CORP 2 - Chapter 12 Flashcards by Matt Morales

The longer the life of an investment
A. the more significant the discount rate.
B. the less significant the discount rate.
C. Makes no difference.
D. None of these.

The longer the life of an investment

A. the more significant the discount rate.

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You require an IRR of 14% to accept a project. If the project will yield $10,000 per year for 10 years, what is the maximum amount that you would be willing to invest in the project?
A. Less than $50,000
B. More than $50,000 and less than $60,000
C. More than $60,000 and less than $70,000
D. More than $70,000

You require an IRR of 14% to accept a project. If the project will yield $10,000 per year for 10 years, what is the maximum amount that you would be willing to invest in the project?

B. More than $50,000 and less than $60,000

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You buy a new piece of equipment for $7,360, and you receive a cash inflow of $1,000 per year for 10 years. What is the internal rate of return?
A. 5%
B. 6%
C. 7%
D. More than 7%

You buy a new piece of equipment for $7,360, and you receive a cash inflow of $1,000 per year for 10 years. What is the internal rate of return?

B. 6%

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The payback method has several disadvantages, among them:
A. payback fails to choose the optimum or most economic solution to a capital budgeting problem.
B. payback ignores cash inflows after the payback period.
C. a and b.
D. none of these.

The payback method has several disadvantages, among them:

C. a and b.

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There are several disadvantages to the payback method, among them:
A. payback ignores the time value of money.
B. payback emphasizes receiving money back as fast as possible for reinvestment.
C. payback is Basic to use and to understand.
D. payback can be used in conjunction with time adjusted methods of evaluation.

There are several disadvantages to the payback method, among them:

A. payback ignores the time value of money.

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Which of the following statements about the “payback method” is true?
A. The payback method considers cash flows after the payback has been reached.
B. The payback method does not consider the time value of money.
C. The payback method uses discounted cash-flow techniques.
D. The payback method generally leads to the same decision as other investment selection methods.

Which of the following statements about the “payback method” is true?

B. The payback method does not consider the time value of money.

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Which of the following is not a time-adjusted method for ranking investment proposals?
A. Net present value method
B. Payback method
C. Internal rate of return method
D. All of these are time-adjusted methods

Which of the following is not a time-adjusted method for ranking investment proposals?

B. Payback method

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Assume a project has earnings before depreciation and taxes of $15,000, depreciation of $25,000, and that the firm has a 30 percent tax bracket. What are the after-tax cash flows for the project?
A. $18,000
B. $19,000
C. A loss of $21,000
D. None of these

Assume a project has earnings before depreciation and taxes of $15,000, depreciation of $25,000, and that the firm has a 30 percent tax bracket. What are the after-tax cash flows for the project?

A. $18,000

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Assume a corporation has earnings before depreciation and taxes of $82,000, depreciation of $45,000, and that it has a 30 percent tax bracket. What are the after-tax cash flows for the company?
A. $70,900
B. $82,000
C. $42,000
D. None of these

Assume a corporation has earnings before depreciation and taxes of $82,000, depreciation of $45,000, and that it has a 30 percent tax bracket. What are the after-tax cash flows for the company?

A. $70,900

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Capital budgeting is primarily concerned with
A. capital formation in the economy.
B. planning future financing needs.
C. evaluating investment alternatives.
D. minimizing the cost of capital.

Capital budgeting is primarily concerned with

C. evaluating investment alternatives.

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Horne robinson Inc.

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Perpetual Power Machine Co.

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The net present value method is a better method of evaluation than the internal rate of return method because
A. the NPV method discounts cash flows at the internal rate of return.
B. the NPV method is a more liberal method of analysis.
C. the NPV method discounts cash flows at higher than the firm’s cost of capital.
D. none of the other answers are correct

The net present value method is a better method of evaluation than the internal rate of return method because

D. none of the other answers are correct

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The reason cash flow is used in capital budgeting is because
A. income rather than cash is used to purchase new machines.
B. cash outlays need not be evaluated in terms of the present value of the resultant cash inflows.
C. to ignore the tax shield provided from amortization ignores the cash flow provided by the machine which should be reinvested to replace old worn out machines.
D. all of the other answers are correct

The reason cash flow is used in capital budgeting is because

C. to ignore the tax shield provided from amortization ignores the cash flow provided by the machine which should be reinvested to replace old worn out machines.

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Which statement, or statements, is true about amortization?
A. amortization is a non-cash expense that provides tax shield benefits.
B. the lesser the amortization expenses in earlier years, the higher the present value of the project.
C. the CCA amortization schedules supersede other methods for tax purposes.
D. all of the other answers are correct

Which statement, or statements, is true about amortization?

C. the CCA amortization schedules supersede other methods for tax purposes.

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Which of the following statements about the “payback period” is true?
A. The payback period considers cash flows after the payback has been reached.
B. The payback period considers the time value of money
C. The payback period uses discounted cash-flow techniques.
D. None of the other answers are correct

Which of the following statements about the “payback period” is true?

D. None of the other answers are correct

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An investment project has a positive net present value. The internal rate of return is
A. less than the cost of capital.
B. greater than the cost of capital.
C. equal to the cost of capital.
D. none of the other answers are correct.

An investment project has a positive net present value. The internal rate of return is

B. greater than the cost of capital.

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The modified internal rate of return (MIRR) assumes
A. inflows are invested at the traditional interest rate of return.
B. inflows are reinvested at the cost of capital.
C. outflows are funded with debt.
D. outflows are funded with equity.

The modified internal rate of return (MIRR) assumes

B. inflows are reinvested at the cost of capital.

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Capital rationing assumes
A. a limited amount of capital is available.
B. a limited number of investments are available.
C. maximum value creation will be obtained.
D. none of the answers are correct

Capital rationing assumes

A. a limited amount of capital is available.

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The internal rate of return (IRR) and net present value (NPV) methods
A. always give the same investment decision.
B. never give the same investment decision.
C. usually give the same investment decision
D. always give a decision different from the payback period method.

The internal rate of return (IRR) and net present value (NPV) methods

C. usually give the same investment decision

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The internal rate of return (IRR) assumes that funds are reinvested at the
A. cost of capital.
B. yield on the investment.
C. minimal acceptable rate to the firm.
D. yield to maturity.

The internal rate of return (IRR) assumes that funds are reinvested at the

B. yield on the investment.

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A firm may adapt capital rationing because
A. it is hesitant to use external sources of financing.
B. it wishes to maximize value.
C. it is fearful of too much growth.
D. two of the answers are correct.

A firm may adapt capital rationing because

D. two of the answers are correct.

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The profitability index will give the same investment decision as
A. the payback period.
B. the average accounting return.
C. the net present value.
D. It can be different from each of these techniques.

The profitability index will give the same investment decision as

C. the net present value.

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NPV is superior to average accounting return as a capital budgeting technique because
A. it employs the accounting definition of income.
B. it values each cash flow equally based on dollar value.
C. it employs the actual cost of an investment.
D. it employs cash flows.

NPV is superior to average accounting return as a capital budgeting technique because

D. it employs cash flows.

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``` The first step in the capital budgeting process is A. collection of data. B. idea development. C. assigning probabilities. D. determining cash flow. ```

The first step in the capital budgeting process is B. idea development.

``` At higher tax rates, CCA amortization is A. more beneficial. B. less beneficial. C. unaffected. D. none of the other answers are correct ```

At higher tax rates, CCA amortization is A. more beneficial.

If an old asset sells below book value (UCC) and the asset pool ends, from a tax standpoint A. there is a decrease in cash flow. B. there is an increase in cash flow. C. there is no effect on cash flow. D. there is a decrease in net present value.

If an old asset sells below book value (UCC) and the asset pool ends, from a tax standpoint B. there is an increase in cash flow.

With non-mutually exclusive projects A. the payback period will select the best project. B. the net present value method will always select the best project. C. the internal rate of return method will always select the best project. D. the net present value and the internal rate of return methods will always accept or reject the same project.

With non-mutually exclusive projects D. the net present value and the internal rate of return methods will always accept or reject the same project.

A characteristic of capital budgeting is A. a large amount of money is always involved. B. the internal rate of return must be less than the cost of capital. C. the internal rate of return must be greater than the cost of capital. D. the time horizon is at least five years.

A characteristic of capital budgeting is C. the internal rate of return must be greater than the cost of capital.

If a firm is experiencing no capital rationing, it should accept all investment proposals A. as long as it has available funds. B. that return an amount equal to or greater than the cost of capital. C. that return an amount greater than the cost of equity. D. that are available, regardless of return.

If a firm is experiencing no capital rationing, it should accept all investment proposals B. that return an amount equal to or greater than the cost of capital.

``` Capital budgeting is primarily concerned with A. capital formation in the economy. B. planning future financing needs. C. evaluating investment alternatives. D. minimizing the cost of capital. ```

Capital budgeting is primarily concerned with C. evaluating investment alternatives.

``` An asset just purchased qualifies for a 20% CCA rate and qualifies for a 5% ITC. If the asset cost $60,000 what is the amortization base (UCC) for tax purposes? A. $54,000 B. $57,000 C. $56,000 D. $48,000 ```

An asset just purchased qualifies for a 20% CCA rate and qualifies for a 5% ITC. If the asset cost $60,000 what is the amortization base (UCC) for tax purposes? B. $57,000

An investment tax credit (ITC) of $100 in comparison to CCA expense of $100 provides A. the same tax shield benefits. B. less tax shield benefits. C. greater tax shield benefits. D. cannot determine with the information given

An investment tax credit (ITC) of $100 in comparison to CCA expense of $100 provides C. greater tax shield benefits.

Project A has a $5,000 net present value at a zero discount rate and an internal rate of return of 12%. Project B has an $8,000 net present value at a 0% discount rate and an IRR of return of 10%. If the projects are mutually exclusive, which one should be chosen? A. project A because it has a higher internal rate of return B. project B if the cost of capital is less than the crossover point C. both projects if the net present value is positive D. not enough information

Project A has a $5,000 net present value at a zero discount rate and an internal rate of return of 12%. Project B has an $8,000 net present value at a 0% discount rate and an IRR of return of 10%. If the projects are mutually exclusive, which one should be chosen? B. project B if the cost of capital is less than the crossover point

The investment tax credit A. reduces the tax bill for the year in which the asset is purchased. B. increases the amount of CCA writeoff available each year. C. decreases the base upon which CCA is calculated. D. two of the other answers are correct

The investment tax credit D. two of the other answers are correct

Suppose that interest rates (and, therefore, the firm's Weighted Average Cost of Capital) increase. This WOULD NOT CHANGE the capital budgeting choices a firm would make if it A. uses payback period analysis. B. uses net present value analysis. C. uses internal rate of return analysis. D. uses profitability indexes.

``` For CCA amortization, automobiles and light trucks fit into the A. 30% category. B. 20% category. C. 10% category. D. 5% category. ```

For CCA amortization, automobiles and light trucks fit into the A. 30% category.

An equipment replacement decision, under resultant cash flow analysis, requires A. calculating the present value of all cash flows associated with the new equipment minus the salvage value of the old asset. B. calculating the present value of all changes in cash flows from the old equipment to the new equipment. C. subtracting the purchase price of the old equipment from the purchase price of the new equipment. D. two of the other answers are correct

An equipment replacement decision, under resultant cash flow analysis, requires B. calculating the present value of all changes in cash flows from the old equipment to the new equipment.

Assuming that a firm has no capital rationing constraint and that a firm's investment alternatives are not mutually exclusive, the firm should accept all investment proposals A. for which it can obtain financing. B. that have a positive net present value. C. that have positive cash flows. D. that provide returns greater than the after tax cost of debt.

Assuming that a firm has no capital rationing constraint and that a firm's investment alternatives are not mutually exclusive, the firm should accept all investment proposals B. that have a positive net present value.

An investment tax credit (ITC) A. increases the amortization base for tax purposes. B. decreases the amortization base for tax purposes. C. does not affect the amortization base for tax purposes. D. may increase or decrease the amortization base for tax purposes.

An investment tax credit (ITC) B. decreases the amortization base for tax purposes.

Wet Corp.

Dammon Corp.

If the capital budgeting decision includes a replacement analysis, then A. a gain from the sale of the old asset will represent a tax savings inflow. B. only incremental cash flows should be looked at. C. the sale price and tax savings will increase the cash inflows throughout the asset's life. D. two of the other answers are correct

If the capital budgeting decision includes a replacement analysis, then B. only incremental cash flows should be looked at.

The Net Present Value Method is a more conservative technique for selecting investment projects than the Internal Rate of Return method because the NPV method A. discounts cash flows at the project's internal rate of return. B. concentrates on the liquidity aspects of investment projects. C. discounts cash flows at the firm's weighted average cost of capital. D. none of the other answers are correct

The Net Present Value Method is a more conservative technique for selecting investment projects than the Internal Rate of Return method because the NPV method C. discounts cash flows at the firm's weighted average cost of capital.

The payback period has several disadvantages, which include A. payback fails to choose the optimum or most economic solution to a capital budgeting problem. B. payback ignores cash inflows after the payback period. C. two of the answers are correct D. none of the other answers are correct

The payback period has several disadvantages, which include C. two of the answers are correct

There are several disadvantages to the payback period, one of which is that A. payback ignores the time value of money. B. payback emphasizes receiving money back as fast as possible for reinvestment. C. payback is easy to use and to understand. D. payback can be used in conjunction with time adjusted methods of evaluation.

There are several disadvantages to the payback period, one of which is that A. payback ignores the time value of money.

Under the capital cost allowance system A. the life span over which an asset may be amortized is fixed at five years. B. all assets are amortized down to their salvage value. C. recovery periods for different types of assets are broken down into categories. D. all of the other answers are correct.

Under the capital cost allowance system C. recovery periods for different types of assets are broken down into categories.

The net present value method is a better method of evaluation than the internal rate of return method because A. the NPV method discounts cash flows at the internal rate of return. B. the NPV method is a more liberal method of analysis. C. the NPV method discounts cash flows at the firm's more conservative cost of capital. D. none of the other answers are correct

The net present value method is a better method of evaluation than the internal rate of return method because C. the NPV method discounts cash flows at the firm's more conservative cost of capital.

The reason cash flow is used in capital budgeting is because A. cash rather than income is used to purchase new machines. B. cash outlays need to be evaluated in terms of the present value of the resultant cash inflows. C. to ignore the tax shield provided from amortization ignores the cash flow provided by the machine which should be reinvested to replace old worn out machines. D. all of the other answers are correct

The reason cash flow is used in capital budgeting is because D. all of the other answers are correct

The longer the life of an investment A. the more significant the discount rate. B. the less significant the discount rate. C. makes no difference. D. none of the other answers are correct.

The longer the life of an investment A. the more significant the discount rate.

The net present value profile A. doesn't work if projects have a negative net present value. B. is a substitute for the IRR. C. graphically portrays the relationship between the discount rate and the net present value. D. two of the other answers are correct

The net present value profile C. graphically portrays the relationship between the discount rate and the net present value.

``` A firm is selling an old asset below book value in a replacement decision. As the firm's tax rate is raised, the net cash outflow (purchase price less proceeds from the sale of the old asset plus CCA effects) would A. go up. B. go down. C. remain the same. D. more information required ```

A firm is selling an old asset below book value in a replacement decision. As the firm's tax rate is raised, the net cash outflow (purchase price less proceeds from the sale of the old asset plus CCA effects) would B. go down.

``` Firm X is considering the replacement of an old machine with one that has a purchase price of $70,000. The current market value of the old machine is $25,000 but the book value is $32,000. What is the net cash outflow for the new machine with consideration for the sale of the old machine? A. $70,000 B. $45,000 C. $38,000 D. $32,000 ```

Firm X is considering the replacement of an old machine with one that has a purchase price of $70,000. The current market value of the old machine is $25,000 but the book value is $32,000. What is the net cash outflow for the new machine with consideration for the sale of the old machine? B. $45,000

``` As the cost of capital increases A. fewer projects are accepted. B. more projects are accepted. C. project selection remains unchanged. D. none of the other answers are correct ```

As the cost of capital increases A. fewer projects are accepted.

For acceptable investments, the discount rate assumption under the internal rate of return is generally A. higher than under the net present-value method. B. lower than under the net present-value method. C. at the cost of capital. D. below the cost of capital

For acceptable investments, the discount rate assumption under the internal rate of return is generally A. higher than under the net present-value method.

Which statement, or statements, is true about amortization? A. amortization is a non-cash expense that provides tax shield benefits B. the greater the amortization expenses in earlier years, the higher the present value of the project C. the CCA amortization schedules supersede other methods for tax purposes D. all of the other answers are correct

Which statement, or statements, is true about amortization? D. all of the other answers are correct

Which of the following is not a step in creating the net present value profile? A. determining the net present value at a zero discount rate B. determining the net present value at a normal discount rate C. determining the project's internal rate of return D. determining the payback period for the project

Which of the following is not a step in creating the net present value profile? D. determining the payback period for the project

Using higher discount rates, A. accelerated amortization is more valuable than straight line amortization. B. straight-line amortization is more valuable than accelerated amortization. C. amortization policy makes no difference. D. later year amortization has a higher net present value.

Using higher discount rates, A. accelerated amortization is more valuable than straight line amortization.

Capital rationing A. is a way of preserving the assets of the firm over the long term. B. is a less than optimal way to arrive at capital budgeting decisions. C. assures shareholder wealth maximization. D. assures maximum potential profitability.

Capital rationing B. is a less than optimal way to arrive at capital budgeting decisions.

``` The _________ assumes returns are reinvested at the cost of capital. A. payback period B. internal rate of return C. net present value D. capital rationing ```

The _________ assumes returns are reinvested at the cost of capital. C. net present value

If projects are mutually exclusive A. they can only be accepted under capital rationing. B. the selection of one alternative precludes the selection of other alternatives. C. the payback method should be used. D. the net present-value should be used.

If projects are mutually exclusive B. the selection of one alternative precludes the selection of other alternatives.

Cash flow can be said to equal A. income before amortization and taxes minus taxes. B. income before amortization and taxes plus taxes. C. income before amortization and taxes plus amortization. D. income after taxes minus amortization.

Cash flow can be said to equal A. income before amortization and taxes minus taxes.

Which of the following statements about the "payback period" is true? A. The payback period considers cash flows after the payback has been reached. B. The payback period does not consider the time value of money C. The payback period uses discounted cash-flow techniques. D. The payback period generally leads to the same decision as other investment selection methods.

Which of the following statements about the "payback period" is true? B. The payback period does not consider the time value of money

An investment project has a positive net present value. The internal rate of return is A. less than the cost of capital. B. greater than the cost of capital. C. equal to the cost of capital. D. indeterminate; it depends on the length of the project.

An investment project has a positive net present value. The internal rate of return is B. greater than the cost of capital.

``` In using the internal rate of return method, it is assumed that cash flows can be reinvested at A. the cost of equity. B. the cost of capital. C. the internal rate of return. D. the prevailing interest rate. ```

In using the internal rate of return method, it is assumed that cash flows can be reinvested at C. the internal rate of return.

Which of the following is not a time-adjusted method for ranking investment proposals? A. net present value method B. payback period C. internal rate of return method D. all of the above are time-adjusted methods

Which of the following is not a time-adjusted method for ranking investment proposals? B. payback period

CORP 2 - Chapter 12 Flashcards

(66 cards)