AGB 310 FINAL EXAM QUESTIONS AND ANSWERS
Installation and shipping costs are not considered part of the initial cost of acquiring the asset. -
CORRECT ANSWER✅✅False
The book value of an asset is equal to the - CORRECT ANSWER✅✅purchase price minus accumulated
depreciation.
The sale of an ordinary asset for its book value results in - CORRECT ANSWER✅✅no tax benefit.
The relevant cash flows for capital budgeting analysis are - CORRECT ANSWER✅✅incremental cash
flows.
Which of the following statements is true? - CORRECT ANSWER✅✅-***Operating cash flow (OCF) is
calculated by adding back depreciation to the net operating profit after taxes.***
-When the sale of an asset is equal to its book value, a firm will have to pay taxes.
-Annual cash inflows are the same as accounting earnings.
-The book value of an asset is equal to the asset's after-tax proceeds, provided after the asset has been
sold.
Which of the following statements is true? - CORRECT ANSWER✅✅-NOPAT is the same as Net Income.
-***Projects will usually have an initial investment, cash inflows, and a terminal cash flow.***
-When calculating the cash flows for a project, we should include interest payments.
-Net working capital is the amount by which a firm's current assets exceed its current liabilities.
Payback Period - CORRECT ANSWER✅✅This criterion tells the analyst how long it will take for an
investment to earn back the initial investment but doesn't account for the time value of money.
Modified Internal Rate of Return (MIRR) - CORRECT ANSWER✅✅This criterion tells the analyst the
average rate of return that the investment earns and assumes proceeds are reinvested at a separate
reinvestment rate.
, Profitability Index - CORRECT ANSWER✅✅This ratio compares the present value of the investment
proceeds to the initial investment cost.
Which of the following is a flaw of the payback period as a metric in capital budgeting analysis? -
CORRECT ANSWER✅✅-The payback period is too hard to calculate.
-The payback period assumes that cash flows are reinvested at the IRR, which overstates the profitability
of projects.
-***The payback period does not apply a discount rate to cash flows received in the future.***
-The payback period is difficult to understand and explain.
All of the following are steps in the capital budgeting process EXCEPT: - CORRECT ANSWER✅✅-***The
pre-audit.***
-evaluating opportunities.
-identifying opportunities.
-implementing the project.
An advantage of the net present value (NPV) method is that it: - CORRECT ANSWER✅✅-does not
employ time value of money techniques.
-***provides its users with a clear decision criterion.***
-does not rely on the discount rate.
-is easy to use when available capital or resources are limited.
According to the net present value technique, a project is considered acceptable if: - CORRECT
ANSWER✅✅-the sum of all cash inflows and outflows is positive.
-its rate of return is greater than the firm's cost of capital.
-it lowers costs below an acceptable hurdle rate.
-***the difference between all discounted cash inflows and outflows exceeds zero.***
-it returns the initial investment faster than competing projects.
The NPV method assumes that cash inflows are reinvested at the: - CORRECT ANSWER✅✅-internal rate
of return.
Installation and shipping costs are not considered part of the initial cost of acquiring the asset. -
CORRECT ANSWER✅✅False
The book value of an asset is equal to the - CORRECT ANSWER✅✅purchase price minus accumulated
depreciation.
The sale of an ordinary asset for its book value results in - CORRECT ANSWER✅✅no tax benefit.
The relevant cash flows for capital budgeting analysis are - CORRECT ANSWER✅✅incremental cash
flows.
Which of the following statements is true? - CORRECT ANSWER✅✅-***Operating cash flow (OCF) is
calculated by adding back depreciation to the net operating profit after taxes.***
-When the sale of an asset is equal to its book value, a firm will have to pay taxes.
-Annual cash inflows are the same as accounting earnings.
-The book value of an asset is equal to the asset's after-tax proceeds, provided after the asset has been
sold.
Which of the following statements is true? - CORRECT ANSWER✅✅-NOPAT is the same as Net Income.
-***Projects will usually have an initial investment, cash inflows, and a terminal cash flow.***
-When calculating the cash flows for a project, we should include interest payments.
-Net working capital is the amount by which a firm's current assets exceed its current liabilities.
Payback Period - CORRECT ANSWER✅✅This criterion tells the analyst how long it will take for an
investment to earn back the initial investment but doesn't account for the time value of money.
Modified Internal Rate of Return (MIRR) - CORRECT ANSWER✅✅This criterion tells the analyst the
average rate of return that the investment earns and assumes proceeds are reinvested at a separate
reinvestment rate.
, Profitability Index - CORRECT ANSWER✅✅This ratio compares the present value of the investment
proceeds to the initial investment cost.
Which of the following is a flaw of the payback period as a metric in capital budgeting analysis? -
CORRECT ANSWER✅✅-The payback period is too hard to calculate.
-The payback period assumes that cash flows are reinvested at the IRR, which overstates the profitability
of projects.
-***The payback period does not apply a discount rate to cash flows received in the future.***
-The payback period is difficult to understand and explain.
All of the following are steps in the capital budgeting process EXCEPT: - CORRECT ANSWER✅✅-***The
pre-audit.***
-evaluating opportunities.
-identifying opportunities.
-implementing the project.
An advantage of the net present value (NPV) method is that it: - CORRECT ANSWER✅✅-does not
employ time value of money techniques.
-***provides its users with a clear decision criterion.***
-does not rely on the discount rate.
-is easy to use when available capital or resources are limited.
According to the net present value technique, a project is considered acceptable if: - CORRECT
ANSWER✅✅-the sum of all cash inflows and outflows is positive.
-its rate of return is greater than the firm's cost of capital.
-it lowers costs below an acceptable hurdle rate.
-***the difference between all discounted cash inflows and outflows exceeds zero.***
-it returns the initial investment faster than competing projects.
The NPV method assumes that cash inflows are reinvested at the: - CORRECT ANSWER✅✅-internal rate
of return.
