NEW 2022 UPDATE FNAN 522: FINAL EXAM ALL EXAM QUESTIONS
AND CORRECT ANSWER
1. 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. - CORRECT
ANSWER False.
2. The most important advantage of the NPV approach is that it is the most theoretical
correct method. True or False. - CORRECT ANSWER True.
3. Relevant financial data for a project are best described as a) EBDT, b) incremental cash flows, c)
incremental profits, or d) accounting cash flows - CORRECT ANSWER b) incremental cash flows
4. The change in net working capital when evaluating a capital budgeting decision is... - CORRECT
ANSWER ...changes in current assets minus the change in current liabilities
5. Some firms use the payback period as a decision criterion or as a supplement to sophisticated
decision making techniques because.... - CORRECT ANSWER ...it can be viewed as a measure of
risk exposure
6. In the context of capital budgeting, risk refers to... - CORRECT ANSWER ...the degree of
variability of the cash inflows
7. One advantage of the NPV approach is that it always provides the right answer. True or false. -
CORRECT ANSWER True.
8. 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. -
CORRECT ANSWER True.
9. 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 -
CORRECT ANSWER a) an increase in the cost of capital
, 10. 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. - CORRECT
ANSWER False.
11. 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. - CORRECT ANSWER False.
12. The higher the risk of a project, the higher its risk-adjusted discount rate and thus the lower the
net present value for a given stream of cash inflows. True or False. - CORRECT ANSWER True.
13. If the NPV is a negative 50,000 and the discount rate is 12%, the IRR is... - CORRECT ANSWER
...less than 12%.
14. An increase in sales and/or profits means there is also an increase in cash on the balance sheet.
True or False. - CORRECT ANSWER False.
15. The goal of the firm is to maximize profits. True or False. - CORRECT ANSWER False
16. Book value per share is of greater concern to the financial manager than the market value.
True or False. - CORRECT ANSWER False. Market Value is most important.
17. is the systematic process of evaluating and selecting long-term investments
consistent with the firm's goal of owner wealth maximization. a) Recapitalizing Assets, b) Capital
Budgeting, c) Ratio Analysis, or d) restructuring debt - CORRECT ANSWER b) Capital Budgeting
18. The underlying cause of conflicts in ranking for projects by IRR and NPV methods is.... - CORRECT
ANSWER the reinvestment rate assumption regarding the cash flows
19. Comparing NPV and IRR analysis: a) may result in conflict with mutually exclusive projects, b)
may result in conflict with independent projects, c) will always result in conflict with mutually
AND CORRECT ANSWER
1. 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. - CORRECT
ANSWER False.
2. The most important advantage of the NPV approach is that it is the most theoretical
correct method. True or False. - CORRECT ANSWER True.
3. Relevant financial data for a project are best described as a) EBDT, b) incremental cash flows, c)
incremental profits, or d) accounting cash flows - CORRECT ANSWER b) incremental cash flows
4. The change in net working capital when evaluating a capital budgeting decision is... - CORRECT
ANSWER ...changes in current assets minus the change in current liabilities
5. Some firms use the payback period as a decision criterion or as a supplement to sophisticated
decision making techniques because.... - CORRECT ANSWER ...it can be viewed as a measure of
risk exposure
6. In the context of capital budgeting, risk refers to... - CORRECT ANSWER ...the degree of
variability of the cash inflows
7. One advantage of the NPV approach is that it always provides the right answer. True or false. -
CORRECT ANSWER True.
8. 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. -
CORRECT ANSWER True.
9. 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 -
CORRECT ANSWER a) an increase in the cost of capital
, 10. 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. - CORRECT
ANSWER False.
11. 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. - CORRECT ANSWER False.
12. The higher the risk of a project, the higher its risk-adjusted discount rate and thus the lower the
net present value for a given stream of cash inflows. True or False. - CORRECT ANSWER True.
13. If the NPV is a negative 50,000 and the discount rate is 12%, the IRR is... - CORRECT ANSWER
...less than 12%.
14. An increase in sales and/or profits means there is also an increase in cash on the balance sheet.
True or False. - CORRECT ANSWER False.
15. The goal of the firm is to maximize profits. True or False. - CORRECT ANSWER False
16. Book value per share is of greater concern to the financial manager than the market value.
True or False. - CORRECT ANSWER False. Market Value is most important.
17. is the systematic process of evaluating and selecting long-term investments
consistent with the firm's goal of owner wealth maximization. a) Recapitalizing Assets, b) Capital
Budgeting, c) Ratio Analysis, or d) restructuring debt - CORRECT ANSWER b) Capital Budgeting
18. The underlying cause of conflicts in ranking for projects by IRR and NPV methods is.... - CORRECT
ANSWER the reinvestment rate assumption regarding the cash flows
19. Comparing NPV and IRR analysis: a) may result in conflict with mutually exclusive projects, b)
may result in conflict with independent projects, c) will always result in conflict with mutually
