FNAN 522 FINAL EXAM QUESTIONS AND ANSWERS
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.
- Answer -False.
The most important advantage of the NPV approach is that it is the most theoretical
correct method. True or False. - Answer -True.
Relevant financial data for a project are best described as a) EBDT, b) incremental cash
flows, c) incremental profits, or d) accounting cash flows - Answer -b) incremental cash
flows
The change in net working capital when evaluating a capital budgeting decision is... -
Answer -...changes in current assets minus the change in current liabilities
Some firms use the payback period as a decision criterion or as a supplement to
sophisticated decision making techniques because.... - Answer -...it can be viewed as a
measure of risk exposure
In the context of capital budgeting, risk refers to... - Answer -...the degree of variability
of the cash inflows
One advantage of the NPV approach is that it always provides the right answer. True or
false. - Answer -True.
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. - Answer -True.
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 - Answer -a) an increase in the cost of capital
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. - Answer -False.
The _________ is the discount rate the equate the present value of the cash inflows
with the initial investment - Answer -Internal Rate of Return (IRR)
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
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.
- Answer -False.
The most important advantage of the NPV approach is that it is the most theoretical
correct method. True or False. - Answer -True.
Relevant financial data for a project are best described as a) EBDT, b) incremental cash
flows, c) incremental profits, or d) accounting cash flows - Answer -b) incremental cash
flows
The change in net working capital when evaluating a capital budgeting decision is... -
Answer -...changes in current assets minus the change in current liabilities
Some firms use the payback period as a decision criterion or as a supplement to
sophisticated decision making techniques because.... - Answer -...it can be viewed as a
measure of risk exposure
In the context of capital budgeting, risk refers to... - Answer -...the degree of variability
of the cash inflows
One advantage of the NPV approach is that it always provides the right answer. True or
false. - Answer -True.
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. - Answer -True.
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 - Answer -a) an increase in the cost of capital
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. - Answer -False.
The _________ is the discount rate the equate the present value of the cash inflows
with the initial investment - Answer -Internal Rate of Return (IRR)
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
