MOS 3310 Corporate Finance Quiz 3
True / False Questions
1. As the opportunity cost of capital increases, the net present value of a project increases.
_____ True
_____ False
Correct Answer – False
2. For mutually exclusive projects, the project with the higher IRR is the correct selection.
_____ True
_____ False
Correct Answer – True
3. When we compare assets with different lives, we should select the machine that has the lowest equivalent annual annuity.
_____ True
_____ False
Correct Answer – True
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4. Because of deficiencies associated with the payback method, it is seldom used in corporate financial analysis today.
_____ True
_____ False
5. Sunk costs influence capital budgeting decisions when the sunk costs exceed future cash inflows.
_____ True
_____ False
6. Suppose you finance a project partly with debt, you should neither subtract the debt proceeds from the required investment, nor would you recognize the interest and principal payments on the debt as cash outflows.
_____ True
_____ False
7. As a project comes to its end, there is a disinvestment in working capital, which also generates positive cash flow as inventories are sold off and accounts receivable are collected.
_____ True
_____ False
8. The total depreciation tax shield equals the product of depreciation and the tax rate.
_____ True
_____ False
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Related: (Solution) MOS 3310 Quiz 4
MULTIPLE CHOICE QUESTIONS
9. A currently used machine costs $10,000 annually to run. What is the maximum that should be paid to replace the machine with one that will last three years and cost only $4,000 annually to run? The opportunity cost of capital is 12 percent.
A. $2,000
B. $9,607
C. $14,411
D. $24,018
(10000-4000)/(1.12)^1 + (10000-4000)^1.12^2+(10000-4000)^1.12^3 = 14,411
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10. What is the equivalent annual cost for a project that requires a $40,000 investment at time-period zero, and a $10,000 annual expense during each of the next 4 years, if the opportunity cost of capital is 10 percent?
A. $20,000.00
B. $21,356.95
C. $22,618.83
D. $25,237.66
11 Ajax Corporation is planning a 10 year project that will have an initial cost of $500,000. During the first 2 years, there will be cash outflows of $40,000. Years 3-6 will see cash inflows of $120,000. Years 7-10 will see cash inflows of $200,000. If the company’s required rate of return is 9%, determine the NPV of the project.
A. $143,200
B. $225,650
C. $375,800
D. $500,000
12. The profitability index for a project costing $40,000 and returning $15,000 annually for four years at an opportunity cost of capital of 12 percent is:
A. 0.139
B. 0.320
C. 0.500
D. 0.861
13. Jamieson is considering a 5-year, $250,000 project with annual cash flows of $90,000. If the company’s required return is 10%, determine its discounted payback.
A. 3.27years
B. 3.43 years
C. 3.79 years
D. 4.01 years
14. What is the approximate IRR for a project that costs $100,000 and provides cash inflows of $30,000 for six years?
A. 19.9 percent
B. 30.0 percent
C. 32.3 percent
D. 80.0 percent
15. What is the present value at a 10 percent discount rate of the depreciation tax shield for a firm in the 35 percent tax bracket that purchases a $50,000 asset being depreciated at 15 percent declining balance with a half-year rule, disposed from the existing asset pool at zero?
A. $10,866
B. $10,023
C. $17,500
D. $37,908
16. What is the amount of the operating cash flow for a firm with $500,000 profit before tax, $100,000 depreciation expense, and a 35 percent marginal tax rate?
A. $260,000
B. $325,000
C. $360,000
D. $425,000
17. A firm generates sales of $250,000, depreciation expense of $50,000, taxable income of $50,000, and has a 35 percent tax rate. By how much does net cash flow deviate from net income?
A. $17,500
B. $50,000
C. $67,500
D. $82,500
18. Which of the following statements is correct?
A. real cash flows must be discounted at a real discount rate
B. nominal cash flows must be discounted at a nominal rate
C. (1 + real rate of interest) = (1 + nominal rate of interest)/(1 + inflation rate)
D. all statements are correct
19. What nominal annual return is required on an investment in order that an investor experiences a 12 percent gain in purchasing power? Assume inflation to be 4 percent.
A. 7.69 percent
C. 12.00 percent
D. 16.48 percent
20. Opportunity costs for organizational resources:
A. are limited to the explicit cash flows involved.
B. are determined according to the marginal tax rate.
C. can involve no cash flows.
D. should not be determined for existing products.
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