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.
- Answers -False.
The most important advantage of the NPV approach is that it is the most theoretical
correct method. True or False. - Answers -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 - Answers -b) incremental
cash flows
The change in net working capital when evaluating a capital budgeting decision is... -
Answers -...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.... - Answers -...it can be viewed as
a measure of risk exposure
In the context of capital budgeting, risk refers to... - Answers -...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. - Answers -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. - Answers -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 - Answers -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. - Answers -False.
Sensitivity analysis is a statistically based approach used in capital budgeting to get a
feel for risk by applying predetermined probability distributions and random numbers to
estimate risky outcomes. True or False. - Answers -False.
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.
- Answers -False.
The most important advantage of the NPV approach is that it is the most theoretical
correct method. True or False. - Answers -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 - Answers -b) incremental
cash flows
The change in net working capital when evaluating a capital budgeting decision is... -
Answers -...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.... - Answers -...it can be viewed as
a measure of risk exposure
In the context of capital budgeting, risk refers to... - Answers -...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. - Answers -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. - Answers -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 - Answers -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. - Answers -False.
Sensitivity analysis is a statistically based approach used in capital budgeting to get a
feel for risk by applying predetermined probability distributions and random numbers to
estimate risky outcomes. True or False. - Answers -False.
