**1. The objective of a firm’s management should be to only undertake the projects that ________ the market value of shareholders’ equity.**

**a. decrease**

**b. increase**

**c. do not change**

**d. provide zero change to**

**e. none of the above**

**2. The decision rule that management should use with net present value (NPV) is to undertake only those projects with a(n) ________ NPV.**

**a. positive**

**b. negative**

**c. indeterminate**

**d. negative or zero**

**e. none of the above**

**3. The net present value (NPV) amount represents the amount by which the project is expected to ________ shareholder wealth (assuming positive NPV for this question).**

**a. provide zero change to**

**b. decrease**

**c. increase**

**d. provide zero change to or decrease**

**4. Net cash inflows from operations can be computed in which of the following ways?**

**a. Cash Flow = Revenues – Cash Expenses – Taxes**

**b. Cash Flow = Net Income + Noncash Expenses**

**c. Cash Flow = Revenue – Total Expenses – Taxes + Noncash Expenses**

**d. all of the above**

**5. Which of the following is not true?**

**a. Multiple IRRs for a project may exist when the project’s required rate of return is high.**

**b. IRR implicitly assumes that cash flows can be reinvested at the IRR rate.**

**c. Ranking projects based on NPV is not always the appropriate way to pick which projects to undertake.**

**d. When used to compare two projects, ACC assumes that a project with a short live can be repeated at a later date.**

**6. Which of the following would not be expected to affect the decision of whether to undertake an investment?**

**a. Income tax rates.**

**b. Cost of capital.**

**c. Sales reductions in other products caused by this investment.**

**d. Cost of the feasibility study which was conducted for a project.**

**7. The cost of capital does not reflect any market related risk of the project, or “beta.”**

**a. true**

**b. false**

**8. In computing a project’s cost of capital the risk to use is:**

**a. the risk of the financing instruments used to fund the project**

**b. the risk of the project’s cash flows**

**c. a risk free rate**

**d. a historical risk rate using T-bills**

**e. none of the above**

**9. When a firm has to ration capital, it should:**

**a. Fund the set of projects within the limits of capital that produces the greatest overall net present value.**

**b. Fund the set of projects within the limits of capital that produces the greatest overall internal rate of return (IRR).**

**c. Rank the projects based on net present value and fund as many of them in that order as possible.**

**d. Rank the projects based on internal rate of return (IRR) and fund as many of them in that order as possible.**

**10. If a project requires a $50,000 increase in inventory, this increase in inventory . . .**

**a. represents a cash outflow for the project.**

**b. represents a cash inflow for the project.**

**c. represents a cash outflow for the project but must be adjusted for taxes.**

**d. represents a cash inflow for the project but must be adjusted for taxes.**

**e. should be ignored in the evaluation of the project.**

**11. The ________ is the rate that prevails in a zero-inflation scenario. The ________ is the rate that one actually observes.**

**a. nominal, inflation**

**b. real rate, expected**

**c. nominal, real rate**

**d. real rate, nominal**

**12. If the nominal cost of capital is 16% per year and the expected rate of inflation is 5% per year, then compute the real cost of capital (rounded to nearest tenth of a %).**

**a. 11.5%**

**b. 10.5%**

**c. 8.5%**

**d. 9.0%**

**e. none of the above**

** 13. When a project has multiple internal rates of return:**

**a. the analyst should choose the highest rate to compare with the firm’s cost of equity**

**b. the analyst should choose the lowest rate to compare with the firm’s cost of capital**

**c. the analyst should choose the rate that seems most “reasonable” given the project’s cash flows, to compare with the firm’s cost of equity**

**d. the analyst should compute the project’s net present value and accept the project if its NPV is greater than $0.**

**e. none of the above**

**14. Which of the following statements is most correct?**

**a. Sunk costs must be included in the project’s cash flow.**

**b. R&D expenditures cannot be a part of the initial cost of a project.**

**c. Opportunity costs are sunk costs and therefore should not be included in the cost of the project.**

**d. Depreciation is not a cash expense.**

**e. All of the above statements are false.**

**15. Suppose the firm’s cost of capital is stated in nominal terms, but the project’s cash flows are expressed in real dollars. If a nominal rate is used to discount real cash flows and there is inflation (assume positive inflation), the calculated NPV would**

**a. be biased upward**

**b. be biased downward**

**c. be correct**

**d. be possibly biased; either upward or downward**

**e. none of the above**

**16. The correct method to handle overhead costs in capital budgeting is to:**

**a. allocate a portion to each project.**

**b. allocate them to projects with the highest NPVs.**

**c. ignore all except identifiable incremental amounts.**

**d. ignore them in all cases. **

**17. Which of the following statements is normally correct for a project with a positive NPV?**

**a. IRR exceeds the cost of capital.**

**b. Accepting the project has an indeterminate effect on shareholders.**

**c. The traditional payback period exceeds the life of the project.**

**d. The present value index equals one.**

**18. Capital budgeting proposals for investment projects should be evaluated as if the project were financed:**

**a. entirely by debt.**

**b. entirely by debt, adjusting for taxes.**

**c. half by debt and half by equity.**

**d. with the highest cost source of funds, to be safe.**

**e. the financing and investment decisions should be viewed separately.**

**19. When projects are mutually exclusive, can be undertaken only once, and capital is unconstrained, selection should be made according to the project with the:**

**a. longer life.**

**b. larger initial size.**

**c. highest IRR.**

**d. highest NPV.**

**e. highest PVI (present value index).**

**20. Which of the following can be deduced about a three-year investment project that has a two year traditional payback period?**

**a. The NPV is positive.**

**b. The IRR is greater than the cost of capital.**

**c. Both ‘a’ and ‘b’ can be deduced.**

**d. Neither ‘a’ nor ‘b’ can be deduced.**

**21. If a project has a cost of $50,000 and a present value index of 1.4, then:**

**a. its cash inflows are $70,000.**

**b. the present value of its cash inflows is $30,000.**

**c. its IRR is 20%.**

**d. its NPV is $20,000.**

**22. If two projects offer the same, positive NPV, then:**

**a. they also have the same IRR.**

**b. they have the same traditional payback period.**

**c. they are mutually exclusive projects.**

**d. they add the same amount to the value of the firm.**

**e. all the above**

**23. The likely effect of discounting nominal cash flows with real interest rates (assuming positive NPV) will be to:**

**a. make an investment’s NPV appear more attractive.**

**b. make an investment’s NPV appear less attractive.**

**c. correctly calculate an investment’s NPV if inflation is expected.**

**d. correctly calculate an investment’s NPV, regardless of expected inflation.**

**24. Which of the following is representative of how depreciation expense is handled in the face of inflation?**

**a. It increases annually with the rate of inflation.**

**b. It decreases annually in nominal terms.**

**c. The depreciable base is not altered by inflation.**

**d. The real value of the depreciation is fixed.**

**25. When analyzing a capital project, an increase in net working capital associated with the project:**

**a. is not a relevant cash flow.**

**b. is a relevant cash outflow.**

**c. is a relevant cash inflow.**

**d. is a relevant cash outflow that must be adjusted for taxes.**

**e. is a relevant cash inflow that must be adjusted for taxes.**

^{"Place your order now for a similar assignment and have exceptional work written by our team of experts, guaranteeing you A results."}