Question 1

is extremely difficult to estimate the revenues and costs associated with large, complex projects that take several years to develop This is why subjective judgment is often used for such projects along with discounted cash flow analysis.

Accepted Answer

A) True 
 B)False

Question 2

cash flows that can be classified as incremental to a particular project--i.e., results directly from the decision to undertake the project--should be reflected in the capital budgeting analysis.

Accepted Answer

A) True 
 B)False

Question 3

Which of the following statements is CORRECT?

Accepted Answer

A)   Under current laws and regulations, corporations must use straight-line depreciation for all assets whose lives are 5 years or longer.
B)   Corporations must use the same depreciation method for both stockholder reporting and tax purposes.
C)   Using accelerated depreciation rather than straight line normally has the effect of speeding up cash flows and thus increasing a project's forecasted NPV.
D)   Using accelerated depreciation rather than straight line normally has no effect on a project's total projected cash flows nor would it affect the timing of those cash flows or the resulting NPV of the project.
E)   Since depreciation is a cash expense, the faster an asset is depreciated, the lower the projected NPV from investing in the asset.F) A) and E)
G) A) and B)

Question 4

Which of the following statements is CORRECT?

Accepted Answer

A)   In a capital budgeting analysis where part of the funds used to finance the project would be raised as debt, failure to include interest expense as a cost when determining the project's cash flows will lead to a downward bias in the NPV.
B)   The existence of any type of "externality" will reduce the calculated NPV versus the NPV that would exist without the externality.
C)   If one of the assets to be used by a potential project is already owned by the firm, and if that asset could be sold or leased to another firm if the new project were not undertaken, then the net after-tax proceeds that could be obtained should be charged as a cost to the project under consideration.
D)   If one of the assets to be used by a potential project is already owned by the firm but is not being used, then any costs associated with that asset is a sunk cost and should be ignored.
E)   In a capital budgeting analysis where part of the funds used to finance the project would be raised as debt, failure to include interest expense as a cost when determining the project's cash flows will lead to an upward bias in the NPV.F) A) and D)
G) A) and E)

Question 5

Superior analytical techniques, such as NPV, used in combination with risk-adjusted cost of capital estimates, can overcome the problem of poor cash flow estimation and lead to generally correct accept/reject decisions.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following statements is CORRECT?

Accepted Answer

A)   Sunk costs must be considered if the IRR method is used but not if the firm relies on the NPV method.
B)   A good example of a sunk cost is a situation where a bank opens a new office, and that new office leads to a decline in deposits of the bank's other offices.
C)   A good example of a sunk cost is money that a banking corporation spent last year to investigate the site for a new office, then expensed that cost for tax purposes, and now is deciding whether to go forward with the project.
D)   If sunk costs are considered and reflected in a project's cash flows, then the project's calculated NPV will be higher than it otherwise would be.
E)   An example of a sunk cost is the cost associated with restoring the site of a strip mine once the ore has been depleted.F) B) and E)
G) All of the above

Question 7

primary advantage to using accelerated rather than straight-line depreciation is that with accelerated depreciation the present value of the tax savings provided by depreciation will be higher, other things held constant.

Accepted Answer

A) True 
 B)False  True

Question 8

use of accelerated versus straight-line depreciation causes net income reported to stockholders to be lower, and cash flows higher, during every year of a project's life, other things held constant.

Accepted Answer

A) True 
 B)False

Question 9

can identify the cash costs and cash inflows to a company that will result from a project These could be called "direct inflows and outflows," and the net difference is the direct net cash flow If there are other costs and benefits that do not flow from or to the firm, but to other parties, these are called externalities, and they need not be considered as a part of the capital budgeting analysis.

Accepted Answer

A) True 
 B)False

Question 10

While developing a new product line, Cook Company spent $3 million two years ago to build a plant for a new product It then decided not to go forward with the project, so the building is available for sale or for a new product Cook owns the building free and clear--there is no mortgage on it Which of the following statements is CORRECT?

Accepted Answer

A)   If the building could be sold, then the after-tax proceeds that would be generated by any such sale should be charged as a cost to any new project that would use it.
B)   This is an example of an externality, because the very existence of the building affects the cash flows for any new project that Rowell might consider.
C)   Since the building was built in the past, its cost is a sunk cost and thus need not be considered when new projects are being evaluated, even if it would be used by those new projects.
D)   If there is a mortgage loan on the building, then the interest on that loan would have to be charged to any new project that used the building.
E)   Since the building has been paid for, it can be used by another project with no additional cost. Therefore, it should not be reflected in the cash flows for any new project.F) C) and E)
G) A) and D)

Question 11

Which of the following statements is CORRECT?

Accepted Answer

A)   Under current laws and regulations, corporations must use straight-line depreciation for all assets whose lives are 3 years or longer.
B)   If firms use accelerated depreciation, they will write off assets slower than they would under straight-line depreciation, and as a result projects' forecasted NPVs are normally lower than they would be if straight-line depreciation were required for tax purposes.
C)   If they use accelerated depreciation, firms can write off assets faster than they could under straight-line depreciation, and as a result projects' forecasted NPVs are normally lower than they would be if straight-line depreciation were required for tax purposes.
D)   If they use accelerated depreciation, firms can write off assets faster than they could under straight-line depreciation, and as a result projects' forecasted NPVs are normally higher than they would be if straight-line depreciation were required for tax purposes.
E)   Since depreciation is not a cash expense, and since cash flows and not accounting income are the relevant input, depreciation plays no role in capital budgeting.F) B) and C)
G) A) and B) D

Question 12

primary advantage to using accelerated rather than straight-line depreciation is that with accelerated depreciation the total amount of depreciation that can be taken, assuming the asset is used for its full tax life, is greater.

Accepted Answer

A) True 
 B)False  False

Question 13

a firm's projects differ in risk, then one way of handling this problem is to evaluate each project with the appropriate risk-adjusted discount rate.

Accepted Answer

A) True 
 B)False

Question 14

Accelerated depreciation has an advantage for profitable firms in that it moves some cash flows forward, thus increasing their present value On the other hand, using accelerated depreciation generally lowers the reported current year's profits because of the higher depreciation expenses However, the reported profits problem can be solved by using different depreciation methods for tax and stockholder reporting purposes.

Accepted Answer

A) True 
 B)False

Question 15

Puckett Incrisk-adjusts its WACC to account for project riskIt uses a WACC of 8% for below-average risk projects, 10% for average-risk projects, and 12% for above-average risk projects Which of the following independent projects should Puckett accept, assuming that the company uses the NPV method when choosing projects?

Accepted Answer

A)   Project B, which has below-average risk and an IRR = 8.5%.
B)   Project C, which has above-average risk and an IRR = 11%.
C)   Without information about the projects' NPVs we cannot determine which project(s)  should be accepted.
D)   All of these projects should be accepted.
E)   Project A, which has average risk and an IRR = 9%.F) A) and B)
G) C) and D)

Question 16

Estimating project cash flows is generally the most important, but also the most difficult, step in the capital budgeting process Methodology, such as the use of NPV versus IRR, is important, but less so than obtaining a reasonably accurate estimate of projects' cash flows.

Accepted Answer

A) True 
 B)False

Question 17

Which one of the following would NOT result in incremental cash flows and thus should NOT be included in the capital budgeting analysis for a new product?

Accepted Answer

A)   A new product will generate new sales, but some of those new sales will be from customers who switch from one of the firm's current products.
B)   A firm must obtain new equipment for the project, and $1 million is required for shipping and installing the new machinery.
C)   A firm has spent $2 million on R&D associated with a new product. These costs have been expensed for tax purposes, and they cannot be recovered regardless of whether the new project is accepted or rejected.
D)   A firm can produce a new product, and the existence of that product will stimulate sales of some of the firm's other products.
E)   A firm has a parcel of land that can be used for a new plant site or be sold, rented, or used for agricultural purposes.F) A) and D)
G) B) and E)

Question 18

Which of the following factors should be included in the cash flows used to estimate a project's NPV?

Accepted Answer

A)   Interest on funds borrowed to help finance the project.
B)   The end-of-project recovery of any working capital required to operate the project.
C)   Cannibalization effects, but only if those effects increase the project's projected cash flows.
D)   Expenditures to date on research and development related to the project, provided those costs have already been expensed for tax purposes.
E)   All costs associated with the project that have been incurred prior to the time the analysis is being conducted.F) B) and D)
G) D) and E)

Question 19

firm that bases its capital budgeting decisions on either NPV or IRR will be more likely to accept a given project if it uses accelerated depreciation than if it uses straight-line depreciation, other things being equal.

Accepted Answer

A) True 
 B)False

Question 20

Which one of the following would NOT result in incremental cash flows and thus should NOT be included in the capital budgeting analysis for a new product?

Accepted Answer

A)   Revenues from an existing product would be lost as a result of customers switching to the new product.
B)   Shipping and installation costs associated with a machine that would be used to produce the new product.
C)   The cost of a study relating to the market for the new product that was completed last year. The results of this research were positive, and they led to the tentative decision to go ahead with the new product. The cost of the research was incurred and expensed for tax purposes last year.
D)   It is learned that land the company owns and would use for the new project, if it is accepted, could be sold to another firm.
E)   Using some of the firm's high-quality factory floor space that is currently unused to produce the proposed new product. This space could be used for other products if it is not used for the project under consideration.F) B) and E)
G) A) and B)

Exam 13: Cash Flows and Risk

is extremely difficult to estimate the revenues and costs associated with large, complex projects that take several years to develop This is why subjective judgment is often used for such projects along with discounted cash flow analysis.

Correct Answer
verified

cash flows that can be classified as incremental to a particular project--i.e., results directly from the decision to undertake the project--should be reflected in the capital budgeting analysis.

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

Superior analytical techniques, such as NPV, used in combination with risk-adjusted cost of capital estimates, can overcome the problem of poor cash flow estimation and lead to generally correct accept/reject decisions.

Correct Answer
verified

Which of the following statements is CORRECT?

Correct Answer
verified

primary advantage to using accelerated rather than straight-line depreciation is that with accelerated depreciation the present value of the tax savings provided by depreciation will be higher, other things held constant.

Correct Answer
verified
True

use of accelerated versus straight-line depreciation causes net income reported to stockholders to be lower, and cash flows higher, during every year of a project's life, other things held constant.

Correct Answer
verified

Correct Answer
verified

Correct Answer
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Which of the following statements is CORRECT?

Correct Answer
verified
D

primary advantage to using accelerated rather than straight-line depreciation is that with accelerated depreciation the total amount of depreciation that can be taken, assuming the asset is used for its full tax life, is greater.

Correct Answer
verified
False

a firm's projects differ in risk, then one way of handling this problem is to evaluate each project with the appropriate risk-adjusted discount rate.

Correct Answer
verified

Correct Answer
verified

Correct Answer
verified

Estimating project cash flows is generally the most important, but also the most difficult, step in the capital budgeting process Methodology, such as the use of NPV versus IRR, is important, but less so than obtaining a reasonably accurate estimate of projects' cash flows.

Correct Answer
verified

Which one of the following would NOT result in incremental cash flows and thus should NOT be included in the capital budgeting analysis for a new product?

Correct Answer
verified

Which of the following factors should be included in the cash flows used to estimate a project's NPV?

Correct Answer
verified

firm that bases its capital budgeting decisions on either NPV or IRR will be more likely to accept a given project if it uses accelerated depreciation than if it uses straight-line depreciation, other things being equal.

Correct Answer
verified

Which one of the following would NOT result in incremental cash flows and thus should NOT be included in the capital budgeting analysis for a new product?

Correct Answer
verified

Exam 13: Cash Flows and Risk

is extremely difficult to estimate the revenues and costs associated with large, complex projects that take several years to develop This is why subjective judgment is often used for such projects along with discounted cash flow analysis.

Correct AnswerverifiedShow Answer

cash flows that can be classified as incremental to a particular project--i.e., results directly from the decision to undertake the project--should be reflected in the capital budgeting analysis.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

Superior analytical techniques, such as NPV, used in combination with risk-adjusted cost of capital estimates, can overcome the problem of poor cash flow estimation and lead to generally correct accept/reject decisions.

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedShow Answer

primary advantage to using accelerated rather than straight-line depreciation is that with accelerated depreciation the present value of the tax savings provided by depreciation will be higher, other things held constant.

Correct AnswerverifiedTrue

use of accelerated versus straight-line depreciation causes net income reported to stockholders to be lower, and cash flows higher, during every year of a project's life, other things held constant.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is CORRECT?

Correct AnswerverifiedD

primary advantage to using accelerated rather than straight-line depreciation is that with accelerated depreciation the total amount of depreciation that can be taken, assuming the asset is used for its full tax life, is greater.

Correct AnswerverifiedFalse

a firm's projects differ in risk, then one way of handling this problem is to evaluate each project with the appropriate risk-adjusted discount rate.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Estimating project cash flows is generally the most important, but also the most difficult, step in the capital budgeting process Methodology, such as the use of NPV versus IRR, is important, but less so than obtaining a reasonably accurate estimate of projects' cash flows.

Correct AnswerverifiedShow Answer

Which one of the following would NOT result in incremental cash flows and thus should NOT be included in the capital budgeting analysis for a new product?

Correct AnswerverifiedShow Answer

Which of the following factors should be included in the cash flows used to estimate a project's NPV?

Correct AnswerverifiedShow Answer

firm that bases its capital budgeting decisions on either NPV or IRR will be more likely to accept a given project if it uses accelerated depreciation than if it uses straight-line depreciation, other things being equal.

Correct AnswerverifiedShow Answer

Which one of the following would NOT result in incremental cash flows and thus should NOT be included in the capital budgeting analysis for a new product?

Correct AnswerverifiedShow Answer

Correct Answer
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True

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D

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False

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