Day 25

Question 1

What method should be used if Capital rationing needs to be considered when comparing Capital projects?

Answer 1

The Profitability Index - is the ratio of the net present value of future cash flows to the net present value of the net initial investment

MCQ-08311

Question 2

Equation: NPV

Answer 2

NPV = present value of cash inflows - present value of cash outflows

PV of Cash Inflows = Future Cash inflows / Discount rate

MCQ-08369

Question 3

A shift of the demand curve to the left implies:

Answer 3

A decline in demand

If the price of a substitute good decreases, the substitute good is more attractive to consumer’s, thus decreasing the demand for the original product

MCQ-07833

Question 4

A shift of the demand curve to the right implies:

Answer 4

Increase in demand

If consumer’s expect prices for the good will increase, they will buy more today

MCQ-07833

Question 5

Baker, inc has no capital rationing constraints and is analyzing investments. Baker, inc should accept all investment proposals that:

Answer 5

Have a positive NPV

A positive NPV = the return on investment exceeds the hurdle rate (the minimum acceptable rate of return)

MCQ-03793

Question 6

A company should accept all positive NPV investments when:

Answer 6

The company has virtually unlimited resources for Capital investments

A positive NPV will always increase shareholder value

MCQ-07804

Question 7

Equation: Profitability Index

Answer 7

= Present Value of net future cash inflows ÷ Present Value of net initial investment

MCQ-06625

Question 8

For Capital budgeting purposes, MGMT would select a high hurdle rate of return because:

Answer 8

Wants to factor risk into the consideration

The high Hurdle rate discounts future cash flows more, creating a smaller present value.

By “devaluing” the cash flows of projects, risk has been compensated for

MCQ-03773

Question 9

A depreciation tax shield is:

Answer 9

A reduction in income taxes

Increases expenses and decreases a company’s taxable income

MCQ-11541

Question 10

The best present value method of capital budgeting assumes that cash flows are reinvested at:

Answer 10

The discount rate used in the analysis

MCQ-03830

Question 11

Factors that Shift Demand Curves:

Answer 11

Shift in Demand –> WRITEN

• Wealth↑, D↑ - shift right = increase demand
• Related Goods - Substitutes Price↑, D↑ - Complements Price↑, D↓
• Income↑, D↑
• Tastes
• Expectations Price in future↑, Buy now D↑

MCQ-07833

Question 12

Equation: NPV

Answer 12

NPV = Inflows - Outflows

MCQ-08369