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Any changes to a firm’s projected future cash flows that are caused by adding a new project are referred to as which
one of the following?
A. Eroded cash flows
B. Deviated projections
C. Incremental cash flows
D. Directly impacted flows
E. Assumed flows
A cost that should be ignored when evaluating a project because that cost has already been incurred and cannot be
recouped is referred to as which type of cost?
A. Fixed
B. Forgotten
C. Variable
D. Opportunity
E. Sunk
Which one of the following terms refers to the best option that was foregone when a particular investment is
A. Side effect
B. Erosion
C. Sunk cost
D. Opportunity cost
E. Marginal cost
A pro forma financial statement is a financial statement that:
A. expresses all values as a percentage of either total assets or total sales.
B. compares actual results to the budgeted amounts.
C. compares the performance of a firm to its industry.
D. projects future years’ operations.
E. values all assets based on their current market values.
The amount by which a firm’s tax bill is reduced as a result of the depreciation expense is referred to as the
A. tax shield.
B. credit.
C. erosion.
D. opportunity cost.
E. adjustment.
Jamie is analyzing the estimated net present value of a project under various what if scenarios. The type of analysis
that Jamie is doing is best described as:
A. sensitivity analysis.
B. erosion planning.
C. scenario analysis.
D. benefit planning.
E. opportunity evaluation.
The net working capital invested in a project is generally:
A. a sunk cost.
B. an opportunity cost.
C. recouped in the first year of the project
D. recouped at the end of the project.
E. depreciated to a zero balance over the life of the project.
A proposed project will increase a firm’s accounts payables. This increase is generally:
A. treated as an erosion cost.
B. treated as an opportunity cost.
C. a sunk cost and should be ignored.
D. a cash outflow at time zero and a cash inflow at the end of the project.
E. a cash inflow at time zero and a cash outflow at the end of the project.
Which one of the following is a correct value to use if you are conducting a best case scenario analysis?
A. Sales price that is most likely to occur
B. Lowest expected level of sales quantity
C. Lowest expected salvage value
D. Highest expected need for net working capital
E. Lowest expected value for fixed costs
A project has sales of $462,000, costs of $274,000, depreciation of $28,000, interest expense of $3,400, and a tax
rate of 35 percent. What is the value of the depreciation tax shield?
A. $9,800
B. $10,300
C. $10,650
D. $10,800
Which one of the following projects should you accept?
a. A project with an IRR of 11.6 percent and a required return of 11.5 percent.
b. A project with an NPV of -$3,091.
c. A project with a PI of 0.87.
d. A project with a payback period of 2.6 years and a required period of 2.5 years.
What do you know for certain about two mutually exclusive projects if their NPVs both plot exactly at the
crossover point on an NPV profile graph?
a. Both projects have a zero NPV.
b. Neither project is acceptable.
c. Both projects should be accepted.
d. You are indifferent between the two projects.
Which one of the following must equal zero if a project’s IRR is used as the discount rate for the project?
a. PI
b. payback period
c. AAR
d. NPV
Lester’s Feed Mill is spending $230,000 to update its facility. The company estimates that this
investment will improve its cash inflows by $46,500 a year for 10 years. What is the payback
A. 4.03 years
B. 4.95 years
C. 5.39 years
D. 5.67 years
Alpha Zeta is considering purchasing some new equipment costing $390,000. The equipment
will be depreciated on a straight line basis to a zero book value over the four-year life of the
project. Projected net income for the four years is $18,900, $21,300, $26,700, and $25,000. What
is the average accounting rate of return?
A. 11.78 percent
B. 11.93 percent
C. 12.01 percent
D. 12.49 percent
The net present value of a project’s cash inflows is $8,216 at a 14 percent discount rate. The
profitability index is 1.03 and the firm’s tax rate is 34 percent. What is the initial cost of the
A. $6,900.00
B. $7,018.50
C. $7,428.32
D. $7,976.70
Which one of the following methods of analysis is most suited to analyzing mutually exclusive projects with
differing initial costs?
a. PI
b. AAR
c. IRR
d. NPV
Which one of the following statements is correct?
A. The internal rate of return is the most reliable method of analysis for any type of investment
B. The payback method is biased towards short-term projects.
C. The modified internal rate of return is most useful when projects are mutually exclusive.
D. The average accounting return is the most difficult method of analysis to compute.
Which one of the following indicates that a project is definitely acceptable?
A. Profitability index greater than 1.0
B. Negative net present value
C. Modified internal rate return that is lower than the requirement
D. Zero internal rate of return
You were recently hired by a firm as a project analyst. The owner of the firm is unfamiliar with
financial analysis and only wants to know what the expected dollar return is per dollar spent on a
given project. Which financial method of analysis will provide the information that the owner
A. Internal rate of return
B. Modified internal rate of return
C. Net present value
D. Profitability index
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