Question 1

The Analytic Hierarchy Process (AHP)  is:

Accepted Answer

A)  A single-criterion decision technique that can combine qualitative and quantitative factors in the overall evaluation of decision alternatives.
B)  A multi-criteria decision technique that can combine qualitative and quantitative factors in the overall evaluation of decision alternatives.
C)  A technique that does not use qualitative factors in the evaluation of decision alternatives.
D)  A technique that only uses qualitative factors in the evaluation of decision alternatives.
E)  Not useful in choosing between two mutually exclusive capital budgeting projects.

Question 2

Flex Corporation is studying a capital investment proposal in which newly acquired assets will be depreciated using the straight-line (SL)  method. Which one of the following statements about the proposal would be incorrect if, instead of SL, the Modified Accelerated Cost Recovery System (MACRS)  is used for determining depreciation for income tax purposes?

Accepted Answer

A)  The estimated net present value (NPV)  of the project would increase.
B)  The internal rate of return (IRR)  of the project would likely increase.
C)  The payback period for the investment would be shortened.
D)  The total after-tax income from this project, over its life, would normally increase.
E)  Total tax payments over the life of the project would be unaffected.

Question 3

The internal rate of return (IRR)  is (Note: to solve this problem students will need access either to Appendix C, Table 2 (Chapter 12)  or Excel) :

Accepted Answer

A)  Less than 10%.
B)  Somewhere between 10% and 12%.
C)  Somewhere between 12% and 14%.
D)  Somewhere between 14% and 15%.
E)  Greater than 15%.

Question 4

Which of the following is not one of the four general classes of real options?

Accepted Answer

A)  Expansion option.
B)  Exercise option.
C)  Abandonment option.
D)  Investment-timing option (e.g., delay)

Question 5

For a given income tax rate, t, after-tax cash operating receipts are calculated as follows:

Accepted Answer

A)  Taxable cash receipt times (1 - t) .
B)  Taxable case receipt times t.
C)  Taxable cash receipt times (1 + t) .
D)  Taxable cash receipt divided by (1 - t) .
E)  Taxable cash receipt divided by t.

Question 6

The accounting (book)  rate of return based on average investment (rounded to two decimal places)  for this proposed investment is:

Accepted Answer

A)  12.73%.
B)  14.00%.
C)  25.45%.
D)  28.00%.
E)  50.90%.

Question 7

LaVar, Inc. has obtained probability estimates from its production and sales departments regarding the costs and selling prices it can anticipate for a new product line. The company is uncertain as to which combination of costs and selling prices will occur. The best method for determining the expected outcome of the investment, based on an assumed probability distribution for both sales and costs, is:

Accepted Answer

A)  Monte Carlo simulation.
B)  The analytic hierarch process (AHP) .
C)  Correlation analysis.
D)  Multiple regression analysis.
E)  Linear programming.

Question 8

The hurdle rate for accepting new capital investment projects is 4%, after-tax. The estimated book (accounting)  rate of return on this project (rounded to two decimal points) , based on the initial investment is:

Accepted Answer

A)  2.67%.
B)  3.33%.
C)  6.67%.
D)  10.00%.
E)  12.00%.

Question 9

Solich Company is evaluating a new tractor that costs $1,350,000 to replace the tractor purchased years earlier, which currently has no salvage value; the new tractor has an estimated useful life of five years with no disposal value or anticipated cost of disposal. The company uses straight-line depreciation with no residual value on all equipment. Solich is subject to a 40% income tax rate. The company uses a 12% hurdle rate for evaluating capital investment projects. The PV of an annuity of $1 at 12% for 5 years is 3.605, and the PV of $1 at 12% in 5 years is 0.567.
Required:
1. Compute the amount of before-tax savings that must be generated by the new tractor to have a payback period of no more than 3 years.
2. Compute the amount of before-tax savings that must be generated by the new tractor to have a NPV of at least $500,000 at a desired rate of return of 12%. (Round your answer to the nearest whole dollar amount.)
3. Compute the amount of before-tax savings that must be generated by the new tractor to have an IRR of 12%.

Accepted Answer

Answer may vary
Feedback: 1. Annual depr...

Question 10

Harris Corporation provides the following data on a proposed capital project:  Harris uses straight-line depreciation method with no salvage value.
Required: Compute for this investment project:
1. NPV (the PV annuity factor for 12%, 4 years is 3.037)
2. IRR (to the nearest tenth of a percent). Note: PV annuity factors for 4 years: @ 8% = 3.312; @ 9% = 3.240; @ 10% = 3.170; @ 11% = 3.102; @ 12% = 3.037; and, @ 13% = 2.974)
3. Payback period (assume that cash inflows occur evenly throughout the year).
4. Accounting rate of return (ARR) on the net initial investment.
5. Discounted payback period (assume that the cash inflows occur evenly throughout the year; round your answer to 2 decimal places). The appropriate PV factors for 12% are as follows: year 1 = 0.893; year 2 = 0.797; year 3 = 0.712; year 4 = 0.636.

Accepted Answer

Answer may vary
Feedback:

2. NPV at 10%...

Question 11

The estimated net present value (NPV)  of this proposed investment (rounded to the nearest thousand)  is: (Note: the PV annuity factor from Table 2, Appendix C, 10%, 10 years is 6.145.)

Accepted Answer

A)  ($105,000) .
B)  ($84,000) .
C)  $181,000.
D)  $248,000.
E)  $285,000.

Question 12

Which of the following statements regarding real options is not true?

Accepted Answer

A)  Similar to financial options, real options are traded on an open exchange.
B)  Their consideration in capital budgeting analysis is designed to complement conventional DCF models.
C)  They refer to options on real assets (i.e., tangible and intangible property) .
D)  They can never reduce NPV of a proposed investment, only increase its NPV.
E)  They represent one way of handling risk and uncertainty in the capital budgeting process.

Question 13

The profitability index (PI)  is calculated as:

Accepted Answer

A)  Net present value (NPV)  divided by average investment.
B)  Net present value (NPV)  divided by initial investment.
C)  Average investment divided by net present value (NPV) .
D)  Initial investment divided by net present value (NPV) .
E)  Average after-tax income divided by average investment.

Question 14

Durable Inc. is considering replacing an old drilling machine that cost $200,000 six years ago with a new one that costs $450,000. Shipping and installation cost an additional $60,000. The old machine has been depreciated using straight-line method with no salvage value over an estimated 8-year useful life. The old machine can be sold for $40,000 now or $10,000 in two years. Management expects increases in inventories of $10,000, accounts receivable of $32,000, and accounts payable of $12,000 if the new machine is acquired. Durable's income tax rate is expected to be 30 percent over the years affected by the investment.
Required: What is Durable's net initial investment (i.e., its after-tax initial cash outlay for the machine)?

Accepted Answer

Answer may...

Question 15

In a discounted cash flow (DCF)  analysis, a required incremental investment in net working capital:

Accepted Answer

A)  Should be amortized over the useful life of the equipment.
B)  Can be disregarded because the same amount of cash will be recovered at the end of the project's life.
C)  Should be treated as a recurring cash outflow over the life of the project.
D)  Should be treated as a reduction in the required cash outflow in period 0.
E)  Should be treated as an immediate cash outflow that is later recovered when it is no longer needed.

Question 16

Conceptually, a firm's capital structure is its:

Accepted Answer

A)  Mix of debt and equity capital, expressed in book-value terms.
B)  Mix of debt and equity capital, expressed in market-value terms.
C)  Equity capital only, expressed in book-value terms.
D)  Equity capital only, expressed in market-value terms.

Question 17

If the net present value (NPV)  of an investment proposal is positive, it would indicate that the:

Accepted Answer

A)  PV of after-tax cash outflows exceeds the PV of after-tax cash inflows.
B)  Payback period is less than one-half the life of the project.
C)  Internal rate of return (IRR)  is equal to the discount percentage used in the NPV calculation.
D)  PV index would be less than 100%.
E)  Internal rate of return (IRR)  for this project is greater than the discount rate used in the NPV computation.

Question 18

In addition to a one million dollar acquisition cost, an investment requires $200,000 net working capital during its useful life. This investment in working capital should be:

Accepted Answer

A)  Added to the cash outflow each year during the useful life of the investment.
B)  Disregarded in the capital budgeting decision because working capital is not an expense.
C)  Treated as an immediate cash outflow that is recovered at the end of the investment's useful life.
D)  Treated as an immediate expense and a gain at the end of the investment's useful life.
E)  Added to the initial investment.

Question 19

George's Garage is considering purchasing a machine for $75,000. The machine is expected to generate a net after-tax income of $11,250 per year. This machine is to be depreciated over a 10-year period with no residual value.
Required: What is the payback period, in years, for this machine? (Assume that the cash inflows from this investment occur evenly throughout the year.)

Accepted Answer

Answer may vary
Feedback: 1. Depreciatio...

Question 20

Which of the following is not an important advantage of the net present value (NPV)  method over the internal rate of return (IRR)  method in evaluating capital investment proposals?

Accepted Answer

A)  NPV facilitates comparisons of mutually exclusive projects requiring different amounts of initial investments.
B)  NPV facilitates comparisons among mutually exclusive projects that have the same useful life but different initial outlays.
C)  NPV can be used to determine an optimum capital budget under conditions of capital rationing, while IRR cannot.
D)  NPV is relatively intuitive.
E)  IRR relies on discounted cash-flow analysis, while NPV does not.

Exam 12: Strategy and the Analysis of Capital Investments

In a discounted cash flow (DCF) analysis, a required incremental investment in net working capital:

Correct Answer
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Correct Answer
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Answer may vary
Feedback: 1. Annual depr...
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The hurdle rate for accepting new capital investment projects is 4%, after-tax. The estimated book (accounting) rate of return on this project (rounded to two decimal points) , based on the initial investment is:

Correct Answer
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Correct Answer
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Answer may...
View Answer

The Analytic Hierarchy Process (AHP) is:

Correct Answer
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If the net present value (NPV) of an investment proposal is positive, it would indicate that the:

Correct Answer
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Conceptually, a firm's capital structure is its:

Correct Answer
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For a given income tax rate, t, after-tax cash operating receipts are calculated as follows:

Correct Answer
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Correct Answer
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The internal rate of return (IRR) is (Note: to solve this problem students will need access either to Appendix C, Table 2 (Chapter 12) or Excel) :

Correct Answer
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Which of the following is not one of the four general classes of real options?

Correct Answer
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Which of the following is not an important advantage of the net present value (NPV) method over the internal rate of return (IRR) method in evaluating capital investment proposals?

Correct Answer
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Correct Answer
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The accounting (book) rate of return based on average investment (rounded to two decimal places) for this proposed investment is:

Correct Answer
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The profitability index (PI) is calculated as:

Correct Answer
verified

Correct Answer
verified
Answer may vary
Feedback: 1. Depreciatio...
View Answer

In addition to a one million dollar acquisition cost, an investment requires $200,000 net working capital during its useful life. This investment in working capital should be:

Correct Answer
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Correct Answer
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Answer may vary
Feedback: 2. NPV at 10%...
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The estimated net present value (NPV) of this proposed investment (rounded to the nearest thousand) is: (Note: the PV annuity factor from Table 2, Appendix C, 10%, 10 years is 6.145.)

Correct Answer
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Which of the following statements regarding real options is not true?

Correct Answer
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Exam 12: Strategy and the Analysis of Capital Investments

In a discounted cash flow (DCF) analysis, a required incremental investment in net working capital:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedAnswer may varyFeedback: 1. Annual depr...View AnswerShow Answer

The hurdle rate for accepting new capital investment projects is 4%, after-tax. The estimated book (accounting) rate of return on this project (rounded to two decimal points) , based on the initial investment is:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedAnswer may...View AnswerShow Answer

The Analytic Hierarchy Process (AHP) is:

Correct AnswerverifiedShow Answer

If the net present value (NPV) of an investment proposal is positive, it would indicate that the:

Correct AnswerverifiedShow Answer

Conceptually, a firm's capital structure is its:

Correct AnswerverifiedShow Answer

For a given income tax rate, t, after-tax cash operating receipts are calculated as follows:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The internal rate of return (IRR) is (Note: to solve this problem students will need access either to Appendix C, Table 2 (Chapter 12) or Excel) :

Correct AnswerverifiedShow Answer

Which of the following is not one of the four general classes of real options?

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Which of the following is not an important advantage of the net present value (NPV) method over the internal rate of return (IRR) method in evaluating capital investment proposals?

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Correct AnswerverifiedShow Answer

The accounting (book) rate of return based on average investment (rounded to two decimal places) for this proposed investment is:

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The profitability index (PI) is calculated as:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedAnswer may varyFeedback: 1. Depreciatio...View AnswerShow Answer

In addition to a one million dollar acquisition cost, an investment requires $200,000 net working capital during its useful life. This investment in working capital should be:

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Correct AnswerverifiedAnswer may varyFeedback: 2. NPV at 10%...View AnswerShow Answer

The estimated net present value (NPV) of this proposed investment (rounded to the nearest thousand) is: (Note: the PV annuity factor from Table 2, Appendix C, 10%, 10 years is 6.145.)

Correct AnswerverifiedShow Answer

Which of the following statements regarding real options is not true?

Correct AnswerverifiedShow Answer

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Correct Answer
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Answer may vary
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Answer may...
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Correct Answer
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Answer may vary
Feedback: 1. Depreciatio...
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Correct Answer
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Answer may vary
Feedback: 2. NPV at 10%...
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