Chapter 6 Quiz, Making Investment Decisions with the Net Present Value Rule
1.
Preferably, cash flows for a project are estimated as:
A.
Cash flows before taxes
B.
Cash flows after taxes
C.
Earnings before taxes
D.
Earnings after taxes
2.
The following cash flows should be treated as incremental flows when deciding whether to go ahead with an electric car except:
A.
The consequent deduction in sales of the company's existing gasoline models
B.
The expenditure on new plants and equipment
C.
The value of tools that can be transferred from the company's existing plants
D.
Interest payment on debt
3.
Money that a firm has already spent or committed to spend regardless of whether a project is taken is called:
A.
Sunk costs
B.
Opportunity costs
C.
Fixed costs
D.
None of the above
4.
A firm owns a building with a book value of $100,000 and a market value of $250,000. If the building is utilized for a project, then the opportunity cost ignoring taxes is:
A.
$100,000
B.
$150,000
C.
$250,000
D.
None of the above
5.
Which of the following statements is true?
A.
Nominal cash flows are discounted using nominal discount rate
B.
Nominal cash flows are discounted using the real discount rate
C.
Real cash flows are discounted using the nominal discount rate
D.
None of the above statements are true
6.
The real rate of interest is 3 % and the inflation is 4%. What is the nominal rate of interest?
A.
3%
B.
4%
C.
7.12%
D.
7%
7.
Real cash flow occurring in year 2 is 50,000. If the inflation rate is 10% per year, calculate nominal cash flow for year 2.
A.
60,500
B.
50,000
C.
55,000
D.
None of the above
8.
The NPV value obtained by discounting nominal cash flows using the nominal discount rate is:
A.
The same as the NPV value obtained by discounting real cash flows using the real discount rate
B.
The same as the NPV value obtained by discounting real cash flows using the nominal discount rate
C.
The same as the NPV value obtained by discounting nominal cash flows using the real discount rate
D.
None of the above
9.
A capital equipment costing $200,000 today has 50,000 slavage value at the end of 5 years. If the straight line depreciation method is used, what is the book value of the equipment at the end of 2 years?
A.
$200,000
B.
$170,000
C.
$140,000
D.
$50,000
10.
For project A in year 2, inventories increase by $10,000 and accounts payable by $4,000. Calculate the increase or decrease in net working capital for year 2.
A.
Increases by $12,000
B.
Decreases by $12,000
C.
Increases by $16,000
D.
Decreases by $16,000
E.
None of the above
11.
If the depreciation amount is $100,000 and the marginal tax rate is 30%, then the tax shield due to depreciation is:
A.
$333,333
B.
$100,000
C.
$30,000
D.
None of the above
12.
The projects have the following NPVs and project lives.
A.
A
B.
B
C.
Both A and B
D.
Reject both A and B
13.
Opportunity costs should not be included as they are missed opportunities.
A.
True
B.
False
14.
Do not forget to include interest and dividend payments when calculating the project's cash flow.
A.
True
B.
False
15.
An investment should be postponed as long as the opportunity cost of capital is less than the growth rate of the value of the project.
A.
True
B.
False
This is the end of the test. When you have completed all the questions and reviewed your answers, press the button below to grade the test.