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The objective of a firm’s management is to only undertake the projects that the
Market value of shareholders' equity.
a) Decay
b) Do not decrease
c) Change
d) Do not change
Answer: (b)
2. The decision rule that management uses with the net present value is to undertake only those
Projects with NPV.
a) a discounted
b) a contingent
c) a positive
d) Negative
Answer: (c)
3. If a firm decides to invest in automated machines that will allow the firm to reduce labor
Costs, this is an example of a capital expenditures project.
a) New products
b) Replacement of existing assets
c) Cost reduction
d) Advertising
Answer: (c)
5. A negative sign in front of a cash-flow forecast for a particular year means that it is an
a) Inflow
b) Outflow
c) Indeterminate flow
d) More information is required to make this determination
Answer: (b)
6. Net cash inflows from operations can be computed in which of the following ways?
a) Cash Flow = Revenue - Cash Expenses - Taxes
b) Cash Flow = Net Income + Noncash Expenses
c) Cash Flow = Revenue - Total Expenses - Taxes + Noncash Expenses
d) All of the above
Answer: (d)
7. Consider the development of a new type of laptop machine. That you will sell 5,000 laptop units per
year at a price of $2,500 per laptop. Production Equipment will have to be purchased at a cost of $2
million. The equipment will be Depreciated over five years using the straight-line method. Net working
capital of $1.9 Million will also required to finance this project. The cash expenses for this project are
$1,700 Per laptop. The tax rate is 40%. Compute the net cash inflows from operations.
a) $4 million
b) $2.56 million
c) $2.16 million
d) $1.76 million
Answer: (b)
8. Refer to question 9. What is the annual depreciation amount for this project?
a) $4 million
b) $1 million
c) $0.78 million
d) $0.4 million
Answer: (d)
9. Refer to question 9. If we use a cost of capital equal to 13%, what is the NPV for this project?
a) $2.3 million
b) $3.7 million
c) $5.1 million
d) $9 million
Answer: (c)
12. The point of indifference between accepting and rejecting a project is referred to as the
point.
a) Payback
b) NPV
c) Reject
d) Break-even
Answer: (d)
13. Consider a project that has total fixed costs of $400,p000: an annual depreciation (based on the
Straight-line method) of $150,000, annual cash flows of $255,000 and a tax rate of 34%. The
Difference between the revenue and variable cost (on a per unit basis) is $1,600 (so we use
1,600Q). Determine the break-even volume for this project.
a) Q = 443 units
b) Q = 349 units
0) Q = 230 units
d) Q = 194 units
Answer: (b)
14. For a project, an initial cash outlay of $1.4 million is made. In year 1 the deemed annual
Cash flow is $900,000, years 2-5 the expected annual cash flow is $1,000,000 and in year 6
The expected annual cash flow is $1.3 million. A cost of capital of 15% is used. The IR
(internal rate of return) is
a) 72.1%
b) 65.8%
c) 51.7%
d) 40.0%
Answer: (b)
15. An initial cash outlay of $1.4 million is made for a capital budgeting project. In year 1, the
Expected annual cash flow is $900,000, years 2-5, the expected annual cash flow is
$1,000,000 and in year 6, the expected annual cash flow is $1.3 million. If a cost of capital of
15 % is used, compute the NPV of this project.
a) $1,800,000
b) $2,100,000
c) $2,427,225
d) $3,296,790
Answer: (c)
16. The is defined as the annual cash payment that has a present value equal to the
Initial outlay.
17. Project A has an initial $3.5 million capital outlay which is converted into an equivalent
Seven year annuity at a discount rate of 12% per year. Project B has a $7 million initial capital
Outlay and will last for 14 years. Project B has the same discount rate as Project A. What is
The preferred alternative based on the annualized capital cost?
18. comparing alternative annualized capital costs; the altemative with the
Annualized capital cost is the preferred altemative.
a) Lowest
b) Highest
c) Zero
d) Amortized
Answer: (a)
19. A project in IRR is its scale, which makes IRR not a good measure for ranking
Transparency exclusive projects.
a) Contgent on
b) Independent of
c) Inversely proportional to
d) Half of
Answer: (b)
20. A________________ rate is the rate that prevails in a zero-inflation scenario. The____________ rate
is the rate that one actual observes.
a) Nominal, inflation
b) Real, expected
c) Nominal, real
d) Real,nominal
Answer: (d)
21. The nominal rate of interest is 16% and the expected rate of inflation is 5%. Compute the
Real rate of cost of capital.
a) 21.8%
b) 11.5%
c) 11%
d) 10.5%
Answer: (d)
22. The nominal rate of interest is 15.7% and the expected rate of inflation is 6%. Compute the
Real rate of return.
a) 22.6%
b) 10.9%
c) 9.15%
d) 7.85%
Answer: (c)
24. Apex Corporation is considering the purchase of Zenith Corporation. The owners of Zenith
Corporation are asking $75 million in cash and the managers of Apex Corporation estimate
That, once under their control, Zenith Corporation will generate cash flows of $20 million per
Year for five years. The cash flows are net of taxes. The IRR of this investment is
a) 8.17%
b) 10.42%
c) 15.34%
d) 20%
Answer: (b)
25. BGB Corporations is considering a project that will pay nothing for the first three years,
$80,000 in the fourth year, $120,000 in the fifth year, and $160,000 in the sixth year. The
Appropriate discount rate is 8.8% and the project requires an investment tomorrow of
$150,000 if we accept the project. The NPV of this project is:
a) $149,135
b) $124,939
c) $94,901
d) $82,263
Answer: (d)
a) $12,000
b) $26,000
c) $30,000
d) $34,000
Answer: (b)