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web.groovymark@gmail.com
- December 14, 2024
Question 21
The MACRS system of depreciation allows:
a) Accelerated write-offs of property under various lifetime classifications.
b) Equal annual depreciation amounts.
c) The deduction of total asset cost in one year.
d) Depreciation only on intangible assets.
Answer: a) Accelerated write-offs of property under various lifetime classifications.
Explanation: MACRS is a depreciation method that allows accelerated deductions based on asset class and useful life.
Question 22
The concept of financial break-even refers to:
a) The level of output where total revenues equal total costs.
b) The point where the project’s NPV is zero.
c) The point where fixed costs equal variable costs.
d) The moment when cash inflows equal cash outflows.
Answer: b) The point where the project’s NPV is zero.
Explanation: Financial break-even is the sales level at which a project’s NPV equals zero.
Question 23
Erosion refers to:
a) The reduction of a project’s cash flows due to competition.
b) The loss of a company’s market share due to external factors.
c) The negative impact of a new project on the cash flows of existing projects.
d) The decline in asset values over time.
Answer: c) The negative impact of a new project on the cash flows of existing projects.
Explanation: Erosion occurs when a new project reduces the cash flows of existing operations, often because of competition between products.
Question 24
Capital rationing occurs when:
a) A firm has unlimited access to funds for investment.
b) A firm restricts the amount of capital allocated to projects.
c) All projects are rejected due to insufficient funds.
d) Only low-risk projects are approved.
Answer: b) A firm restricts the amount of capital allocated to projects.
Explanation: Capital rationing happens when a firm limits its investment in new projects, often due to budget constraints.
Question 25
Soft capital rationing refers to:
a) An external restriction on capital availability.
b) Internal constraints imposed by management on capital spending.
c) The inability to raise debt due to market conditions.
d) The decision to delay investments due to high interest rates.
Answer: b) Internal constraints imposed by management on capital spending.
Explanation: Soft capital rationing is a situation where the firm itself, not external forces, limits the capital available for projects.
Question 26
A project with conventional cash flows is characterized by:
a) An initial outflow followed by a series of inflows.
b) A series of inflows followed by an outflow.
c) Alternating inflows and outflows over time.
d) No outflows, only inflows.
Answer: a) An initial outflow followed by a series of inflows.
Explanation: Conventional cash flows have a single initial cash outlay followed by a stream of positive inflows.
Question 27
A project with a negative NPV is expected to:
a) Add value to the firm.
b) Decrease the firm’s value.
c) Break even.
d) Have a profitability index greater than 1.
Answer: b) Decrease the firm’s value.
Explanation: A negative NPV indicates that the project will decrease the value of the firm, as the cash outflows exceed the inflows when discounted.
Question 28
An independent project is one that:
a) Can only be undertaken if another project is not accepted.
b) Is not affected by the acceptance or rejection of other projects.
c) Requires external financing to be accepted.
d) Must be accepted before other projects are considered.
Answer: b) Is not affected by the acceptance or rejection of other projects.
Explanation: Independent projects do not rely on the outcomes of other projects and can be evaluated on their own merits.
Question 29
The payback period for a project can be misleading because:
a) It assumes that cash flows are reinvested at the firm’s WACC.
b) It ignores the time value of money and cash flows after the payback period.
c) It uses the firm’s required rate of return as the discount rate.
d) It overstates the profitability of long-term projects.
Answer: b) It ignores the time value of money and cash flows after the payback period.
Explanation: The payback method does not account for the time value of money or cash flows beyond the payback point, making it less reliable.
Question 30
Which of the following statements about sensitivity analysis is true?
a) It evaluates the impact of multiple variables changing simultaneously.
b) It helps identify the most critical variables affecting a project’s outcome.
c) It disregards project risk.
d) It uses scenario analysis to simulate different outcomes.
Answer: b) It helps identify the most critical variables affecting a project’s outcome.
Explanation: Sensitivity analysis helps determine how changes in key assumptions affect the overall project outcome, highlighting the most important variables.
Question 31
The decision to finance a project using debt instead of equity will most likely:
a) Decrease the firm’s financial leverage.
b) Increase the cost of equity.
c) Lower the risk of bankruptcy.
d) Eliminate tax benefits.
Answer: b) Increase the cost of equity.
Explanation: Financing a project with debt increases financial leverage, which typically raises the cost of equity due to increased risk to equity holders.
Question 32
Which of the following is a weakness of the discounted payback period?
a) It ignores the time value of money.
b) It includes all project cash flows.
c) It may reject positive NPV projects.
d) It is more complex than the regular payback period.
Answer: c) It may reject positive NPV projects.
Explanation: The discounted payback period may reject projects that are profitable in the long run but have delayed cash inflows.
Question 33
If a project has a profitability index (PI) less than 1, it means:
a) The project has a positive NPV.
b) The project should be accepted.
c) The project will break even.
d) The project should be rejected.
Answer: d) The project should be rejected.
Explanation: A profitability index less than 1 indicates that the present value of cash inflows is less than the initial investment, meaning the project is not profitable.
Question 34
Which of the following increases a project’s NPV?
a) Decreasing the project’s life.
b) Increasing the project’s initial investment.
c) Increasing the project’s cash inflows.
d) Increasing the discount rate.
Answer: c) Increasing the project’s cash inflows.
Explanation: Increasing the future cash inflows of a project directly raises its NPV, as more value is created over time.
Question 35
A mutually exclusive project is best defined as:
a) A project that cannot be rejected once it is accepted.
b) A project that competes with another project for limited resources.
c) A project that is independent of other projects.
d) A project that requires approval from multiple stakeholders.
Answer: b) A project that competes with another project for limited resources.
Explanation: Mutually exclusive projects require choosing between alternatives, as only one can be accepted due to limited resources.
Question 36
The purpose of capital budgeting is to:
a) Allocate financial resources to maximize short-term profits.
b) Identify projects that will add value to the firm.
c) Minimize the cost of financing a project.
d) Optimize the firm’s tax strategy.
Answer: b) Identify projects that will add value to the firm.
Explanation: Capital budgeting aims to evaluate and select projects that will contribute positively to the firm’s overall value.
Question 37
When a firm uses more debt to finance a project, it:
a) Decreases the financial risk of the firm.
b) Increases the project’s NPV.
c) Increases the firm’s financial leverage.
d) Lowers the firm’s overall cost of capital.
Answer: c) Increases the firm’s financial leverage.
Explanation: Using more debt increases the firm’s financial leverage, which raises the level of risk associated with the firm’s operations.
Question 38
What is the primary disadvantage of the internal rate of return (IRR) method?
a) It ignores the time value of money.
b) It assumes that cash inflows are reinvested at the IRR.
c) It cannot be used for independent projects.
d) It overstates the NPV of long-term projects.
Answer: b) It assumes that cash inflows are reinvested at the IRR.
Explanation: One of the main limitations of IRR is that it assumes reinvestment of future cash flows at the IRR, which may not always be realistic.
Question 39
The payback period method is most useful for:
a) Analyzing long-term projects.
b) Evaluating projects with uncertain future cash flows.
c) Assessing the liquidity of a project.
d) Comparing projects with different lifespans.
Answer: c) Assessing the liquidity of a project.
Explanation: The payback period is useful for evaluating how quickly a project will return its initial investment, which helps assess liquidity.
Question 40
Which of the following is true regarding the net present value (NPV) method?
a) It disregards the time value of money.
b) It is only useful for short-term projects.
c) It measures the profitability of a project in today’s dollars.
d) It always results in a positive outcome.
Answer: c) It measures the profitability of a project in today’s dollars.
Explanation: NPV accounts for the time value of money and expresses the project’s value in present terms, making it a widely used profitability measure.
