FIN 300 EVALUATION TEST QUESTIONS AND
✔✔The net present value of a project equals the value of the assets used in the project
- ✔✔False (The net present value of a project equals the difference between the
present value of its cost and the present value of its expected cash flows.)
✔✔Which of the following represents an example of key reasons for making capital
expenditures?
A) Replacing production equipment
B) Floating a corporate bond issue
C) Replacing a key executive of a firm
D) Changing the capital structure of a firm - ✔✔A) Replacing production equipment
✔✔The cost of capital for a project is its return on equity - ✔✔False (The cost of capital
is the rate of return that a capital project must earn to be accepted by management)
✔✔If you start with incremental net operating profits after tax (NOPAT) and add
depreciation and amortization to it, you will obtain incremental cash flows from
operations - ✔✔True
✔✔Accounting earnings are a reliable measure of the costs and benefits of a project -
✔✔False
✔✔If taken without accompanying changes in cash flow, changes in a company's
accounting earnings do not impact the overall value of the firm - ✔✔True
✔✔The research and development costs to date of a project should be considered
when analyzing the cash flows of a prospective project - ✔✔False
✔✔Since our perspective when evaluating a project is that of all the shareholders only,
then we should evaluate the after-tax cash flows produced by a project - ✔✔True
, ✔✔a progressive tax system means that a taxpayer will pay a higher tex rate for a given
dollar of earnings for every successive year - ✔✔False
✔✔It is possible for a firm to have one depreciation schedule for tax purposes and
another for financial reporting purposes - ✔✔True
✔✔[Blank] refers to the cash flow that a project is expected to generate after all
operating expenses and taxes have been paid - ✔✔Incremental cash flow from
operations
✔✔The idea that we can evaluate the cash flows from a project independently of the
cash flows for the firm is known as: - ✔✔The stand-alone principle
✔✔The firm's [blank] is used to calculate NOPAT because the profits from a project are
assumed to be incremental to the firm - ✔✔Marginal tax rate
✔✔Corporate overhead allocations should only be taken into account on a project
analysis if:
A) The firm is currently covering all of its overhead allocations
B) The firm is currently unable to cover all of its overhead allocations
C) the overhead allocations involve cash expenditures
D) None of the above - ✔✔D) None of the above
✔✔Which of the following is the best example of a sunk cost
A) Future payments on a leased building
B) Historical non-cash expenses
C) Historical research and development costs
D) Future research and development costs - ✔✔C) Historical research and
development costs
✔✔[Blank] represents dollars stated in terms of constant purchasing power - ✔✔Real
dollars
✔✔When estimating the free cash flows for a project we must account for -
✔✔Incremental cash flows from capital expenditures
✔✔When we calculate the free cash flows for a project, we first must compute the -
✔✔Incremental cash flows from operations
✔✔Which of the following statements is correct?
A) Incremental net operating profits after-tax exclude the effects of financing costs
associated with a project
✔✔The net present value of a project equals the value of the assets used in the project
- ✔✔False (The net present value of a project equals the difference between the
present value of its cost and the present value of its expected cash flows.)
✔✔Which of the following represents an example of key reasons for making capital
expenditures?
A) Replacing production equipment
B) Floating a corporate bond issue
C) Replacing a key executive of a firm
D) Changing the capital structure of a firm - ✔✔A) Replacing production equipment
✔✔The cost of capital for a project is its return on equity - ✔✔False (The cost of capital
is the rate of return that a capital project must earn to be accepted by management)
✔✔If you start with incremental net operating profits after tax (NOPAT) and add
depreciation and amortization to it, you will obtain incremental cash flows from
operations - ✔✔True
✔✔Accounting earnings are a reliable measure of the costs and benefits of a project -
✔✔False
✔✔If taken without accompanying changes in cash flow, changes in a company's
accounting earnings do not impact the overall value of the firm - ✔✔True
✔✔The research and development costs to date of a project should be considered
when analyzing the cash flows of a prospective project - ✔✔False
✔✔Since our perspective when evaluating a project is that of all the shareholders only,
then we should evaluate the after-tax cash flows produced by a project - ✔✔True
, ✔✔a progressive tax system means that a taxpayer will pay a higher tex rate for a given
dollar of earnings for every successive year - ✔✔False
✔✔It is possible for a firm to have one depreciation schedule for tax purposes and
another for financial reporting purposes - ✔✔True
✔✔[Blank] refers to the cash flow that a project is expected to generate after all
operating expenses and taxes have been paid - ✔✔Incremental cash flow from
operations
✔✔The idea that we can evaluate the cash flows from a project independently of the
cash flows for the firm is known as: - ✔✔The stand-alone principle
✔✔The firm's [blank] is used to calculate NOPAT because the profits from a project are
assumed to be incremental to the firm - ✔✔Marginal tax rate
✔✔Corporate overhead allocations should only be taken into account on a project
analysis if:
A) The firm is currently covering all of its overhead allocations
B) The firm is currently unable to cover all of its overhead allocations
C) the overhead allocations involve cash expenditures
D) None of the above - ✔✔D) None of the above
✔✔Which of the following is the best example of a sunk cost
A) Future payments on a leased building
B) Historical non-cash expenses
C) Historical research and development costs
D) Future research and development costs - ✔✔C) Historical research and
development costs
✔✔[Blank] represents dollars stated in terms of constant purchasing power - ✔✔Real
dollars
✔✔When estimating the free cash flows for a project we must account for -
✔✔Incremental cash flows from capital expenditures
✔✔When we calculate the free cash flows for a project, we first must compute the -
✔✔Incremental cash flows from operations
✔✔Which of the following statements is correct?
A) Incremental net operating profits after-tax exclude the effects of financing costs
associated with a project
