Financial Decision models

Question 1

Cash flow Effects

Answer 1

Direct

Indirect

Net effect

Question 2

Stages of cash flows

Answer 2

Inception of the project

Operations

Disposal of the project

Question 3

Methods that consider the time value of money are

Answer 3

DCF (discounted cash flow)

NPV (net present value)

Internal rate of return

Question 4

A discount or hurdle rate is determined in advance for which capital budgeting technique?

Answer 4

Net present value

Question 5

What is an acceptable procedure to evaluate cash flows with risk?

Answer 5

Discount rates may be used that reflects the degree of risk

Question 6

NPV focuses on what?

Answer 6

Cash flow

Question 7

Advantage of using NPV over internal rate of return model in discounted cash flow analysis

Answer 7

NPV can be used when there is no constant rate of return required

Question 8

Profitability index is used when?

Answer 8

The capital rationing needs to be considered when comparing projects

Question 9

Profitability index equation?

ONE limitation is?

Answer 9

present value of net future cash inflow / present value of net initial investment

It requires detailed long term forecasts of the projects cash flows.

Question 10

NPV uses what rate to discount cash flow

Answer 10

hurdle rate (discount percentage rate)

Question 11

NPV of a project is a function of

Answer 11

current and future cash flows, including proceeds from sale of old asset

Question 12

capital budgeting is based on

Answer 12

managements predictions of an uncertain future

Question 13

Capital financing relates to

Answer 13

longer periods of time that are subject to greater levels of uncertainty

Question 14

ONE limitation of payback period, discounted cash flow, internal rate of return, and NPV

Answer 14

They rely on the forecasting of future data

Question 15

Capital budgeting decisions do not include

Answer 15

Financing short-term working capital needs (more operational in nature)

Question 16

in capital budgeting decisions, MARCS and straight line depreciation will

Answer 16

equal in total

Question 17

Relevant cost are those cost that will

Answer 17

differ among many alternatives

Question 18

NPV method recognizes the

Answer 18

time value of money and discounts cash flow over the life of the project using the hurdle rate

Question 19

List the rates used in NPV

Answer 19

Cost of capital
Hurdle rate
Discount rate
Required rate of return

Question 20

NPV method of capital budgeting assumes that

Answer 20

cash flows are reinvested at the discount rate

Question 21

One disadvantage of NPV is

Answer 21

It does not provide that true rate of return on investment

Question 22

The accelerated method of depreciation in NPV calculation affects the value in what way?

Answer 22

Increases the present value of the depreciation tax shield