-
web.groovymark@gmail.com
- December 17, 2024
Question 01
A company that utilizes the MACRS system of depreciation will likely experience which of the following in year two of a project?
a) A greater tax shield than it would with straight-line depreciation.
b) A smaller tax shield than it would with straight-line depreciation.
c) No difference in tax shield compared to straight-line depreciation.
d) A smaller deduction than it would with MACRS depreciation.
Answer: a) A greater tax shield than it would with straight-line depreciation.
Explanation: The MACRS system allows for accelerated depreciation, leading to larger deductions in the early years and thus a greater tax shield.
Question 02
A project has a discounted payback period equal to the required payback period. Which of the following statements must be true?
a) The project must have a positive NPV.
b) The project must also be acceptable under the profitability index rule.
c) The project must have an IRR lower than the required rate of return.
d) The project must be unacceptable under the payback rule.
Answer: b) The project must also be acceptable under the profitability index rule.
Explanation: A discounted payback period equal to the required period implies that the project is acceptable based on the profitability index.
Question 03
A project has an NPV of zero. Which of the following best describes this project?
a) The project generates no cash flows.
b) The project’s cash inflows equal its cash outflows in current dollar terms.
c) The project creates value equal to its initial cost.
d) The project should not be undertaken.
Answer: b) The project's cash inflows equal its cash outflows in current dollar terms.
Explanation: An NPV of zero means the present value of cash inflows is exactly equal to the initial investment, so the project breaks even in value terms.
Question 04
A project has a required payback period of three years. Which of the following is correct concerning the payback analysis?
a) Cash flow in year two is discounted more heavily than year one.
b) The project is acceptable if it pays back within four years.
c) The cash flow in year two is valued the same as in year one.
d) The project must be rejected if it doesn’t pay back by year two.
Answer: c) The cash flow in year two is valued the same as in year one.
Explanation: Payback period analysis does not account for the time value of money, so cash flows are treated equally regardless of when they occur.
Question 05
A project with financing-type cash flows is typified by which of the following?
a) Cash inflows occurring in the later years of the project.
b) A large cash outflow followed by consistent cash inflows.
c) A cash inflow at time zero.
d) A cash inflow followed by incremental outflows.
Answer: c) A cash inflow at time zero.
Explanation: A financing-type cash flow involves an initial inflow (such as receiving a loan) followed by outflows.
Question 06
A project’s average net income divided by its average book value is referred to as the project’s:
a) Internal Rate of Return.
b) Net Present Value.
c) Average accounting return.
d) Profitability index.
Answer: c) Average accounting return.
Explanation: The average accounting return is calculated by dividing a project’s average net income by its average book value.
Question 07
All of the following are related to a proposed project. Which should be included in the cash flow at time zero?
a) Equipment needed to commence the project.
b) Depreciation of existing machinery.
c) Future operating expenses.
d) Revenues from increased sales.
Answer: a) Equipment needed to commence the project.
Explanation: The purchase of equipment is a capital expenditure and is included in the initial cash outlay (time zero).
Question 08
Applying the discounted payback decision rule to all projects may cause:
a) Some positive NPV projects to be accepted.
b) Some positive NPV projects to be rejected.
c) Some negative NPV projects to be accepted.
d) All projects to be rejected.
Answer: b) Some positive NPV projects to be rejected.
Explanation: The discounted payback rule might reject projects that take too long to recover costs, even if they have a positive NPV.
Question 09
Changes in the net working capital requirements can:
a) Only affect the initial year of the project.
b) Affect the project only at the end of its life.
c) Affect the cash flows of a project every year of the project’s life.
d) Never affect the project’s cash flows.
Answer: c) Affect the cash flows of a project every year of the project's life.
Explanation: Changes in working capital can impact cash flows at various points during the project’s life.
Question 10
Danielle’s Furniture is considering adding appliances to its offerings. Which of the following would be considered an incremental operating cash flow?
a) The revenue generated from furniture sales.
b) The cost of purchasing appliance inventory.
c) The future depreciation of existing assets.
d) Past marketing expenses for the furniture store.
Answer: b) The cost of purchasing appliance inventory.
Explanation: The purchase of new inventory related to appliances would be considered an incremental cash flow specific to the new project.
Question 11
Decreasing which of the following will increase the acceptability of a project?
a) Initial outlay.
b) Equivalent annual cost.
c) Payback period.
d) Profitability index.
Answer: b) Equivalent annual cost.
Explanation: Lowering the equivalent annual cost improves the financial attractiveness of a project.
Question 12
Douglass Interiors is considering two mutually exclusive projects. The crossover rate for these projects is 11.7%. Which statement is most likely true?
a) Project A should be accepted.
b) You cannot determine which project should be accepted based on the crossover rate alone.
c) Project B should be accepted.
d) Both projects should be rejected.
Answer: b) You cannot determine which project should be accepted based on the crossover rate alone.
Explanation: The crossover rate provides information on when projects switch preferences, but it doesn’t indicate which is superior without additional context.
Question 13
Forecasting risk emphasizes the point that the correctness of any decision to accept or reject a project is highly dependent upon:
a) The project manager’s expertise.
b) Accuracy of the projected cash flows.
c) The level of competition in the market.
d) The initial cost of the project.
Answer: b) Accuracy of the projected cash flows.
Explanation: Forecasting risk refers to the sensitivity of a project’s outcome based on the accuracy of cash flow projections.
Question 14
G&L Plastic Molders spent $1,200 last week repairing a machine that will be used in a new project. This cost is classified as a:
a) Sunk cost.
b) Opportunity cost.
c) Fixed cost.
d) Variable cost.
Answer: a) Sunk cost.
Explanation: The repair cost was incurred before deciding on the new project, making it a sunk cost and irrelevant to future decisions.
Question 15
Graphing the crossover point helps explain:
a) The payback period of a project.
b) How decisions concerning mutually exclusive projects are derived.
c) How IRR is computed.
d) The tax impact on NPV.
Answer: b) How decisions concerning mutually exclusive projects are derived.
Explanation: The crossover point helps in understanding when one project becomes more favorable than another based on different discount rates.
Question 16
If a project has a net present value of zero, then:
a) The project earns a return exactly equal to the discount rate.
b) The project is expected to fail.
c) The project’s cash flows are insufficient to cover its initial cost.
d) The project should be rejected.
Answer: a) The project earns a return exactly equal to the discount rate.
Explanation: An NPV of zero indicates the project is expected to generate a return exactly equal to the required rate of return.
Question 17
If a firm accepts Project A, it will not be feasible to accept Project B. These projects are:
a) Independent.
b) Mutually exclusive.
c) Contingent.
d) Additive.
Answer: b) Mutually exclusive.
Explanation: Mutually exclusive projects are those where the acceptance of one precludes the acceptance of the other.
Question 18
Increasing which one of the following will increase the operating cash flow, assuming the bottom-up approach is used?
a) Fixed assets.
b) Depreciation expense.
c) Working capital.
d) Variable costs.
Answer: b) Depreciation expense.
Explanation: Depreciation reduces taxable income, thereby increasing cash flow under the bottom-up approach.
Question 19
Kelley’s Baskets makes handmade baskets and is considering adding wreaths to its product line. Which of the following is an example of an incremental operating cash flow related to the wreath project?
a) The cost of hiring additional employees to make the wreaths.
b) The revenue from additional basket sales.
c) The depreciation of existing machinery.
d) The marketing costs incurred for the existing product line.
Answer: a) The cost of hiring additional employees to make the wreaths.
Explanation: Hiring additional employees specifically for the new project is considered an incremental operating cash flow.
Question 20
Kristi wants to train her assistant in capital budgeting methods. Which method is Kristi most likely to ask her assistant to use in making initial decisions?
a) Net present value.
b) Internal rate of return.
c) Payback period.
d) Profitability index.
Answer: c) Payback period.
Explanation: The payback period is a simple method that is often used as an initial decision-making tool.
