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web.groovymark@gmail.com
- December 17, 2024
Question 21
Mutually exclusive projects are best defined as competing projects which:
a) Both require the use of the same limited resource.
b) Can be accepted simultaneously.
c) Have the same cash flows.
d) Have no impact on one another.
Answer: a) Both require the use of the same limited resource.
Explanation: Mutually exclusive projects cannot both be accepted because they compete for the same resources.
Question 22
Net present value (NPV) is:
a) The best method of analyzing mutually exclusive projects.
b) The most widely used method of capital budgeting.
c) The simplest method for evaluating projects.
d) A method that ignores cash flows.
Answer: a) The best method of analyzing mutually exclusive projects.
Explanation: NPV is considered the most reliable method for evaluating mutually exclusive projects, as it measures the value added by a project.
Question 23
Net working capital:
a) Has no impact on project cash flows.
b) Can create either a cash inflow or a cash outflow at time zero of a project.
c) Is only relevant in the final year of a project.
d) Does not need to be considered in capital budgeting.
Answer: b) Can create either a cash inflow or a cash outflow at time zero of a project.
Explanation: Changes in net working capital can cause cash inflows or outflows at the beginning of a project.
Question 24
Pro forma statements for a proposed project should:
a) Be compiled on a stand-alone basis.
b) Exclude incremental cash flows related to the project.
c) Include all costs associated with the company’s other projects.
d) Include interest expenses.
Answer: a) Be compiled on a stand-alone basis.
Explanation: Pro forma financial statements for a project should focus on the project's individual cash flows and not be mixed with the rest of the company’s operations.
Question 25
Scenario analysis is best suited to accomplishing which one of the following when analyzing a project?
a) Identifying the potential range of reasonable outcomes.
b) Determining the sensitivity of NPV to a single variable.
c) Calculating the expected value of a project.
d) Eliminating uncertainty.
Answer: a) Identifying the potential range of reasonable outcomes.
Explanation: Scenario analysis helps identify the range of outcomes by varying different assumptions.
Question 26
Sensitivity analysis is based on:
a) Varying a single variable and measuring the resulting change in the NPV of a project.
b) Testing the impact of multiple variables changing at once.
c) The worst-case scenario.
d) Applying fixed values to all variables.
Answer: a) Varying a single variable and measuring the resulting change in the NPV of a project.
Explanation: Sensitivity analysis measures the impact on NPV of changing one variable at a time.
Question 27
Southern Chicken is considering two projects. Which of the following methods should the firm rely most heavily on when deciding which project to accept?
a) Payback period.
b) Profitability index.
c) Internal rate of return.
d) Net present value.
Answer: d) Net present value.
Explanation: NPV is the most reliable method for determining which project adds the most value to the firm.
Question 28
The annual annuity stream of payments that has the same present value as a project’s costs is referred to as which one of the following?
a) Equivalent annual cost.
b) Payback period.
c) Profitability index.
d) Internal rate of return.
Answer: a) Equivalent annual cost.
Explanation: The equivalent annual cost (EAC) is used to compare the costs of different projects that have different lifespans.
Question 29
The bid price always assumes which one of the following?
a) The NPV of the project is positive.
b) The project generates no cash inflows.
c) The project has zero risk.
d) The NPV of the project is zero.
Answer: d) The NPV of the project is zero.
Explanation: A bid price is calculated to ensure the project breaks even, so it assumes the NPV is zero.
Question 30
The bottom-up approach to computing the operating cash flow applies only when:
a) The interest expense is equal to zero.
b) There is depreciation involved.
c) The project is cash flow positive.
d) Sales and costs are constant.
- d) Sales and costs are constant.
Answer: a) The interest expense is equal to zero.
Explanation: The bottom-up approach excludes interest, so it’s only used when interest expense is zero.
Question 31
The depreciation tax shield is best defined as:
a) The reduction in taxable income resulting from depreciation.
b) The amount of tax that is saved because of the depreciation expense.
c) The future value of depreciation.
d) The net present value of depreciation.
Answer: b) The amount of tax that is saved because of the depreciation expense.
Explanation: The depreciation tax shield represents the savings a company gets on taxes due to the depreciation expense.
Question 32
The difference between a firm’s future cash flows if it accepts a project and the firm’s future cash flow if it does not accept the project is referred to as the project’s:
a) Sunk costs.
b) Incremental cash flows.
c) Net present value.
d) Opportunity costs.
Answer: b) Incremental cash flows.
Explanation: Incremental cash flows are the additional cash flows a company will receive if it accepts a project.
Question 33
. The equivalent annual cost considers which of the following?
a) Depreciation expense only.
b) Operating cost and replacement costs.
c) Only capital costs.
d) Initial outlay only.
Answer: b) Operating cost and replacement costs.
Explanation: EAC takes into account the operating and replacement costs over the life of a project.
Question 34
The internal rate of return is defined as:
a) The discount rate that causes the NPV of a project to be zero.
b) The discount rate at which cash inflows equal cash outflows.
c) The project’s required rate of return.
d) The return generated by the company on all projects.
Answer: a) The discount rate that causes the NPV of a project to be zero.
Explanation: The IRR is the discount rate at which the NPV of a project equals zero.
Question 35
The internal rate of return:
a) Is difficult to compute without a financial calculator or computer.
b) Is the simplest method of calculating project returns.
c) Should only be used when comparing mutually exclusive projects.
d) Is equal to the profitability index.
Answer: a) Is difficult to compute without a financial calculator or computer.
Explanation: Calculating IRR manually is complex, but it can be easily determined with a financial calculator or software.
Question 36
The length of time a firm must wait to recoup, in present value terms, the money it has invested in a project is referred to as the:
a) Payback period.
b) Discounted payback period.
c) Break-even point.
d) Profitability index.
Answer: b) Discounted payback period.
Explanation: The discounted payback period takes into account the time value of money when calculating how long it takes to recover the investment.
Question 37
The present value of an investment’s future cash flows divided by the initial cost of the investment is called the:
a) Profitability index.
b) Net present value.
c) Internal rate of return.
d) Payback period.
Answer: a) Profitability index.
Explanation: The profitability index is calculated by dividing the present value of cash flows by the initial investment cost.
Question 38
The stand-alone principle advocates that project analysis should be based solely on which one of the following costs?
a) Sunk costs.
b) Opportunity costs.
c) Incremental costs.
d) Fixed costs.
Answer: c) Incremental costs.
Explanation: The stand-alone principle suggests analyzing a project’s individual incremental cash flows without considering the company’s overall situation.
Question 39
There are two distinct discount rates at which a particular project will have a zero net present value. In this situation, the project is said to:
a) Have multiple rates of return.
b) Be unacceptable.
c) Be at break-even.
d) Have no feasible solution.
Answer: a) Have multiple rates of return.
Explanation: When there are two IRRs, it indicates that the project has multiple rates of return.
Question 40
Webster Iron Works started a project last year. As it turns out, the project is operating at its cash break-even level. This implies the project:
a) Has positive operating cash flow.
b) Is generating sufficient revenue to cover all expenses except depreciation.
c) Is operating at a level that does not affect NPV.
d) Is not covering its initial outlay.
Answer: b) Is generating sufficient revenue to cover all expenses except depreciation.
Explanation: Operating at the cash break-even level means the project is covering all cash expenses, but not non-cash ones like depreciation.
