FIN3701 MULTIPLE CHOICE QUESTIONS
1. A company would accept a project with a net present value of zero because the…
2. All the following are the weaknesses of the payback period except
3. Cash flows that could be realized from the best alternative use of owned asset are called….
...
a company would accept a project with a net present value of zero because the
all the following are the weaknesses of the payback period except
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FIN 3701 (FIN3701)
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FIN3701 MULTIPLE CHOICE QUESTIONS
1. A company would accept a project with a net present value of zero because the…
project would maintain the wealth of the company’s owners.
2. All the following are the weaknesses of the payback period
except it uses cash flows, not accounting profit.
3. Cash flows that could be realized from the best alternative use of owned asset are called….
opportunity costs.
4. In developing the cash flows for an expansion project, the analysis is the same as
the analysis for replacement projects where ….
all cash flows from the old asset are zero.
5. The evaluation of capital expenditure proposals to determine whether they meet
the company’s minimum acceptable criteria are called …...
the accept-reject approach
6. The amount by which the required discount rate exceeds the risk-free rate is called the ….
risk premium.
7. Some companies use the payback period as a decision criterion as a supplement
to sophisticated decision techniques because ….
it can be viewed as a measure of risk exposure
8. Which of the following rules are essential to successful cash flow estimation,
and ultimately, to successful capital budgeting?
only incremental cash flows are relevant to the accept/reject decision
9. The book value of an asset is equal to the …...
original purchase price minus accumulated depreciation
10. The cash flows of any project having a conventional pattern include all the
following basic components except …...
operating cash outflows
11. Net cash flow equals ….
net income + depreciation
12. Define payback period …...
number of years before recovery of original investment) + (amount of investment remaining
to be recaptured / total cash flow during year of payback.
16. Net present value equals ………...
investment / (1 + interest) ^rate
17. Under normal circumstances, the weighted average cost of capital is used as the firm's
required rate of return because ……….
"as long as the firm's investments earn returns greater than the cost of capital, the value of
the firm will not decrease."
18. Depreciation must be considered when evaluating the incremental operating cash
flows associated with a capital budgeting project because ….
"although it is a non-cash expense, depreciation has an impact on the taxes paid by the firm,
which is a cash flow."
19. "When evaluating a new project, the firm should consider all of the following factors
except:" "Previous expenditures associated with a market test to determine the feasibility
of the project, if the expenditures have been expensed for tax purposes"
20. How do most firms deal with the risks of projects when making capital budgeting
decisions? Most firms adjust the discount rates used to evaluate new projects that have
significantly different risks than the risk associated with the firm's existing assets.
21. The marginal cost of capital as more capital is raised during a given period
increases
22. "If a company uses the same discount rate for evaluating all projects, which of the
following results is likely?"
Accepting poor, high-risk projects
23. "When evaluating the cash flows associated with a capital budgeting project, shipping and
installation costs associated with the purchase of an asset, such as a lathe, are considered part
of the "…………
initial investment outlay because these expenses effectively are part of the asset's purchase
price.
24. "The before-tax cost of debt, kd, is the same as the "
average yield to maturity (YTM) associated with the firm's bonds.
, 25. A graph of a firm's acceptable capital projects ranked in the order of the projects' internal rate
of return is called the firm's
investment opportunity schedule
26. Although it is a subjective measure, analysts often estimate the cost of common equity
by adding a risk premium of 3 to 5 percentage points to the"-------------------
interest rate on the firm's long-term debt
27. The financial staff's role in the forecasting process includes all the following except--------------
determine the appropriate discount rate for cash flows.
28. "Which of the following rules are essential to successful cash flow estimates, and ultimately,
to successful capital budgeting?"
Only incremental cash flows are relevant to the accept/reject decision
29. Which of the following is not a difficulty concerning beta and its estimation?
"The beta of an ""average stock,"" or ""the market,"" can change over time, sometimes
drastically."
30. "If the calculated NPV is negative, then which of the following must be true? The discount
rate used is"
Greater than the internal rate of return
31. The internal rate of return of a capital investment
Must exceed the required rate of return for the firm to accept the investment
32. " is a measure of total risk, whereas is a measure of systematic risk"
Standard deviation; beta
33. All the following factors can complicate the post-audit process except
"the most successful firms, on average, are the ones that put the least emphasis on the post-
audit"
34. A major disadvantage of the discounted payback period method is it
Ignores cash flows after the payback period
35. The present value of the expected net cash inflows for a project will most likely exceed
the present value of the expected net profit after tax for the same project because
………...
"Income is reduced by depreciation charges, but cash flow is not"
36. "Assume you are considering combining two investments to form a portfolio and you are very
concerned with the risk that will result from the combination. If you want to attain the
greatest effect from diversification, you would prefer that the assets are related."
negatively
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