use the net present value or internal rate of return methods.

Accepted Answer

A) True 
 B)False

Exam 12: The Capital Budgeting Decision

We add depreciation to net income to arrive at a true earnings picture.

Correct Answer
verified

In a replacement decision, a book loss on an old asset can be a valuable feature.

Correct Answer
verified

Stone Inc. is evaluating a project with an initial cost of $9,500. Cash inflows are expected to be $1,500, $1,500, and $10,000 in the three years over which the project will produce cash flows. If the discount rate is 6%, what is the net present value of the project?

Correct Answer
verified

It is the difference in the reinvestment assumptions that can be significant in determining when to use the net present value or internal rate of return methods.

Correct Answer
verified

Which of the following is not a time-adjusted method for ranking investment proposals?

Correct Answer
verified

Elective expensing has the following characteristic:

Correct Answer
verified

In most cases, asset lives are shorter under MACRS depreciation than they would be with straight-line depreciation.

Correct Answer
verified

Which statement(s) are true about depreciation?

Correct Answer
verified

Capital rationing

Correct Answer
verified

Project XYZ has a cost of $200,000 and provides the following annual cash inflows: year 1 $35,000; year 2 $25,000; year 3 $175,000; and year 4 $10,000. What is the net present value of this investment, assuming the discount rate is 8%?

Correct Answer
verified

All of the following is information required to create a net present value profile except for which one?

Correct Answer
verified

An appropriate capital budgeting process requires that the following steps be taken in which order? a. Collection of data b. Reevaluation and adjustment c. Evaluation and decision making d. Search for and discovery of investment opportunities

Correct Answer
verified

Correct Answer
verified

When using accelerated depreciation, the present value of future cash flows increases.

Correct Answer
verified

For acceptable investments, the reinvestment assumption under the internal rate of return is generally

Correct Answer
verified

Investors discount the later years of a long-term project at a lower rate because they are generally less precise.

Correct Answer
verified

Suppose that interest rates (and, therefore, the firm's weighted average cost of capital) increase. This WOULD NOT CHANGE the capital budgeting choices a firm would make if it

Correct Answer
verified

Technology Corp. is considering a $238,160 investment in a new marketing campaign that it anticipates will provide annual cash flows of $52,000 for the next five years. The firm has a 6% cost of capital. What should the analysis indicate to the firm's managers?

Correct Answer
verified

Even though one project may have superior cash flows, top management may sometimes choose a project that inflates earnings instead of cash flow.

Correct Answer
verified

The payback method is not really a theoretically correct approach.

Correct Answer
verified

Exam 12: The Capital Budgeting Decision

We add depreciation to net income to arrive at a true earnings picture.

Correct AnswerverifiedShow Answer

In a replacement decision, a book loss on an old asset can be a valuable feature.

Correct AnswerverifiedShow Answer

Stone Inc. is evaluating a project with an initial cost of $9,500. Cash inflows are expected to be $1,500, $1,500, and $10,000 in the three years over which the project will produce cash flows. If the discount rate is 6%, what is the net present value of the project?

Correct AnswerverifiedShow Answer

It is the difference in the reinvestment assumptions that can be significant in determining when to use the net present value or internal rate of return methods.

Correct AnswerverifiedShow Answer

Which of the following is not a time-adjusted method for ranking investment proposals?

Correct AnswerverifiedShow Answer

Elective expensing has the following characteristic:

Correct AnswerverifiedShow Answer

In most cases, asset lives are shorter under MACRS depreciation than they would be with straight-line depreciation.

Correct AnswerverifiedShow Answer

Which statement(s) are true about depreciation?

Correct AnswerverifiedShow Answer

Capital rationing

Correct AnswerverifiedShow Answer

Project XYZ has a cost of $200,000 and provides the following annual cash inflows: year 1 $35,000; year 2 $25,000; year 3 $175,000; and year 4 $10,000. What is the net present value of this investment, assuming the discount rate is 8%?

Correct AnswerverifiedShow Answer

All of the following is information required to create a net present value profile except for which one?

Correct AnswerverifiedShow Answer

An appropriate capital budgeting process requires that the following steps be taken in which order? a. Collection of data b. Reevaluation and adjustment c. Evaluation and decision making d. Search for and discovery of investment opportunities

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

When using accelerated depreciation, the present value of future cash flows increases.

Correct AnswerverifiedShow Answer

For acceptable investments, the reinvestment assumption under the internal rate of return is generally

Correct AnswerverifiedShow Answer

Investors discount the later years of a long-term project at a lower rate because they are generally less precise.

Correct AnswerverifiedShow Answer

Suppose that interest rates (and, therefore, the firm's weighted average cost of capital) increase. This WOULD NOT CHANGE the capital budgeting choices a firm would make if it

Correct AnswerverifiedShow Answer

Technology Corp. is considering a $238,160 investment in a new marketing campaign that it anticipates will provide annual cash flows of $52,000 for the next five years. The firm has a 6% cost of capital. What should the analysis indicate to the firm's managers?

Correct AnswerverifiedShow Answer

Even though one project may have superior cash flows, top management may sometimes choose a project that inflates earnings instead of cash flow.

Correct AnswerverifiedShow Answer

The payback method is not really a theoretically correct approach.

Correct AnswerverifiedShow Answer

Correct Answer
verified

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