Exam 3

Question 1

Average Accounting Return Disadvantages

Answer 1

Does not take into account the time value of money

Question 2

Discounted Payback Disadvantages

Answer 2

• Ignores cash flows after cut off

- bias toward short term projects

Question 3

Common Disadvantage of all six evaluating projects

Answer 3

They are based on estimates

Question 4

Which of the following is TRUE about the stock market?

Answer 4

If an asset has a significantly higher than average return, there is a high degree of risk also

Question 5

Which of the following would have erosion consequences?

Answer 5

• You begin selling ice cream in pint containers alongside your half gallons.
• you build a wendy’s just down the street from your McDonalds

Question 6

Net Present Value Decision Rule

Answer 6

If NPV is above zero Accept.

Below zero reject.

Question 7

A pro forma financial statement is one that:

Answer 7

Projects future years’ operations

Question 8

The possibility of several correct answers is a disadvantage of which method?

Answer 8

Internal Rate of Return

Question 9

Dividing total production costs by the number of units produce gives you:

Answer 9

average cost

Question 10

Occasionally a company will accept a project that has a negative NPV because

Answer 10

There may be future (unquantifiable) community relations benefits

Question 11

Under normal conditions, which one of the following statements concerning net present value is correct?

Answer 11

An investment should be accepted if the NPV is positive and rejected if it is negative.

Question 12

Which of the following is FALSE about the efficient markets hypothesis?

Answer 12

EMH means that it does not matter how you invest your money, the market will protect you from making a mistage

Question 13

The reason that MACRS is better for businesses than straight-line depreciation is because of:

Answer 13

The time value of money

Question 14

Average Accounting Return Advantages

Answer 14

Accountants like this one because it is based on more reliable accounting numbers such as book values

Question 15

Net Present Value Disadvantages

Answer 15

based on estimates

Question 16

The after tax salvage value is equal to:

Answer 16

the market value plus or minus the tax effect

Question 17

Payback Advantages

Answer 17

Easy to calculate and understand

Question 18

Internal Rate of Return Disadvantages

Answer 18

• If cash flows are not level it can be time consuming to find the answer
• can have multiple answers

Question 19

An example of a sunk cost would be

Answer 19

Your tuition for this semester.

Question 20

Discounted Payback Advantages

Answer 20

• Easy to calculate and understand.

- takes into account the time value of money

Question 21

When there are no capital budgeting dollars available no matter how good the project is.

Answer 21

Hard Rationing

Question 22

Net Present Value Advantages

Answer 22

• easy to calculate

- takes into account the time value of money

Question 23

In capital budgeting analysis, the primary objective should be to choose projects that

Answer 23

Maximize Firm Value

Question 24

In using MACRS there are eight percentages for a seven year asset because of:

Answer 24

the half year convention

Question 25

In capital budgeting analysis, the primary objective should be to choose projects that:

Answer 25

Maximize firm value

Question 26

Profitability Index Decision Rule

Answer 26

Above one Accept

Below one Reject

Question 27

Method of evaluating that tells you when your initial investment will be paid back by the incomes generated in future years

Answer 27

Payback Method

Question 28

If the only project income statement items known to you are net income and depreciation, which of the following methods for calculating project OCF would you use?

Answer 28

Bottom Up Approach

Question 29

Which of the following is true about annual yields on investments?

Answer 29

The total yield equals the dividend yield plus the capital gains yield.

Question 30

Which of the following is FALSE about after tax salvage value?

Answer 30

The book value is equal to the accumulated depreciation.

Question 31

Which of the following is FALSE regarding risk and return?

Answer 31

The reward for bearing risk is known as the standard deviation

Question 32

Company A and Company B are in the same industry and both have a DOL of 2.25. Company A has the opportunity to double its size through a merger with a smaller company. Which of the following would you expect to be a result of this action?

Answer 32

Company A’s degree of operating leverage will fall due to its increased size.

Question 33

The value of an asset that has to be disposed of in the middle of its useful life

Answer 33

After Tax Salvage Value

Question 34

Payback Disadvantages

Answer 34

• Does not take into account the time value of money

- biased toward short term projects

Question 35

When capital budget dollars are not abundant and must be rationed out among several departments within the company

Answer 35

Soft Rationing

Question 36

Internal Rate of Return Advantages

Answer 36

• many managers understand IRR

- used a lot in marketing

Question 37

Which of the following are important criteria for evaluating a method of project analysis?

Answer 37

• Accounts for the time value of money
• Estimates risk of Cash Flows
• Measures the incremental value of the project to the corporation.

Question 38

Method of evaluating that nets the negatives against the positives when they are discounted back to the present using some rate

Answer 38

Net Present Value

Question 39

Occasionally a company will accept a project that has a negative NPV because:

Answer 39

There are future (unquantifiable) community benefits.

Question 40

Net Present Value is the method used most by firms because:

Answer 40

it directly addresses the main goal of finance (to enhance the value of owners equity)

Question 41

Which of the following “what if” analysis methods would be most useful in identifying the vulnerability of the company to changes in the price of gasoline?

Answer 41

Sensitivity Analysis