FIN 3403 EXAM 4 REVIEW QUESTIONS WITH
VERIFIED SOLUTIONS
Which of the following statements best describes the post-audit function in the capital
budgeting process?
The post-audit involves comparing the actual results of previous capital budgeting decisions with
the forecasted results to identify and explain any differences.
Which of the following statements is true about capital budgeting analysis?
A project should be purchased if its net present value (NPV) is positive.
Union Atlantic Corporation, which has a required rate of return equal to 14 percent, is
evaluating a capital budgeting project that requires an initial investment of $170,000. The
project will generate a $60,750 cash inflow at the year-end of each of the next four years.
According to this information, which of the following statements is correct?
The project is acceptable because its net present value is positive.
For a particular project, other things held constant, an increase in the firm's required rate
of return will result in _____.
a decrease in the project's net present value (NPV)
Which of the following statements is correct?
To compute the NPV for a project, the firm's required rate of return must be known. To compute
a project's internal rate of return (IRR), the firm's required rate of return is not used because the
IRR is the discount rate where the project's NPV equals zero.
When determining a project's true profitability, it is normally better to compute the
project's modified internal rate of return (MIRR) rather than its internal rate of return
(IRR) because the MIRR technique:
assumes that the project's cash flows are reinvested at the firm's required rate of return, whereas
IRR assumes the cash flows are reinvested at the project's IRR.
The incremental cash flows associated with a capital budgeting project that occur only at
the start of a project's life are included in the computation of the project's _____.
initial investment outlay
Which of the following statements concerning cash flow evaluation in capital budgeting is
correct?
Even though it is a noncash expense, a capital budgeting project's depreciation expense must be
computed because it affects the after-tax cash flows of the project.
, Hill Top Lumber Company is considering building a sawmill in the state of Washington
because the company doesn't have such a facility to service its growing customer base
located on the west coast. When evaluating the acceptability of the project, which of the
following would be considered a relevant cash flow that should be included when
determining the sawmill's initial investment outlay?
It will cost Hill Top $3 million to clear the land on which the sawmill will be built.
Which of the following should be included in the computation of an expansion project's
terminal cash flow?
Any change in net working capital that was recognized at the time the project was purchased
Stonewood Manufacturing is evaluating whether to replace one of its existing machines
with a new, more technologically advanced one. Which of the following statements
concerning a replacement decision analysis is correct?
The net cash flow from the sale of old machine should be included as part of the new machine's
initial investment outlay.
A firm is evaluating a new machine to replace one of its existing, older machines. If the old
machine is replaced, the change in the annual depreciation expense will be $3,000. The
firm's marginal tax rate is 30 percent. Which of the following statements is correct?
The depreciation expense can be added to the machine's after-tax net operating income to
determine its supplemental operating cash flows.
Sensitivity analysis is a technique in which:
the values of key input variables are changed to observe the resulting changes in a project's net
present value (NPV) and its internal rate of return (IRR).
Suppose a firm's senior management is careful to make decisions that contribute to the goal
of wealth maximization. If our basic assumptions about the relationship between risk and
return are valid, which of the following statements is correct?
If the beta coefficient of a capital budgeting project is greater than the firm's existing beta
coefficient, the firm's required rate of return will increase if the project is purchased.
_____ risk is the uncertainty associated with the price at which the currency from one
country can be converted into the currency of another country.
Exchange rate
Under normal circumstances, the weighted average cost of capital (WACC) is used as the
firm's required rate of return because:
as long as the firm's investments earn returns greater than its WACC, the value of the firm will
not decrease.
VERIFIED SOLUTIONS
Which of the following statements best describes the post-audit function in the capital
budgeting process?
The post-audit involves comparing the actual results of previous capital budgeting decisions with
the forecasted results to identify and explain any differences.
Which of the following statements is true about capital budgeting analysis?
A project should be purchased if its net present value (NPV) is positive.
Union Atlantic Corporation, which has a required rate of return equal to 14 percent, is
evaluating a capital budgeting project that requires an initial investment of $170,000. The
project will generate a $60,750 cash inflow at the year-end of each of the next four years.
According to this information, which of the following statements is correct?
The project is acceptable because its net present value is positive.
For a particular project, other things held constant, an increase in the firm's required rate
of return will result in _____.
a decrease in the project's net present value (NPV)
Which of the following statements is correct?
To compute the NPV for a project, the firm's required rate of return must be known. To compute
a project's internal rate of return (IRR), the firm's required rate of return is not used because the
IRR is the discount rate where the project's NPV equals zero.
When determining a project's true profitability, it is normally better to compute the
project's modified internal rate of return (MIRR) rather than its internal rate of return
(IRR) because the MIRR technique:
assumes that the project's cash flows are reinvested at the firm's required rate of return, whereas
IRR assumes the cash flows are reinvested at the project's IRR.
The incremental cash flows associated with a capital budgeting project that occur only at
the start of a project's life are included in the computation of the project's _____.
initial investment outlay
Which of the following statements concerning cash flow evaluation in capital budgeting is
correct?
Even though it is a noncash expense, a capital budgeting project's depreciation expense must be
computed because it affects the after-tax cash flows of the project.
, Hill Top Lumber Company is considering building a sawmill in the state of Washington
because the company doesn't have such a facility to service its growing customer base
located on the west coast. When evaluating the acceptability of the project, which of the
following would be considered a relevant cash flow that should be included when
determining the sawmill's initial investment outlay?
It will cost Hill Top $3 million to clear the land on which the sawmill will be built.
Which of the following should be included in the computation of an expansion project's
terminal cash flow?
Any change in net working capital that was recognized at the time the project was purchased
Stonewood Manufacturing is evaluating whether to replace one of its existing machines
with a new, more technologically advanced one. Which of the following statements
concerning a replacement decision analysis is correct?
The net cash flow from the sale of old machine should be included as part of the new machine's
initial investment outlay.
A firm is evaluating a new machine to replace one of its existing, older machines. If the old
machine is replaced, the change in the annual depreciation expense will be $3,000. The
firm's marginal tax rate is 30 percent. Which of the following statements is correct?
The depreciation expense can be added to the machine's after-tax net operating income to
determine its supplemental operating cash flows.
Sensitivity analysis is a technique in which:
the values of key input variables are changed to observe the resulting changes in a project's net
present value (NPV) and its internal rate of return (IRR).
Suppose a firm's senior management is careful to make decisions that contribute to the goal
of wealth maximization. If our basic assumptions about the relationship between risk and
return are valid, which of the following statements is correct?
If the beta coefficient of a capital budgeting project is greater than the firm's existing beta
coefficient, the firm's required rate of return will increase if the project is purchased.
_____ risk is the uncertainty associated with the price at which the currency from one
country can be converted into the currency of another country.
Exchange rate
Under normal circumstances, the weighted average cost of capital (WACC) is used as the
firm's required rate of return because:
as long as the firm's investments earn returns greater than its WACC, the value of the firm will
not decrease.
