finance quiz 3 UPDATED ACTUAL QUESTIONS AND CORRECT ANSWERS
Which of the following appears to be a more likely result c. Isolation of pivotal factor in project profitability
from using sensitivity analysis?
Select one:
a. Agreement on the appropriate discount rate
b. Determine whether to finance with debt or equity.
c. Isolation of pivotal factor in project profitability
d. Select the best capital budgeting project.
Feedback
In capital budgeting, a possible consequence of mutual b. inconsistent ranking of projects with certain evaluation techniques.
exclusivity is that it can lead to:
Select one:
a. inconsistent correlation coefficient calculations.
b. inconsistent ranking of projects with certain evaluation
techniques.
c. incorrect measures of incremental IRR.
d. incorrect measures of equivalent annual cash flows.
e. incorrect variances of incremental cash flows.
When analysing a set of capital budgeting alternatives, a d. The value of the firm.
firm should always choose the ones which add the most
to:
Select one:
a. Earnings per share.
b. Return on equity.
c. Net income.
d. The value of the firm.
e. Return on investment.
, A firm is looking at replacing a machine. The new machine 88903
will cost $674606 and in 5 years time the machine could
be sold for $127004. The allowable depreciation rate is Explanation:
10.9% on a straight line basis. The company tax rate is for final year add terminal and operating cash flows together
30%. What is the terminal cash flow assuming the project
is evaluated over a 5 year investment horizon? to find terminal cash flows:
after tax proceeds from new machine = selling price = taxes
- after tax proceeds from old machine = selling price - tax to pay
+ recovery of NWC
Which of the following adjustment techniques would be a. increase the discount rate.
preferred practical method of account for additional
project risk?
Select one:
a. increase the discount rate.
b. Adjust expected cash flows downward.
c. Increase the beta.
d. Adjust the market risk premium.
A firm is evaluating a proposal which has an initial c. 2.25 years.
investment of $35,000 and has cash flows of $10,000 in
year 1, $20,000 in year 2, and $20,000 in year 3. The explanation:
payback period of the project is: when initial investment is paid off and profit is 0
Select one:
a. 1.75 years.
b. 2 years.
c. 2.25 years.
d. 2.5 years.
e. 3 years.
According to the NPV rule, all projects should be b. opportunity cost of capital.
accepted if NPV is positive when discounted at the:
Select one:
a. internal rate of return.
b. opportunity cost of capital.
c. risk-free interest rate.
d. accounting rate of return.
The value of a proposed capital budgeting project b. incremental cash flows produced
depends upon the:
Select one:
a. total cash flows produced.
b. incremental cash flows produced.
c. accounting profits produced.
d. increase in total sales produced.
Which of the following appears to be a more likely result c. Isolation of pivotal factor in project profitability
from using sensitivity analysis?
Select one:
a. Agreement on the appropriate discount rate
b. Determine whether to finance with debt or equity.
c. Isolation of pivotal factor in project profitability
d. Select the best capital budgeting project.
Feedback
In capital budgeting, a possible consequence of mutual b. inconsistent ranking of projects with certain evaluation techniques.
exclusivity is that it can lead to:
Select one:
a. inconsistent correlation coefficient calculations.
b. inconsistent ranking of projects with certain evaluation
techniques.
c. incorrect measures of incremental IRR.
d. incorrect measures of equivalent annual cash flows.
e. incorrect variances of incremental cash flows.
When analysing a set of capital budgeting alternatives, a d. The value of the firm.
firm should always choose the ones which add the most
to:
Select one:
a. Earnings per share.
b. Return on equity.
c. Net income.
d. The value of the firm.
e. Return on investment.
, A firm is looking at replacing a machine. The new machine 88903
will cost $674606 and in 5 years time the machine could
be sold for $127004. The allowable depreciation rate is Explanation:
10.9% on a straight line basis. The company tax rate is for final year add terminal and operating cash flows together
30%. What is the terminal cash flow assuming the project
is evaluated over a 5 year investment horizon? to find terminal cash flows:
after tax proceeds from new machine = selling price = taxes
- after tax proceeds from old machine = selling price - tax to pay
+ recovery of NWC
Which of the following adjustment techniques would be a. increase the discount rate.
preferred practical method of account for additional
project risk?
Select one:
a. increase the discount rate.
b. Adjust expected cash flows downward.
c. Increase the beta.
d. Adjust the market risk premium.
A firm is evaluating a proposal which has an initial c. 2.25 years.
investment of $35,000 and has cash flows of $10,000 in
year 1, $20,000 in year 2, and $20,000 in year 3. The explanation:
payback period of the project is: when initial investment is paid off and profit is 0
Select one:
a. 1.75 years.
b. 2 years.
c. 2.25 years.
d. 2.5 years.
e. 3 years.
According to the NPV rule, all projects should be b. opportunity cost of capital.
accepted if NPV is positive when discounted at the:
Select one:
a. internal rate of return.
b. opportunity cost of capital.
c. risk-free interest rate.
d. accounting rate of return.
The value of a proposed capital budgeting project b. incremental cash flows produced
depends upon the:
Select one:
a. total cash flows produced.
b. incremental cash flows produced.
c. accounting profits produced.
d. increase in total sales produced.
