Financial Decisions Model Part 1

Question 1

The discount or hurdle rate is determined

Answer 1

In advance for computations of net present value - Project cash flows are discounted based upon a predetermined rate and compared to the investment in the project to arrive at a positive or negative net present value.

Question 2

When the risks of the individual components of a projects cash flows are different

Answer 2

Discount rates may be adjusted to factor differences in risk into cash flow analysis.

Question 3

an advantage of the NPV method over the internal rate of return model in discounted cash flow analysis is that

Answer 3

when using the NPV method of capital budgeting, different hurdle rates can be used for each year of the project

Question 4

an advantage of the NPV method over the internal rate of return model in discounted cash flow analysis is that

Answer 4

the NPV method can be used when there is no constant rate of return required for each year of the project

Question 5

the profitability index is used for

Answer 5

Capital Rationing

Question 6

the profitability index is the ratio of

Answer 6

the net future cash flow to the present value of the net initial investment

Question 7

the method of funding the project has not effect on

Answer 7

the net present value

Question 8

A projects net present value, ignoring income tax considerations is normally affected by

Answer 8

proceeds from the sale of the asset to be replaced

Question 9

The net present value of an investment

Answer 9

is equal to the discounted after-tax cash flow associated with the investment minus the initial investment

Question 10

Opportunity cost is the potential benefit lost by selecting a particular course of action

Answer 10

Opportunity costs is the revenue that will not occur

Question 11

the formula for the profitability index is

Answer 11

PV of Net Future cash inflows / PV of Net initial investment - the profitability index is used to rank qualifying investments

Question 12

the common disadvantage of all capital budgeting model is their reliance on future data

Answer 12

Capital financing relates to longer periods of time that are subject to greater levels of uncertainty than short term.

Question 13

The profitability index is the ratio of

Answer 13

the pv of Net future inflows / PV of net initial investment

Question 14

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

Answer 14

Original Fair Market value of Old equipment, which is a sunk cost

Question 15

the profitability index is used for capital rationing,

the profitability index is the ratio of

Answer 15

Net present value of net future cash inflows/to the net present value of the net initial investment

Question 16

the Net present value of an investment is equal to the

Answer 16

discounted after-tax cash flows associated with the investment minus the initial investment

Question 17

the profitability index is the ratio of the present value of net future cash inflows to the present value of the net initial investment

Answer 17

The profitability ratio requires detailed long term forecasts of projects cash flows.

Question 18

the NPV

Answer 18

is equal to inflows -outflows

Question 19

when employing MACRS method of depreciation in capital budgeting decision, the use of MACRS as copared to the straight line method of depreciation will result

Answer 19

equal total depreciation for both methods

Question 20

the NPV method

Answer 20

recognizes the time value of money and discounts cash flows over the life of a project, using the minimum desired (hurdle) rate

Question 21

if the net present value is positive (greater than Zero), a project should be accepted, unless

Answer 21

there is a better project, however, if acompany has unlimited funds all projects with a net present value greater than zero should be accepted in order to maximize shareholder wealth

Question 22

All of these are rates used in net present value analysis

Answer 22

Cost of Capital
hurdle rate
discount rate
required rate of return

Question 23

the NPV method of capital budgeting assumes

Answer 23

that cash flows are reinvested at the discount rate used in the analysis

Question 24

if the NPV of a proposed investment is negative, the discount rate used must be greater than the projects IRR

Answer 24

or the NPV of a proposed investment is negative, therefore, the discount rate used must be , greater than the internal rate of return

Question 25

A disadvantage of the NPV method of capital expenditure evaluation is that

Answer 25

the NPV method of capital expenditure evaluation does not provide the truth rate of return on investment.