NEW 2022 UPDATE FNAN 522: FINAL EXAM ALL EXAM QUESTIONS
AND CORRECT ANSWER
1. Since the focus of capital budgeting is cash flows, changes in non-cash accounts such as
depreciation and working capital would not be relevant to the analysis. True of false. -
CORRECT ANSWER False.
2. The most important advantage of the NPV approach is that it is the most theoretical
correct method. True or False. - CORRECT ANSWER True.
3. Relevant financial data for a project are best described as a) EBDT, b) incremental cash
flows, c) incremental profits, or d) accounting cash flows - CORRECT ANSWER b)
incremental cash flows
4. The change in net working capital when evaluating a capital budgeting decision is... -
CORRECT ANSWER ...changes in current assets minus the change in current liabilities
5. Some firms use the payback period as a decision criterion or as a supplement to
sophisticated decision making techniques because.... - CORRECT ANSWER ...it can be
viewed as a measure of risk exposure
6. In the context of capital budgeting, risk refers to... - CORRECT ANSWER ...the
degree of variability of the cash inflows
7. One advantage of the NPV approach is that it always provides the right answer. True
or false. - CORRECT ANSWER True.
8. Mutually exclusive projects are projects whose cash flows are related to one
another, the acceptance of one does eliminate the others from further
considerations. True or false. - CORRECT ANSWER True.
9. Which of the following would decrease the NPV of a project being considered: a) an
increase in the cost of capital (discount rate), b) the sale of a machine at a capital gain
rather than book value, c) an initial required decrease in net working capital, or d) a
lowering of the tax rate - CORRECT ANSWER a) an increase in the cost of capital
[Date]
1
, 10. The risk-adjusted discount rate (RADR) is the most theoretically correct method and is
the rate of return that must be earned on a given project to compensate the firm's
owners for risk, thereby resulting in the maintenance or improvement of share price.
True or False. - CORRECT ANSWER False.
11. Sensitivity analysis is a statistically based approach used in capital budgeting to get a
feel for risk by applying predetermined probability distributions and random numbers
to estimate risky outcomes. True or False. - CORRECT ANSWER False.
12. The higher the risk of a project, the higher its risk-adjusted discount rate and thus the
lower the net present value for a given stream of cash inflows. True or False. - CORRECT
ANSWER True.
13. If the NPV is a negative 50,000 and the discount rate is 12%, the IRR is... - CORRECT
ANSWER
...less than 12%.
14. An increase in sales and/or profits means there is also an increase in cash on the
balance sheet. True or False. - CORRECT ANSWER False.
15. The goal of the firm is to maximize profits. True or False. - CORRECT ANSWER False
16. Book value per share is of greater concern to the financial manager than the market
value. True or False. - CORRECT ANSWER False. Market Value is most important.
17. is the systematic process of evaluating and selecting long-term investments
consistent with the firm's goal of owner wealth maximization. a) Recapitalizing Assets,
b) Capital Budgeting, c) Ratio Analysis, or d) restructuring debt - CORRECT ANSWER b)
Capital Budgeting
18. The underlying cause of conflicts in ranking for projects by IRR and NPV methods is.... -
CORRECT ANSWER the reinvestment rate assumption regarding the cash flows
[Date]
2
AND CORRECT ANSWER
1. Since the focus of capital budgeting is cash flows, changes in non-cash accounts such as
depreciation and working capital would not be relevant to the analysis. True of false. -
CORRECT ANSWER False.
2. The most important advantage of the NPV approach is that it is the most theoretical
correct method. True or False. - CORRECT ANSWER True.
3. Relevant financial data for a project are best described as a) EBDT, b) incremental cash
flows, c) incremental profits, or d) accounting cash flows - CORRECT ANSWER b)
incremental cash flows
4. The change in net working capital when evaluating a capital budgeting decision is... -
CORRECT ANSWER ...changes in current assets minus the change in current liabilities
5. Some firms use the payback period as a decision criterion or as a supplement to
sophisticated decision making techniques because.... - CORRECT ANSWER ...it can be
viewed as a measure of risk exposure
6. In the context of capital budgeting, risk refers to... - CORRECT ANSWER ...the
degree of variability of the cash inflows
7. One advantage of the NPV approach is that it always provides the right answer. True
or false. - CORRECT ANSWER True.
8. Mutually exclusive projects are projects whose cash flows are related to one
another, the acceptance of one does eliminate the others from further
considerations. True or false. - CORRECT ANSWER True.
9. Which of the following would decrease the NPV of a project being considered: a) an
increase in the cost of capital (discount rate), b) the sale of a machine at a capital gain
rather than book value, c) an initial required decrease in net working capital, or d) a
lowering of the tax rate - CORRECT ANSWER a) an increase in the cost of capital
[Date]
1
, 10. The risk-adjusted discount rate (RADR) is the most theoretically correct method and is
the rate of return that must be earned on a given project to compensate the firm's
owners for risk, thereby resulting in the maintenance or improvement of share price.
True or False. - CORRECT ANSWER False.
11. Sensitivity analysis is a statistically based approach used in capital budgeting to get a
feel for risk by applying predetermined probability distributions and random numbers
to estimate risky outcomes. True or False. - CORRECT ANSWER False.
12. The higher the risk of a project, the higher its risk-adjusted discount rate and thus the
lower the net present value for a given stream of cash inflows. True or False. - CORRECT
ANSWER True.
13. If the NPV is a negative 50,000 and the discount rate is 12%, the IRR is... - CORRECT
ANSWER
...less than 12%.
14. An increase in sales and/or profits means there is also an increase in cash on the
balance sheet. True or False. - CORRECT ANSWER False.
15. The goal of the firm is to maximize profits. True or False. - CORRECT ANSWER False
16. Book value per share is of greater concern to the financial manager than the market
value. True or False. - CORRECT ANSWER False. Market Value is most important.
17. is the systematic process of evaluating and selecting long-term investments
consistent with the firm's goal of owner wealth maximization. a) Recapitalizing Assets,
b) Capital Budgeting, c) Ratio Analysis, or d) restructuring debt - CORRECT ANSWER b)
Capital Budgeting
18. The underlying cause of conflicts in ranking for projects by IRR and NPV methods is.... -
CORRECT ANSWER the reinvestment rate assumption regarding the cash flows
[Date]
2
