D362 Corporate Finance - Set 1 - Part 1

Test your knowledge of technical writing concepts with these practice questions. Each question includes detailed explanations to help you understand the correct answers.

Question 1: A company that utilizes the MACRS system of depreciation will likely experience which of the following in year two of a project?

A greater tax shield than it would with straight-line depreciation.

A smaller tax shield than it would with straight-line depreciation.

No difference in tax shield compared to straight-line depreciation.

A smaller deduction than it would with MACRS depreciation.

Question 2: A project has a discounted payback period equal to the required payback period. Which of the following statements must be true?

The project must have a positive NPV.

The project must also be acceptable under the profitability index rule.

The project must have an IRR lower than the required rate of return.

The project must be unacceptable under the payback rule.

Question 3: A project has an NPV of zero. Which of the following best describes this project?

The project generates no cash flows.

The project's cash inflows equal its cash outflows in current dollar terms.

The project creates value equal to its initial cost.

The project should not be undertaken.

Question 4: A project has a required payback period of three years. Which of the following is correct concerning the payback analysis?

Cash flow in year two is discounted more heavily than year one.

The project is acceptable if it pays back within four years.

The cash flow in year two is valued the same as in year one.

The project must be rejected if it doesn't pay back by year two.

Question 5: A project with financing-type cash flows is typified by which of the following?

Cash inflows occurring in the later years of the project.

A large cash outflow followed by consistent cash inflows.

A cash inflow at time zero.

A cash inflow followed by incremental outflows.

Question 6: A project's average net income divided by its average book value is referred to as the project's:

Internal Rate of Return.

Net Present Value.

Average accounting return.

Profitability index.

Question 7: All of the following are related to a proposed project. Which should be included in the cash flow at time zero?

Equipment needed to commence the project.

Depreciation of existing machinery.

Future operating expenses.

Revenues from increased sales.

Question 8: Applying the discounted payback decision rule to all projects may cause:

Some positive NPV projects to be accepted.

Some positive NPV projects to be rejected.

Some negative NPV projects to be accepted.

All projects to be rejected.

Question 9: Changes in the net working capital requirements can:

Only affect the initial year of the project.

Affect the project only at the end of its life.

Affect the cash flows of a project every year of the project's life.

Never affect the project’s cash flows.

Question 10: Danielle's Furniture is considering adding appliances to its offerings. Which of the following would be considered an incremental operating cash flow?

The revenue generated from furniture sales.

The cost of purchasing appliance inventory.

The future depreciation of existing assets.

Past marketing expenses for the furniture store.

Question 11: Decreasing which of the following will increase the acceptability of a project?

Initial outlay.

Equivalent annual cost.

Payback period.

Profitability index.

Question 12: Douglass Interiors is considering two mutually exclusive projects. The crossover rate for these projects is 11.7%. Which statement is most likely true?

Project A should be accepted.

You cannot determine which project should be accepted based on the crossover rate alone.

Project B should be accepted.

Both projects should be rejected.

Question 13: Forecasting risk emphasizes the point that the correctness of any decision to accept or reject a project is highly dependent upon:

The project manager’s expertise.

Accuracy of the projected cash flows.

The level of competition in the market.

The initial cost of the project.

Question 14: G&L Plastic Molders spent $1,200 last week repairing a machine that will be used in a new project. This cost is classified as a:

Sunk cost.

Opportunity cost.

Fixed cost.

Variable cost.

Question 15: Graphing the crossover point helps explain:

The payback period of a project.

How decisions concerning mutually exclusive projects are derived.

How IRR is computed.

The tax impact on NPV.

Question 16: If a project has a net present value of zero, then:

The project earns a return exactly equal to the discount rate.

The project is expected to fail.

The project’s cash flows are insufficient to cover its initial cost.

The project should be rejected.

Question 17: If a firm accepts Project A, it will not be feasible to accept Project B. These projects are:

Independent.

Mutually exclusive.

Contingent.

Additive.

Question 18: Increasing which one of the following will increase the operating cash flow, assuming the bottom-up approach is used?

Fixed assets.

Depreciation expense.

Working capital.

Variable costs.

Question 19: Kelley’s Baskets makes handmade baskets and is considering adding wreaths to its product line. Which of the following is an example of an incremental operating cash flow related to the wreath project?

The cost of hiring additional employees to make the wreaths.

The revenue from additional basket sales.

The depreciation of existing machinery.

The marketing costs incurred for the existing product line.

Question 20: Kristi wants to train her assistant in capital budgeting methods. Which method is Kristi most likely to ask her assistant to use in making initial decisions?

Net present value.

Internal rate of return.

Payback period.

Profitability index.

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