Exam 500302 capital budget | Management homework help


1.   What’s the best investment criteria when   dealing with mutually exclusive projects? 



A. Payback period 


B. Net present value (NPV) 


C. Profitability     index (PI) 


D. Internal rate     of return (IRR) 


2.   The change in revenue that occurs when one more       unit of output is sold is referred to as 



A. scenario         revenue. 


B. total         revenue. 


C. average         revenue. 


D. marginal revenue. 



3.   A project requires an initial investment of $1,000   and will pay only one payment of $1,160 in one year. Assuming a firm’s   required rate of return is 15 percent, should the firm accept the project   according to the IRR rule? Why or why not? 



A. The firm should     be indifferent toward the decision. 


B. There isn’t     enough information to determine if the project should be accepted or     rejected. 


C. Yes, the IRR is greater than the required rate of     return. 


D. No, the IRR is     less than the required rate of return. 


4.   PA Petroleum just purchased some equipment at a       cost of $67,000. The equipment is classified as MACRS five-year property.       The MACRS rates are .2, .32, .192, .1152, .1152, and .0576 for years one       through six, respectively. What’s the proper methodology for computing       the depreciation expense for year two? 



A. $67,000 ×         (1 – 0.32) 


B. $67,000 ×         (1 – 0.20) ÷ 0.32 


C. $67,000 ×         (1 + 0.32) 


D. $67,000 × 0.32 


5.   A disadvantage of the discounted payback period   method when compared to NPV is that it 



 A. may     reject economically viable projects (positive NPV projects). 


B. is more     difficult to understand. 


C. may accept     negative NPV projects. 


D. completely     ignores the time value of money. 


6.   Assume a project has cash flows of –$51,300,       $18,200, $37,300, and $14,300 for years zero to three, respectively.       What’s the profitability index given a required return of 12½ percent? 



A. .98 


 B. 1.09         


C. 1.11 


D. 1.06 



7.   What’s an example of a variable cost? 



A. Cost of goods sold 


B. Administrative             costs 


C. Rent 


D. Depreciation             


8.   A               project will require $498,000 for fixed assets and $58,000 for               net working capital. The fixed assets will be depreciated               straight-line to a zero book value over the five-year life of the               project. At the end of the project, the fixed assets will be               worthless. The net working capital returns to its original level               at the end of the project. The project is expected to generate               annual sales of $875,000 and costs of $640,000. The tax rate is               35 percent, and the required rate of return is 15 percent. What’s               the amount of the annual operating cash flow? 



A. $117,320 


B. $147,820 


C. $187,610 


D. $105,000 



9.                 Net present value is based on many estimates and forecasts. What               can be done to compensate for the uncertainty of these future               variables? 



A. Using IRR instead 


B. Nothing 


C. Decreasing the discount rate 


D. Sensitivity and scenario                 analysis 


10.                     Assume a project has a sales quantity of 8,600 units                   plus or minus five percent and a sales price of $69 a unit                   plus or minus one percent. The expected variable cost per                   unit is $11 plus or minus three percent, and the expected                   fixed costs are $290,000 plus or minus two percent. The                   depreciation expense is $68,000. The tax rate is 34 percent.                   What’s the operating cash flow under the best-case scenario? 



A.                     $187,295.40 


B. $175,705.93 


C. $168,470.15 


D. $164,208.11 


11.   The profitability index is                       calculated by 



A.                         multiplying NPV weighted by the proportion of                         project assets to firm assets. 


B.                         setting the NPV to zero and solving for the                         discount rate. 


                         C. dividing cash flows by the initial investment. 


D.                         dividing NPV by the initial investment. 


12.   Mary has                           decided to get a two-year degree from a local                           technical school, despite being offered a job at the                           local hardware store for $11 dollars per hour, 40                           hours per week. She quickly calculates that she would                           have made $45,760 in the two years she was at school.                           $45,760, the cost of her next best option, is                           considered a/an 



A.                             erosion cost. 


B. opportunity cost.                             


C.                             sunk cost. 


D.                             cash outflow cost. 



13.   Assume that a firm has                               an average net income of $120,000 and an average                               book value of $600,000. What’s the firm’s average                               accounting return? 



A. 30 percent 


 B. 20 percent 


C. 35 percent 


D. 25 percent 



14.   Changes in the net                                   working capital requirements 



A. are generally excluded from                                     project analysis due to their irrelevance                                     to the total project. 


B. are excluded from the analysis as                                     long as they’re recovered when the project                                     ends. 


C. can                                     affect the cash flows of a project every                                     year of the project’s life. 


D. only affect the initial and final                                     cash flows of a project. 



15.                               The Coffee Express has computed its fixed                             costs to be $.48 for every cup of coffee it sells,                             given annual sales of 145,000 cups. The sales price                             is $1.29 per cup, while the variable cost per cup                             is $.07. How many cups of coffee must it sell to                             break even on a cash basis? 



A. 57,049 


B. 67,630 


C. 46,472 


D. 23,910 



16.   You’re working on a bid to build                     two apartment buildings a year for the next three years.                     This project requires the purchase of $1,089,000 of                     equipment that will be depreciated using straight-line                     depreciation to a zero book value over the project’s life.                     The equipment can be sold at the end of the project for                     $815,000. You’ll also need $280,000 in net working capital                     over the life of the project. The fixed costs will be                     $528,000 a year, and the variable costs will be $1,640,000                     per building. Your required rate of return is 18 percent                     for this project, and your tax rate is 35 percent. What’s                     the minimal amount, rounded to the nearest $100, you should                     bid per building? 



A. $4,489,500 


B. $4,233,000 


C. $2,780,600 


D.                       $2,116,200 



17.   A project requires an initial                         investment of $45,400 today. The present value of the                         cash inflows likely to result from this initial                         investment is $45,300. Should the firm proceed with the                         investment? Why or why not? 



A.                           Yes, because the NPV is positive. 


B.                           No, because the NPV is positive. 


                           C. No, because the NPV is negative. 


D.                           Yes, because the NPV is negative. 



18.   Why is it important to find                         changes of net working capital (NWC) in developing cash                         flows? 



A.                           Changes in NWC have important tax implications (a                           tax shield), so they must be multiplied by 1 minus                           the tax rate to find total cash flow. 


B.                           Changes in NWC indicate capital expenditures                           (such as purchase of equipment). They must be                           subtracted from cash inflows (measured by other cash                           flow). 


C. Changes in NWC indicate cash                           outflows (measured by change in NWC) must be                           subtracted from cash inflows (measured by operating                           cash flow). 


D.                           Changes of NWC are unimportant. 


19.                               A new project will cause a $2,200 increase                             in sales, a $1,045 increase in costs, a $440                             increase in depreciation, and a $243 increase in                             taxes. Using the bottom-up approach, what’s the                             change to OCF? 



 A. $912 


B. $342 


C. $1,155 


D. $472 


20.   A project requires an                                 initial investment of $950,000 today. The                                 present value of the cash inflows likely to                                 result from this initial investment is                                 $1,208,293. What’s the net present value of                                 this investment? 



A. $950,000 


B. –$950,000 


 C. $258,293 


D. –$258,293




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