Chapter 12 Quiz, Making Sure Managers Maximize NPV




1. In the principal-agent framework, the ultimate principals are:
A.Managers
B.Board of directors
C.Shareholders
D.Government


2. Which of the following statements regarding capital budgeting and strategic planning is true?
A.Capital budgeting and strategic planning are bottom-up processes
B.Capital budgeting and strategic planning are top down processes
C.Capital budgeting is a top-down process, while strategic planning is a bottom-up process
D.Capital budgeting is a bottom-up process, while strategic planning is a top-down process


3. Which of the following capital expenditure may not appear in capital budget?
A.Investment in a new plant
B.Investment in a new machine
C.Investment in information technology
D.All of the above are included in capital budget


4. Post audit is conducted:
A.Before starting a project
B.Before authorizing a project
C.Shortly after a project has started operating
D.Long after the project has been completed and the salvage has been realized


5. In the example of revitalizing a merchandise delivery device requires the following three investments except:
A.Buy a new diesel truck
B.Hire a new dispatch clerk
C.Buy a computer and software to keep track of packages and schedules
D.Construct a dispatching center


6. The following are agency problems in capital budgeting except:
A.Reduced effort
B.Need for good information
C.Empire building
D.Perks


7. A firm has an average investment of $1000 during the year. During the same time the firm has an after tax earnings of $120. If the cost of capital is 10%, what is the net return on investment?
A.10%
B.12%
C.2%
D.None of the above


8. Economic value added (EVA) was first implemented and popularized by the consulting firm of:
A.Stern-Stewart.
B.Anderson Counting
C.McKinsey and Company
D.None of the above


9. A firm has an average investment of 10,000 during the year. During the same period, the firm has an after-tax income of $1600. If the cost of capital is 14%, what is the economic profit?
A.+200
B.+1600
C.+1400
D.None of the above


10. The following are disadvantages of using EVA as a measure of performance except:
A.EVA does not measure present value
B.EVA rewards taking project with quick paybacks and penalizes taking projects with longer payback periods
C.EVA is difficult to apply for start up ventures
D.EVA reduces explicit monitoring by top management


11. EVA is used for:
A.Measuring performance within the firm
B.Rewarding performance within the firm
C.Improving performance within the firm
D.All of the above


12. Economic rate of return is defined as:
A.(Cash flow)(Change in present value/Initial present value)
B.(Cash flow)(Change in present value/Initial present value)
C.(Cash flow)(Change in present value/Initial present value)
D.None of the above


13. The annual capital budget contains a list of proposed new projects for the coming year and any projects from earlier years that are incomplete.
A.True
B.False


14. EVA is a measure of NPV.
A.True
B.False


15. Economic Income = cash flow + change in PV.
A.True
B.False



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