B | Initial cash outflows and subsequent operating cash inflows for a project are referred to as ________.A) necessary cash flowsB) relevant cash flowsC) perpetual cash flowsD) ordinary cash flows |

B | Relevant cash flows for a project are best described as ________.A) incidental cash flowsB) incremental cash flowsC) sunk cash flowsD) contingent cash flows |

C | When making replacement decisions, the development of relevant cash flows is complicatedwhen compared to expansion decisions, due to the need to calculate ________ cash inflows.A) conventionalB) opportunityC) incrementalD) sunk |

C | In developing the cash flows for an expansion project, the analysis is the same as the analysis for replacement projects where ________.A) all cash flows from the old assets are equalB) prior cash flows are irrelevantC) all cash flows from the old asset are zeroD) cash inflows equal cash outflows |

D | Cash outlays that had been previously made and have no effect on the cash flows relevant to acurrent decision are called ________.A) incremental historical costsB) incremental past expensesC) opportunity costs foregoneD) sunk costs |

C | Cash flows that could be realized from the best alternative use of an owned asset are called ________.A) incremental costsB) lost resale opportunitiesC) opportunity costsD) sunk costs |

B | Benefits expected from proposed capital expenditures ________.A) must be on a pre-tax basis because it provides the true position of profits by the firmB) must be on an after-tax basis because no benefits may be used until tax claims are satisfiedC) may be valued either on pre-tax or after-tax basis based on the size of the firmD) are independent of interest and taxes |

A | One basic technique used to evaluate after-tax operating cash flows is to ________.A) add noncash charges to net incomeB) subtract depreciation from operating revenuesC) add cash expenses to net incomeD) subtract cash expenses from noncash charges |

C | The book value of an asset is equal to the ________.A) fair market value minus the accounting valueB) original purchase price plus annual depreciation expenseC) original purchase price minus accumulated depreciationD) depreciated value plus recaptured depreciation |

D | The tax treatment regarding the sale of existing assets that are sold for more than the originalpurchase price results in ________.A) an ordinary tax benefitB) no tax benefit or liabilityC) a recaptured depreciation taxed as ordinary incomeD) a capital gain tax liability |

C | The tax treatment regarding the sale of existing assets that are sold for more than the bookvalue but less than the original purchase price results in a(n) ________.A) ordinary tax benefitB) capital gain tax liabilityC) recaptured depreciation taxed as ordinary incomeD) capital gain tax liability and recaptured depreciation taxed as ordinary income |

B | The tax treatment regarding the sale of existing assets that are sold for their book value results in ________.A) an ordinary tax benefitB) no tax benefit or liabilityC) recaptured depreciation taxed as ordinary incomeD) a capital gain tax liability and recaptured depreciation taxed as ordinary income |

B | The portion of an asset’s sale price that is above its book value and below its initial purchaseprice is called ________.A) a capital gainB) recaptured depreciationC) a capital lossD) book value |

C | The portion of an asset’s sale price that is below its book value and below its initial purchaseprice is called ________.A) a capital gainB) recaptured depreciationC) a capital lossD) book value |

B | The tax treatment regarding the sale of existing assets that are sold for less than the book value results in ________.A) an ordinary tax benefitB) a capital loss tax benefitC) recaptured depreciation taxed as ordinary incomeD) a capital gain tax liability and recaptured depreciation taxed as ordinary income |

D | A corporation is selling an existing asset for $21,000. The asset, when purchased, cost $10,000, was being depreciated under MACRS using a five-year recovery period, and has been depreciated for four full years. If the assumed tax rate is 40 percent on ordinary income and capital gains, the tax effect of this transaction is ________.A) $0 tax liabilityB) $7,560 tax liabilityC) $4,400 tax liabilityD) $7,720 tax liability |

A | A corporation is selling an existing asset for $1,700. The asset, when purchased, cost $10,000, was being depreciated under MACRS using a five-year recovery period, and has been depreciated for four full years. If the assumed tax rate is 40 percent on ordinary income and capital gains, the tax effect of this transaction is ________.A) $0 tax liabilityB) $840 tax liabilityC) $3,160 tax liabilityD) $3,160 tax benefit |

D | A corporation is selling an existing asset for $1,000. The asset, when purchased, cost $10,000, was being depreciated under MACRS using a five-year recovery period, and has been depreciated for four full years. If the assumed tax rate is 40 percent on ordinary income and capital gains, the tax effect of this transaction is ________.A) $0 tax liabilityB) $1,100 tax liabilityC) $3,600 tax liabilityD) $280 tax benefit |

B | A firm is selling an existing asset for $5,000. The asset, when purchased, cost $10,000, wasbeing depreciated under MACRS using a five-year recovery period and has been depreciated forfour full years. If the assumed tax rate is 40 percent on ordinary income and capital gains, the taxeffect of this transaction is ________.A) $0 tax liabilityB) $1,320 tax liabilityC) $1,160 tax liabilityD) $2,000 tax benefit |

B | A loss on the sale of an asset that is depreciable and used in business is ________; a loss on the sale of a non-depreciable asset is ________.A) deductible from capital gains income; deductible from ordinary incomeB) deductible from ordinary income; deductible only against capital gainsC) a credit against the tax liability; not deductibleD) not deductible; deductible only against capital gains |

C | A corporation has decided to replace an existing asset with a newer model. Two years ago,the existing asset originally cost $30,000 and was being depreciated under MACRS using a five-year recovery period. The existing asset can be sold for $25,000. The new asset will cost $75,000 and will also be depreciated under MACRS using a five-year recovery period. If the assumed tax rate is 40 percent on ordinary income and capital gains, the initial investment is ________.A) $42,000B) $52,440C) $54,240D) $50,000 |

A | A corporation has decided to replace an existing asset with a newer model. Two years ago,the existing asset originally cost $70,000 and was being depreciated under MACRS using a five-year recovery period. The existing asset can be sold for $30,000. The new asset will cost $80,000 and will also be depreciated under MACRS using a five-year recovery period. If the assumed tax rate is 40 percent on ordinary income and capital gains, the initial investment is ________.A) $48,560B) $44,360C) $49,240D) $27,600 |

B | Which of the following would be used in the computation of an initial investment?A) the annual after-tax inflow expected from the investmentB) the initial purchase price of the investmentC) the historic cost of the existing investmentD) the profits from the new investment |

C | Which of the following basic variables must be considered in determining the initial investment associated with a capital expenditure?A) incremental annual savings produced by the new assetB) cash flows generated by the new investmentC) proceeds from the sale of an existing assetD) profits on the sale of an existing asset |

D | An important cash inflow in the analysis of initial cash flows for a replacement project is ________.A) taxesB) the cost of the new assetC) installation costD) the sale value of the old asset |

B | When evaluating a capital budgeting project, installation costs of a new machine must beconsidered as part of ________.A) the operating cash inflowsB) the initial investmentC) the incremental operating cash inflowsD) the operating cash outflows |

D | The change in net working capital when evaluating a capital budgeting decision is ________.A) the change in fixed liabilities minus the change in fixed assetsB) the increase in current assetsC) the increase in current liabilitiesD) the change in current assets minus the change in current liabilities |

C | In evaluating the initial investment for a capital budgeting project, ________.A) an increase in net working capital is considered a cash inflowB) a decrease in net working capital is considered a cash outflowC) an increase in net working capital is considered a cash outflowD) net working capital does not have to be considered |

D | A corporation is considering expanding operations to meet growing demand. With the capitalexpansion, the current accounts are expected to change. Management expects cash to increase by $20,000, accounts receivable by $40,000, and inventories by $60,000. At the same time accounts payable will increase by $50,000, accruals by $10,000, and long-term debt by $100,000. The change in net working capital is ________.A) an increase of $120,000B) a decrease of $60,000C) a decrease of $120,000D) an increase of $60,000 |

B | A corporation is considering expanding operations to meet growing demand. With the capitalexpansion the current accounts are expected to change. Management expects cash to increase by $10,000, accounts receivable by $20,000, and inventories by $30,000. At the same time accounts payable will increase by $40,000, accruals by $30,000, and long-term debt by $80,000. The change in net working capital is ________.A) an increase of $10,000B) a decrease of $10,000C) a decrease of $90,000D) an increase of $80,000 |

D | If accounts receivable increase by $1,000,000, inventory decreases by $500,000, and accounts payable increase by $500,000, net working capital would ________.A) decrease by $500,000B) increase by $1,500,000C) increase by $2,000,000D) experience no change |

B | A corporation is evaluating the relevant cash flows for a capital budgeting decision and mustestimate the terminal cash flow. The proposed machine will be disposed of at the end of itsusable life of five years at an estimated sale price of $15,000. The machine has an originalpurchase price of $80,000, installation cost of $20,000, and will be depreciated under the five-year MACRS. Net working capital is expected to decline by $5,000. The firm has a 40 percenttax rate on ordinary income and long-term capital gain. The terminal cash flow is ________.A) $24,000B) $16,000C) $14,000D) $26,000 |

C | A corporation is evaluating the relevant cash flows for a capital budgeting decision and mustestimate the terminal cash flow. The proposed machine will be disposed of at the end of itsusable life of five years at an estimated sale price of $2,000. The machine has an originalpurchase price of $80,000, installation cost of $20,000, and will be depreciated under the five-year MACRS. Net working capital is expected to decline by $5,000. The firm has a 40 percenttax rate on ordinary income and long-term capital gain. The terminal cash flow is ________.A) $5,800B) $7,800C) $8,200D) $6,200 |

B | Which of the following must be considered in computing the terminal value of a replacementproject?A) operating cash flow for the final yearB) after-tax proceeds from the sale of a new assetC) before-tax proceeds from the sale of an old assetD) before-tax proceeds from the sale of a new asset |

B | Behavioral approaches ________.A) are used to explicitly recognize project riskB) are used to get a feel for project riskC) are not used by rational financial managersD) are used to quantify the risk |

A | Breakeven cash inflow refers to ________.A) the minimum level of cash inflow necessary for a project to be acceptable, that is, NPVgreater than zeroB) the minimum level of cash inflow necessary for a project to be acceptable, that is, NPV lessthan zeroC) the minimum level of cash inflow necessary for a project to be acceptable, that is, IRR lessthan zero cost of capitalD) the minimum level of cash inflow necessary for a project to be acceptable, that is, IRR equalszero |

D | In capital budgeting, risk refers to ________.A) the chance that a project will prove acceptableB) the conflicting IRR and NPV in a projectC) the degree of variability of initial outlayD) the uncertainty of cash inflows |

A | In capital budgeting, risk refers to ________.A) the degree of variability of the cash inflowsB) the degree of variability of the initial investmentC) the chance that the net present value will be greater than zeroD) the chance that the internal rate of return will exceed the cost of capital |

B | Tangshan Mining Company, with a cost of capital of 10 percent, is considering investing in project A, with an initial investment of $1,000,000. Project A is expected to provide equal cash inflows over its 15 year useful life. Based on this information, the breakeven cash inflow for the project is ________.A) $1,000,000B) $131,474C) $100,000D) $66,667 |

B | A behavioral approach that evaluates the impact on a firm’s return through simultaneouschanges in a number variables of a project is called ________.A) sensitivity analysisB) scenario analysisC) simulation analysisD) Monte Carlo simulation |

B | The advantage of using simulation in the capital budgeting process is the ________.A) ease of calculation over scenario analysisB) continuum of risk-return trade-offs for decision makingC) single point estimate that helps the decision maker to choose the most accurate alternativeD) use of several possible outcomes to asses risk |

D | One type of simulation program made popular by the widespread use of personal computers is called ________.A) Monaco SimulationB) Lemans SimulationC) Cannes SimulationD) Monte Carlo Simulation |

C | ________ reflects the return that must be earned on the given project to compensate the firm’s owners adequately.A) Internal rate of returnB) Cost of capitalC) Risk-adjusted discount rateD) Average rate of return |

B | The difference by which the required discount rate exceeds the risk-free rate is called the________.A) excess returnB) risk premiumC) inflation premiumD) maturity premium |

D | A preferred approach for risk adjustment of capital budgeting cash flows, from a practicalviewpoint, is ________.A) sensitivity analysisB) simulation analysisC) scenario analysisD) risk-adjusted discount rates |

B | The theoretical basis from which the concept of risk-adjusted discount rates is derived is ________.A) the Gordon modelB) the capital asset pricing modelC) simulation theoryD) the basic cost of money |

C | The shares traded publicly in an efficient market are ________.A) generally positively affected by diversification, because of the reduction in riskB) generally negatively affected by diversification, because of the increase in riskC) generally not affected by diversification, unless greater returns are expectedD) generally negatively affected by diversification, because of the increase in the required rate ofreturn |

C | Firms do not usually get rewarded by diversifying investments in different lines of business because ________.A) the capital markets are efficient and they quickly respond to change in economic conditionsB) cash flows from such projects tend to respond less to changing economic conditionsC) investors themselves can diversify by holding securities in a variety of firms; they do not needthe firm to do it for themD) it is not possible for a firm to diversify its risk as the inflation premium is different fordifferent projects |

D | The ________ approach is used to convert the net present value of unequal-lived projects into an equivalent annual amount (in net present value terms).A) internal rate of returnB) investment opportunities scheduleC) risk-adjusted discount rateD) annualized net present value |

A | The option to develop follow-on projects, expand markets, expand or retool plants, and so on that would not be possible without implementation of the project that is being evaluated is called ________.A) growth optionB) timing optionC) flexibility optionD) abandonment option |

A | A(n) ________ allows management to avoid or minimize losses on projects that turn bad.A) abandonment optionB) growth optionC) timing optionD) put option |

A | The objective of ________ is to select the group of projects that provides the highest overallnet present value and does not require more dollars than are budgeted.A) capital rationingB) scenario analysisC) real optionsD) sensitivity analysis |

D | An IRR approach to capital rationing involves graphically plotting project IRRs indescending order against total dollar investment on an ________ graph.A) ANPVB) NPVC) RADRD) IOS |

C | If a firm has a limited capital budget to fund its capital projects, it is said to be facing the problem of ________.A) constrained capitalB) wealth optimizationC) capital rationingD) profitability |

B | An approach to capital rationing that involves graphing project returns in descending orderagainst the total dollar investment to determine the group of acceptable projects is called the________.A) net present value approachB) internal rate of return approachC) payback approachD) profitability index approach |

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