B3: Financial Management

Question 1

Define Present Value of Ordinary Annuity

Answer 1

money you get at end of year (remains the same

Question 2

Name the 5 steps for Net Present Value

Answer 2

Step 1: Calculate after tax cash flows
Step 2: + (depr.  *tax rate)
Step 3:  x PVOA (*above )
Step 4: - initial cash outflows
Step 5: sum gives you NPV

Question 3

In equipment-replacement decisions, which one of the following does not affect the decision-making process?

a.
Current disposal price of the old equipment.

b.
Original fair market value of the old equipment.

c.
Cost of the new equipment.

d.
Operating costs of the new equipment.

Answer 3

b.

Original fair market value of the old equipment.

Question 4

When the risks of the individual components of a project’s cash flows are different, an acceptable procedure to evaluate these cash flows is to:

a.
Compute the net present value of each cash flow using the firm’s cost of capital.

b.
Compare the internal rate of return from each cash flow to its risk.

c.
Utilize the accounting rate of return.

d.
Discount each cash flow using a discount rate that reflects the degree of risk.

Answer 4

d.

Discount each cash flow using a discount rate that reflects the degree of risk.

Question 5

If the net present value of a capital budgeting project is positive, it would indicate that the:

a.
Present value of cash outflows exceeds the present value of cash inflows.

b.
Internal rate of return is equal to the discount percentage rate used in the net present value computation.

c.
Present value index would be less than 100 percent.

d.
Rate of return for this project is greater than the discount percentage rate used in the net present value computation.

Answer 5

D. Rate of return for this project is greater than the discount percentage rate used in the net present value computation

Question 6

Define IRR

Answer 6

discount rate at which the PV equals todays purchase price

Question 7

Which of the following statements is true regarding the payback method?

a.
It does not consider the time value of money.

b.
It is the time required to recover the investment and earn a profit.

c.
It is a measure of how profitable one investment project is compared to another.

d.
The salvage value of old equipment is ignored in the event of equipment replacement.

Answer 7

A

Question 8

Which of the following statements about investment decision models is true?

a.
The discounted payback rate takes into account cash flows for all periods.

b.
The payback rule ignores all cash flows after the end of the payback period.

c.
The net present value model says to accept investment opportunities when their rates of return exceed the company’s incremental borrowing rate.

d.
The internal rate of return rule is to accept the investment if the opportunity cost of capital is greater than the internal rate of return.

Answer 8

B) The payback rule ignores all cash flows after the end of the payback period.