Corporate Finance Exam Questions With
Correct Answers
a company that utilizes the MACRS system of depreciation
will have a greater taxs shield in year two of a project than it would have if the firm had opted for
straight-line depreciation
a project has a discounted payback period that is equal to the required payback period. Given this
which of the following statements must be true?
The projec tmust also be acceptable under the payback rule AND The project must have a profitability
index that is equal to or greater than 1
a project has a net present value of zero. Which one of the following best describes this project?
The project's cash inflows equal its cash outflows in current dollar terms.
A project has a required payback period of three years. Which one of the following statements is
correct concerning the payback analysis of this project?
The cash flow in year two is valued just as highly as the cash flow in year one.
A project has an initial cost of $27,400 and a market value of $32,600. What is the difference between
these two value called?
net present value
a project with financing type cash flows is typified by a project that has which one of the following
characteristics?
a cash inflow at time zero
A project's average net income divided by its average book value is referred to as the project's
average:
accounting return
Allof the following are related to a proposed project. Which of these should be included in the case
flow at time zero?
Purchase of $1,400 of parts inventory needed to support the project AND $6,500 of equipment
needed to commence the project
Applying the discounted payback decision rule to all projects may cause
some positive net present value projects to be rejected.
Brubaker & Goss has received requests for capital investment funds for next year from each of its five
devisions....
soft rationing
Changes in the net working capital requirements
can affect the cash flows of a project every year of the project's life.
, Dan is comparing three machines to determine which one to purchase...
equivalent annual cost
Danielle's is a furniture store that is considering adding appliances to its offerings...
Utilizing the cred offered by a supplier to purchase the appliance inventory AND benefiting from
increased furniture sales to appliance customers AND purchasing parts for inventory to handle any
appliance repairs that might be necessary
decreasing which one of the following will increase the acceptability of a project
equivalent annual cost
Dexte Smith co. is replacing a machine simply because it has worn out... which of the following
statements is correct?
The new machine will generate positive operating cash flows, at least in the first few years of its life.
Douglass Interiors is consideringtwo mutually exclusive projects and have determined that the
crossover rates for these projects is 11.7 percent.
You cannot determine which project should be accepted given the information provided.
Forecasting risk emphasizes the point that the correctness of any decision to accept or reject a project
is highly dependent upon the:
accuracy of the projected cash flows.
Forecasting risk is defined as the possibly that:
incorrect decisions will be made due to erroneous cash flow projections
G&L Plastic Molders spent $1,200 last week repairing a machine...
sunk
Graphing the crossover point helps explain:
how decisions concerning mutually exclusive projects are derived.
If a firm accepts Project A it will not be feasible to also accept Project B because both projects would
require the simultaneous and exclusive use of the same piece of machinery.
Mutually exclusive
If a project has a net present value equal to zero, then:
the project earns a return exactly equal to the discount rate
In actual practice, managers frequently
Average accounting return method AND internal rate of return AND net present value
Increasing which one of the following will increase the operating cash flow assuming that the bottom-
up approach is used to compute the operating cash flow?
depreciation expense
Correct Answers
a company that utilizes the MACRS system of depreciation
will have a greater taxs shield in year two of a project than it would have if the firm had opted for
straight-line depreciation
a project has a discounted payback period that is equal to the required payback period. Given this
which of the following statements must be true?
The projec tmust also be acceptable under the payback rule AND The project must have a profitability
index that is equal to or greater than 1
a project has a net present value of zero. Which one of the following best describes this project?
The project's cash inflows equal its cash outflows in current dollar terms.
A project has a required payback period of three years. Which one of the following statements is
correct concerning the payback analysis of this project?
The cash flow in year two is valued just as highly as the cash flow in year one.
A project has an initial cost of $27,400 and a market value of $32,600. What is the difference between
these two value called?
net present value
a project with financing type cash flows is typified by a project that has which one of the following
characteristics?
a cash inflow at time zero
A project's average net income divided by its average book value is referred to as the project's
average:
accounting return
Allof the following are related to a proposed project. Which of these should be included in the case
flow at time zero?
Purchase of $1,400 of parts inventory needed to support the project AND $6,500 of equipment
needed to commence the project
Applying the discounted payback decision rule to all projects may cause
some positive net present value projects to be rejected.
Brubaker & Goss has received requests for capital investment funds for next year from each of its five
devisions....
soft rationing
Changes in the net working capital requirements
can affect the cash flows of a project every year of the project's life.
, Dan is comparing three machines to determine which one to purchase...
equivalent annual cost
Danielle's is a furniture store that is considering adding appliances to its offerings...
Utilizing the cred offered by a supplier to purchase the appliance inventory AND benefiting from
increased furniture sales to appliance customers AND purchasing parts for inventory to handle any
appliance repairs that might be necessary
decreasing which one of the following will increase the acceptability of a project
equivalent annual cost
Dexte Smith co. is replacing a machine simply because it has worn out... which of the following
statements is correct?
The new machine will generate positive operating cash flows, at least in the first few years of its life.
Douglass Interiors is consideringtwo mutually exclusive projects and have determined that the
crossover rates for these projects is 11.7 percent.
You cannot determine which project should be accepted given the information provided.
Forecasting risk emphasizes the point that the correctness of any decision to accept or reject a project
is highly dependent upon the:
accuracy of the projected cash flows.
Forecasting risk is defined as the possibly that:
incorrect decisions will be made due to erroneous cash flow projections
G&L Plastic Molders spent $1,200 last week repairing a machine...
sunk
Graphing the crossover point helps explain:
how decisions concerning mutually exclusive projects are derived.
If a firm accepts Project A it will not be feasible to also accept Project B because both projects would
require the simultaneous and exclusive use of the same piece of machinery.
Mutually exclusive
If a project has a net present value equal to zero, then:
the project earns a return exactly equal to the discount rate
In actual practice, managers frequently
Average accounting return method AND internal rate of return AND net present value
Increasing which one of the following will increase the operating cash flow assuming that the bottom-
up approach is used to compute the operating cash flow?
depreciation expense
