AGB 425 FINAL COMPREHENSIVE EXAM
STUDY GUIDE WITH COMPLETE
SOLUTIONS
●● The book value of an asset is equal to the
Answer: purchase price minus accumulated depreciation.
●● The sale of an ordinary asset for its book value results in
Answer: no tax benefit.
●● The relevant cash flows for capital budgeting analysis are
Answer: incremental cash flows.
●● Which of the following statements is true?
Answer: -***Operating cash flow (OCF) is calculated by adding back
depreciation to the net operating profit after taxes.***
-When the sale of an asset is equal to its book value, a firm will have to
pay taxes.
-Annual cash inflows are the same as accounting earnings.
-The book value of an asset is equal to the asset's after-tax proceeds,
provided after the asset has been sold.
,●● Which of the following statements is true?
Answer: -NOPAT is the same as Net Income.
-***Projects will usually have an initial investment, cash inflows, and a
terminal cash flow.***
-When calculating the cash flows for a project, we should include
interest payments.
-Net working capital is the amount by which a firm's current assets
exceed its current liabilities.
●● Payback Period
Answer: This criterion tells the analyst how long it will take for an
investment to earn back the initial investment but doesn't account for the
time value of money.
●● Modified Internal Rate of Return (MIRR)
Answer: This criterion tells the analyst the average rate of return that the
investment earns and assumes proceeds are reinvested at a separate
reinvestment rate.
●● Profitability Index
Answer: This ratio compares the present value of the investment
proceeds to the initial investment cost.
, ●● Which of the following is a flaw of the payback period as a metric in
capital budgeting analysis?
Answer: -The payback period is too hard to calculate.
-The payback period assumes that cash flows are reinvested at the IRR,
which overstates the profitability of projects.
-***The payback period does not apply a discount rate to cash flows
received in the future.***
-The payback period is difficult to understand and explain.
●● All of the following are steps in the capital budgeting process
EXCEPT:
Answer: -***The pre-audit.***
-evaluating opportunities.
-identifying opportunities.
-implementing the project.
●● An advantage of the net present value (NPV) method is that it:
Answer: -does not employ time value of money techniques.
-***provides its users with a clear decision criterion.***
-does not rely on the discount rate.
-is easy to use when available capital or resources are limited.
STUDY GUIDE WITH COMPLETE
SOLUTIONS
●● The book value of an asset is equal to the
Answer: purchase price minus accumulated depreciation.
●● The sale of an ordinary asset for its book value results in
Answer: no tax benefit.
●● The relevant cash flows for capital budgeting analysis are
Answer: incremental cash flows.
●● Which of the following statements is true?
Answer: -***Operating cash flow (OCF) is calculated by adding back
depreciation to the net operating profit after taxes.***
-When the sale of an asset is equal to its book value, a firm will have to
pay taxes.
-Annual cash inflows are the same as accounting earnings.
-The book value of an asset is equal to the asset's after-tax proceeds,
provided after the asset has been sold.
,●● Which of the following statements is true?
Answer: -NOPAT is the same as Net Income.
-***Projects will usually have an initial investment, cash inflows, and a
terminal cash flow.***
-When calculating the cash flows for a project, we should include
interest payments.
-Net working capital is the amount by which a firm's current assets
exceed its current liabilities.
●● Payback Period
Answer: This criterion tells the analyst how long it will take for an
investment to earn back the initial investment but doesn't account for the
time value of money.
●● Modified Internal Rate of Return (MIRR)
Answer: This criterion tells the analyst the average rate of return that the
investment earns and assumes proceeds are reinvested at a separate
reinvestment rate.
●● Profitability Index
Answer: This ratio compares the present value of the investment
proceeds to the initial investment cost.
, ●● Which of the following is a flaw of the payback period as a metric in
capital budgeting analysis?
Answer: -The payback period is too hard to calculate.
-The payback period assumes that cash flows are reinvested at the IRR,
which overstates the profitability of projects.
-***The payback period does not apply a discount rate to cash flows
received in the future.***
-The payback period is difficult to understand and explain.
●● All of the following are steps in the capital budgeting process
EXCEPT:
Answer: -***The pre-audit.***
-evaluating opportunities.
-identifying opportunities.
-implementing the project.
●● An advantage of the net present value (NPV) method is that it:
Answer: -does not employ time value of money techniques.
-***provides its users with a clear decision criterion.***
-does not rely on the discount rate.
-is easy to use when available capital or resources are limited.
