NEW 2022 UPDATE FNAN 522

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 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 19. Comparing NPV and IRR analysis: a) may result in conflict with mutually exclusive projects, b) may result in conflict with independent projects, c) will always result in conflict with mutually exclusive projects, or d) will always result in conflict with independent projects - CORRECT ANSWER a) may result in conflict with mutually exclusive projects 20. The is the discount rate the equate the present value of the cash inflows with the initial investment - CORRECT ANSWER Internal Rate of Return (IRR) 21. On a purely theoretical basis, the NPV is the better approach to capital budgeting due to all of the following reasons except: a) that it measures the benefits relative to the amount investments, b) for the reasonableness of the reinvestment rate assumption, c) that there may be multiple solutions for the IRR computation, and d) that it maximizes shareholder wealth - CORRECT ANSWER b) for the reasonableness of the reinvestment rate assumption 22. A project has an initial investment of $600,000 and a profitability index of 1.21. The NPV of the project is... - CORRECT ANSWER ...$725,000 23. measure(s) the risk of a capital budgeting project by estimating the NPV's associated with the change in one of the projects cash flow assumptions. - CORRECT ANSWER Sensitivity Analysis 24. Project post-audit reviews are rarely of practical value because capital investments are sunk, irreversible costs. True or False. - CORRECT ANSWER False. 25. Pro forma financial statements are: a) used by the firms auditors, b) used by the finance manager for financial forecasting, c) used by the IRS to determine tax liability, or d) used by investors to determine stock value. - CORRECT ANSWER b) used by the finance manager for financial forecasting 26. Stikes, Lawsuits, regulatory actions, and increased competition are all examples of.... - CORRECT ANSWER diversifiable risk. 27. A company is analyzing a variety of potential investments using different capital budgeting methods. Which of the following represents the most profitable choice based on the information provided? - CORRECT ANSWER The company picks a project with profitability index of 1.25 over a project with a PI of -.25 28. A firm is trying to choose the most profitable project to invest in. Which of the following should be used as the company's discount rate? - CORRECT ANSWER The company's reinvestment rate or weighted average cost of capital. 29. Calculate the discounted payback period for a project with a discount rate of 5% the following cash flows: 30. Year 0: -$2000Year 1: $1000Year 2: -$1000Year 3: $1000Year 4: $3000Year 5: $2000 - CORRECT ANSWER 3.44 years. 31. In which of the following situations would it be appropriate to use the IRR method to make an investment decision? - CORRECT ANSWER To compare two projects that have an equal initial investment and lifespan. 32. The tax rate that applies to the last dollar of the tax base and is often applied to the change in one's tax obligation as income rises is called . - CORRECT ANSWER the marginal tax rate 33. When evaluating the cash flows from a project, a financial manager needs to analyze the: - CORRECT ANSWER costs, benefits, and opportunity costs of the project. 34. Which of the following describes an advantage the internal rate of return has over net present value for capital budgeting purposes? - CORRECT ANSWER Internal rate of return is an indicator of the efficiency, quality or yield of an investment. 35. Which of the following is a correct definition of a capital budgeting method? - CORRECT ANSWER The internal rate of return is the discount rate that gives a net present value of zero. 36. Which of the following is a way cash flow factors can be used to improve a business? - CORRECT ANSWER It can be used to .determine a project's rate of return or value, It can be used to evaluate the ""quality"" of income generated by accrual accounting, It can be used to determine problems with a business's liquidity.