Which of the following capital budgeting techniques would allow management to justify investing in a project that could not be justified currently by using techniques that focus on expected cash flows?

Which of the following capital budgeting techniques would allow management to justify investing in a project that could not be justified currently by using techniques that focus on expected cash flows?

a. Real options.
b. Net present value.
c. Accounting rate of return.
d. Internal rate of return.


Answer: a

Andrew Corporation is evaluating a capital investment that would result in $30,000 higher contribution margin benefit with increased annual personnel costs of $20,000. In calculating the net present value of benefits and costs, income taxes would:

Andrew Corporation is evaluating a capital investment that would result in $30,000 higher contribution margin benefit with increased annual personnel costs of $20,000. In calculating the net present value of benefits and costs, income taxes would:

a. Decrease both the amount of the benefits and costs.
b. Have no net effect on either the amount of the benefits or costs.
c. Decrease the amount of the benefits but increase the amount of the costs.
d. Increase the amount of the benefits but decrease the amount of the costs.


Answer: a

As used in capital budgeting analysis, the internal rate of return uses which of the following items in its computation?

As used in capital budgeting analysis, the internal rate of return uses which of the following items in its computation?

Net incremental investment / Incremental average operating income / net annual cash flows



a. Yes / No / Yes
b. Yes / Yes / No
c. No / No / Yes
d. No/ Yes / Yes


Answer: a

A project's net present value, ignoring income tax considerations, is normally affected by the

A project's net present value, ignoring income tax considerations, is normally affected by the

a. Proceeds form the sale of the asset to be replaced.
b. Carrying amount of the asset to be replaced by the project.
c. Amount of annual depreciation on the asset to be replaced.
d. Amount of annual depreciation on fixed assets used directly on the project.


Answer: a

If an investment project has a profitability index of 1.15, then the

If an investment project has a profitability index of 1.15, then the

a. Project's internal rate of return is 15%.
b. Project's cost of capital is greater than its internal rate of return.
c. Project's internal rate of return exceeds its net present value.
d. Net present value of the project is positive.


Answer: d

The capital budgeting technique known as accounting rate of return uses

The capital budgeting technique known as accounting rate of return uses

Revenue over life of project / Depreciation expense.


a. No / Yes
b. No / No
c. Yes / No
d. Yes / Yes


Answer: d

When a firm finances each asset with a financial instrument of the same approximate maturity as the life of the asset, it is applying

When a firm finances each asset with a financial instrument of the same approximate maturity as the life of the asset, it is applying

a. Working capital management.
b. Return maximization.
c. Financial leverage.
d. A hedging approach.


Answer: d

Which of the following risks relates to the possibility that a derivative might NOT be effective at hedging a particular asset?

Which of the following risks relates to the possibility that a derivative might NOT be effective at hedging a particular asset?

a. Credit risk.
b. Legal risk.
c. Market risk.
d. Basis risk.


Answer: d

Which of the following techniques is used to value stock options?

Which of the following techniques is used to value stock options?

a. Black-Scholes method.
b. Zero-coupon method.
c. Weighted-average method.
d. Expected earnings method.


Answer: a

According to the expectations theory of the term structure of interest rates, if inflation is expected to increase, the yield curve is

According to the expectations theory of the term structure of interest rates, if inflation is expected to increase, the yield curve is

a. Humped, with an upward slope that peaks and then turns downward.
b. Downward sloping.
c. Upward sloping.
d. Flat.


Answer: c

According to the expectations theory, if the yield curve on the New York money market is upward sloping while that on the Tokyo money market is downward sloping, then inflation in

According to the expectations theory, if the yield curve on the New York money market is upward sloping while that on the Tokyo money market is downward sloping, then inflation in

a. The United States is expected to decrease.
b. The United States is expected to remain constant.
c. Japan is expected to decrease.
d. Japan is expected to remain constant.


Answer: c

The yield curve shown below implies that the

The yield curve shown below implies that the

a. Credit risk premium of corporate bonds has increased.
b. Credit risk premium of municipal bonds has increased.
c. Long-term interest rates have a higher annualized yield than short-term rates.
d. Short-term interest rates have a higher annualized yield than long-term rates.


Answer: c

The expected return of a portfolio is measured by the

The expected return of a portfolio is measured by the

a. Variance.
b. Weighted average.
c. Standard deviation.
d. Beta.


Answer: b

Probability (risk) analysis is

Probability (risk) analysis is

a. Used only for situations involving five or fewer possible outcomes.
b. Used only for situations in which the summation of probability weights is greater than one.
c. An extension of sensitivity analysis.
d. Incompatible with sensitivity analysis.


Answer: c.

To assist in an investment decision, Gift Co. selected the most likely sales volume from several possible outcomes. Which of the following attributes would that selected sales volume reflect?

To assist in an investment decision, Gift Co. selected the most likely sales volume from several possible outcomes. Which of the following attributes would that selected sales volume reflect?

a. The midpoint of the range.
b. The median.
c. The greatest probability.
d. The expected value.


Answer: c.

The level of risk that concerns investors who supply capital to a diversified company is

The level of risk that concerns investors who supply capital to a diversified company is

a. Project risk (beta)
b. Pure play risk (beta).
c. The standard deviation of project risk (betas).
d. The weighted-average of project risk (betas).


Answer: d.

Buff Co. is considering replacing an old machine with a new machine. Which of the following item is economically relevant to Buff's decision? (Ignore income tax consideration)

Buff Co. is considering replacing an old machine with a new machine. Which of the following item is economically relevant to Buff's decision? (Ignore income tax consideration)

Carrying amount of old machine / Disposal value of new machine



a. Yes / No
b. No / Yes
c. No / No
d. Yes / Yes


Answer: b.

How are the following used in the calculation of the internal rate of return of a proposed project? Ignore income tax considerations.

How are the following used in the calculation of the internal rate of return of a proposed project? Ignore income tax considerations.

Residual sales value of project / Depreciation expense


a. Exclude / Include
b. Include / Include
c. Exclude / Exclude
d. Include / Exclude


Answer: d.

Tam Co. is negotiating for the purchase of equipment that would cost $100,000, with the expectation that $20,000 per year could be saved in after-tax cash costs if the equipment were acquired. The equipment's estimated useful life is ten years, with no residual value, and would be depreciated by the straight-line method. Tam's predetermined minimum desired rate of return is 12%. Present value of an annuity of 1 at 12% for ten periods is 5.65. Present value of 1 due in ten periods at 12% is .322. In estimating the internal rate of return, the factors in the table of present values of an annuity should be taken from the columns closest to

Tam Co. is negotiating for the purchase of equipment that would cost $100,000, with the expectation that $20,000 per year could be saved in after-tax cash costs if the equipment were acquired. The equipment's estimated useful life is ten years, with no residual value, and would be depreciated by the straight-line method. Tam's predetermined minimum desired rate of return is 12%. Present value of an annuity of 1 at 12% for ten periods is 5.65. Present value of 1 due in ten periods at 12% is .322. In estimating the internal rate of return, the factors in the table of present values of an annuity should be taken from the columns closest to

a. 0.65
b. 1.30
c. 5.00
d. 5.65


Answer: c.

An organization is using capital budgeting techniques to compare two independent projects. It could accept one, both, or neither of the projects. Which of the following statements is true about the use of NPV and IRR methods for evaluating these two projects?

An organization is using capital budgeting techniques to compare two independent projects. It could accept one, both, or neither of the projects. Which of the following statements is true about the use of NPV and IRR methods for evaluating these two projects?

a. NPV and IRR criteria will always lead to the same accept or reject decision for two independent projects.
b. If the first project's IRR is higher than the organization's cost of capital, the first project will be accepted but the second project will not.
c. If the NPV criterion leads to accepting or rejecting the first project, one cannot predict whether the IRR criterion will lead to accepting or rejecting the first project.
d. If the NPV criterion leads to accepting the first project, the IRR criterion will never lead to accepting the first project.


Answer: a.