Finance Test 3

Which one of the following indicates that a project is expected to create value for its owners?a. Profitability index less than 1.0b. Payback period greater than the requirementc. Positive net present valued. Positive average accounting rate of returnE. Internal rate of return that is less than the requirement C. Positive net present value
Which of the following is the primary advantage of payback analysis?a. Incorporation of the time value of money conceptb. Easy of Usec. Research and development biasd. Arbitrary cutoff pointe. Long-term Bias b. Ease of Use
Which of the following defines the internal rate of return for a project?a. Discount rate that creates a zero cash flow from assetsb. Discount rate that results in a zero net present value for the project c. Discount rate that results in a net present value equal to the projects initial cost E. The Projects current market rate of return b. Discount rate that results in a zero net present value for the project
The Fluffy Feather sells customized handbags. Currently, it sells 18,000 handbags annually at an average price of $89 each. It is considering adding a lower-priced line of handbags that sell for $59 each. The firm estimates it can sell handbags but will sell 3,000 less of the higher priced handbags by doing so. What is the amount of the evaluating the addition of the lower-priced handbags? (LP x quantity) – (HP x quantity) 413,000-276,000= 146,00
A project will product an operating cash flow of 14,600 a year for 7 years. The initial fixed asset investment is $48,900. The net aftertax salvage value is estimated at $12,000 and will be received during the last year of the project’s life. What is the net present value of the project if the required rate of return is 12 percent? 14,600 x 4.564 (Present value annuity at 7 yrs of 12%)+ (12,000) x .452 (Present value interest at 12%) Answer: 23,159.04
What is the net present value of a project with the following cash flows if the discount rate is 12%? Use Present Value Interest Factor for years 1-4 Add all of them up and then subtract them by Year 0= -$59,200Answer: -$2,524.10
The problem of multiple IRRs can occur when: A. There is only one sign change in the cash flowsB. the first cash flow is always positiveC. the cash flows decline over the life of the projectD. there is more than one sign change in the cash flowsE. none of the above D. there is more than one sign change in the cash flows
Discounted cash flow valuation is the process of discounting an investments:A. assetsB. future profitsC. liabilitiesD. CostsE. Future cash flows E. Future Cash Flows
Hollister & Hollister is considering a new project. The project will require $543,000 for new fixed assets, $218,000 for additional inventory, and $42,000 for additional accounts receivable. Short term debt is expected to increase by $165,000. The projec thas a 6-year life. the fixed assets will be depreciated straight line to a zero book value over the life of the project. At the end of the project, the fixed assets can be sold for 20% of their original cost. The net working capital returns to its original level at the end of the project. the project is expected to generate annual sales of $875,000 with costs of $640,000. The tax rate is 34% and the required rate of return is 13 percent. What is the project’s net investment? (0-543,000) – 218,000 – 42,000 + 165,000Answer: -638,000
Sailcloth & More currently produces boat sails and is considering expanding its operations to include awnings for homes and travel trailers. The company owns land besides its current manufacturing facility that could be used for the expansion. The company bought land 5 years ago at a cost of $319,000. At the time of purchase, the company paid $24,000 to level out the land so it would be suitable for future use. Today, the land is valued at $295,000. The company has some unused equipment that it currently owns valued at $38,000. This equipment could be used for producing awnings if $12,000 is spent for equipment modifications. Other equipment costing $490,000 will also be required. What is the amount of the initial cash flow for this expansion project? 295,000 + 38,000 + 12,000 +490,000 = 835,000
Erosion can be explained as the:A. additional income generated from the sales of a newly added productB. loss of current sales due to a new project being implementedC. loss of revenue due to employee theftD. loss of revenue due to customer theftE. loss of cash due to the expenses required to fix a parking lot after a heavy rain storm B. loss of current sales due to a new project being implemented
A project has the following cash flows. What is the payback period?A. 2.48B. 2.59C. 2.96D. 3.21E. 3.34 D. 3.21
Which one of the following statements is correct?A. If the IRR exceeds the required return, the profitability index will be less than 1.0B. The profitability index will be greater than 1.0 when the net present value is negativeC. When the internal rate of return is greater than the required rate of return, the net present value is positiveD. Projects with conventional cash flows have multiple internal rates of returnE. If two projects are mutually exclusive, you should select the project with the shortest payback period C. When the internal rate of return is greater than the required rate of return, the net present value is positive
Which of the following methods of analysis is most appropriate to use when two investments are mutually exclusive?A. Internal rate of returnB. Profitability IndexC. Net Present valueD. Modified internal rate of returnE. Average accounting return C. Net Present Value
Webster & Moore paid $148,000, in cash, for a piece of equipment 3 years ago. At the beginning of last year, the company spent $21,000 to update the equipment with the latest tech. The company no longer uses this equipment in its current operations and has received an offer of $96,000 from a firm that would like to purchase it. What value if any should the firm assign to this equipment as an initial cost of the project? $96,000
Which one of the following is an indicator that an investment is acceptable?A. modified internal rate of return equal to zeroB. Profitability index of zeroC. Internal rate of return that exceeds the required returnD. Payback period that exceeds the required periodE. Negative average accounting return C. Internal rate of return that exceeds the required return
An investment is acceptable if its IRR:A. is exactly equal to its net present value (NPV)B. is exactly equal to zeroC. is less than the required returnD. exceeds the required returnE. is exactly equal to 100% D. Exceeds the required return
Jefferson & Sons is evaluating a project that will increase annual sales by $145,000 and annual cash costs by $94,000. The project will initially require $110,000 in fixed assets that will be depreciated straight line to a zero book value over the 4 year life of the project. The applicable tax rate is 32%. What is the Operating cash flow for the project? $145,000 – 94,000 = 51,00051,000 – (110,000/4) = 23,50023,500 x (1-.32) = 15,98015,980 + 27, 500 = 43,480Answer: $43,480
Which of the following statements is correct?A. A longer payback period is preferred over a shorter payback periodB. The payback rule states that you should accept a project if the payback period is less than one yearC. The payback period ignores the time value of moneyD. The payback rule is biased in favor of long-term projectE. The payback period considers the timing and amount C. The payback period ignores the time value of money
Which of the following statements is correct concerning the payback period?A. An investment is acceptable if its calculated payback period is less than some pre-specified period of timeB. An investment should be accepted if they payback is positive and rejected if its negativeC. An investment should be rejected if the payback is positive and accepted if its negativeD. An investment is acceptable if its calculated payback is greater than some pre-specified period of timeE. An investment should be accepted any time the payback period is less than the discounted payback period, given a positive rate A. An investment is acceptable if its calculated payback period is less than some pre-specified period of time.
An internal rate of return is:A. more reliable as a decision making tool than net present value whenever you are considering mutually exclusive projectsB. equivalent to the discount rate that makes the net present value equal to one.C. Difficult to compute without the use of either a financial calculator or a computer. D. Dependent upon the interest rates offered in the marketplace. E. a better methodology than net present value when dealing with unconventional cash flows. C. difficult to compute without the use of either a financial calculator or computer
the operating cash flow for a project should exclude which one of the following?A. taxesB. variable costsC. Fixed costsD. interest expenseE. depreciation tax shield D. interest expense
The payback period is the length of time it takes an investment to generate sufficient cash flows to enable the project to:A. produce a positive annual cash flowB. produce a positive cash flow from assetsC. offset its fixed expenses D. offset its total expensesE. Recoup its initial cost E. Recoup its initial cost
The changes in a firms future cash flows are a direct consequence of accepting a project are called _____ cash flows.A. incrementalB. Stand-aloneC. after-taxD. net present valueE. erosion A. incremental
Both Projects A and B are acceptable as independent projects. However, the selection of either one of these projects eliminates the option of selecting the other project. Which one of the following terms best describes the relationship between Project A and Project B.A. Mutually ExclusiveB. ConventionalC. Multiple ChoiceD. Dual ReturnE. Crosswise A. Mutually Exclusive
the internal rate of return tends to be:A. easier for managers to comprehend than the net present valueB. extremely accurate even when cash flow estimates are faultyC. Ignored by most financial analystsD. Used primarily to differentiate between mutually exclusive projectsE. Utilized in project analysis only when multiple net present values apply A. easier for managers to comprehend than the net present value
Keyser Mining is considering a project that will require the purchase of $980,000 in new equipment. The equipment will be depreciated straight-line to a zero book value over the 7-year life of the project. The equipment can be scraped at the end of the project for 5% of its original cost. Annual sales from this project are estimated at $420,000. Net working capital equal to 20% of sales will be required to support the project. All of the net working capital will be recouped. The required return is 16% and the tax rate is 35%. What is the amount of the aftertax salvage value of the equipment? $980,000 x 5% = 49,000$980,000 / 7 ( years) = $140,000 a yearSalvage –> 49,000 x 0.35 (tax rate) = 17,15049,000 – 17,150 = 31,850Answer= 31,850
A cost that has already been paid, or the liability to pay has already been incurred is a(n):A. salvage value expenseB. Net Working Capital expenseC. sunk costD. opportunity costE. erosion cost C. sunk cost
Gateway communications is considering a project with an initial fixed asset cost of $2.46 million which will be depreciated straight-line to a zero book value over the 10-year life of the project. At the end of the project the equipment will be sold for an estimated $300,000. The project will ont directly produce any sales bt will reduce operating costs by $725,000 a year. The tax rate is 35%. The project will require $45,000 of inventory which will be recouped when the project ends. Should this project be implemented if the firm requires a 12% rate of return? Why or Why Not? E. yes, the NPV is $721,307.50
No matter how many forms of investment analysis you do:A. the actual results from a project may vary significantly from the expected resultsB. The internal rate of return will always produce the most reliable resultsC. A project will never be accepted unless the payback period is metD. The initial costs will generally vary considerably from the estimated costsE. Only the first three years of a project ever affect its final outcome A. the actual results from a project may vary significantly from the expected results
Which one of the following statements concerning net present value (NPV) is correct?A. An investment should be accepted if, and only if, the NPV is exactly equal to zeroB. An investment should be accepted only if the NPV is equal to the initial cash flowC. An investment should be accepted if the NPV is positive and rejected if it is negativeD. An investment with greater cash inflows than cash outflows, regardless of when the cash flows occur, will always have a positive NPV and therefore should always be acceptedE. Any project that has positive cash flows for every time period after the initial investment should be accepted C. An investment should be accepted if the NPV is positive and rejected if it is negative
The book value of an asset is primarily used to compute the:A. annual depreciation tax shieldB . amount of cash received from the sale of an assetC. Amount of tax saved annually due to the depreciation expenseD. Amount of tax due on the sale of an assetE. change in depreciation needed to reflected the market value of the asset. D. amount of tax due on the sale of an asset
The Buck Store is considering a project that will require additional inventory of $216,000 and will increase accounts payable by $181,000. Accounts receivable are currently $525,000 and are expected to increase by 9% if this project is accepted. What is the project’s initial cash flow for net working capital? $525,000 x 9% = 47,250-216,000 + 181,000 – 47,250 = -82,250Answer: -$82,250
The net present value: A. decreases as the required rate of return increasesB. Is equal to the initial investment when the internal rate of return is equal to the required returnC. method of analysis cannot be applied to mutually exclusive projectsD. Is directly related to the discount rateE. Is unaffected by the timing of an investment’s cash flows A. decreases as the required rate of return increases.

Leave a Reply

Your email address will not be published. Required fields are marked *