Deck 14: Financial Analysis

Question 1

The value of an investment at the end of the period over which interest is compounded is called the future value of the investment.

Answer 1

True

Question 2

Which method of analysis does not consider the time value of money?

A) Net present value (NPV)
B) Internal rate of return (IRR)
C) Payback
D) None of the above; they all consider the time value of money.

Answer 2

C

Question 3

The advantage of using the modified accelerated cost recovery system (MACRS)for depreciation is that it extends the lives of investments,giving a firm a longer period of time before the item must be replaced.

Answer 3

False

Question 4

Cash flow is the cash that will flow into and out of the organization.

Question 5

An annuity is a series of payments of a fixed amount for a specified number of years.

Question 6

The net present value (NPV)method must exceed a hurdle rate.

Question 7

The time value of money implies that a dollar in hand today is worth more than a dollar to be received in the future.

Question 8

Projects with the greatest strategic impact are likely to be riskier and have qualitative benefits that cannot easily be quantified.

Question 9

The amount to be invested now to accumulate to a certain amount in the future at a specified interest rate is called the

A) time value of money.
B) present value of an investment.
C) future value of an investment.
D) None of the above.

Question 10

Depreciation

A) is an allowance for the consumption of capital.
B) acts as a tax shield.
C) is not a legitimate cash flow.
D) All of the above.

Question 11

The interest rate is also called the discount rate.

Question 12

The present value of an investment is the amount that must be invested now to accumulate to a certain amount in the future at a specific interest rate.

Question 13

A poultry farmer is interested in purchasing an egg tester that can measure weight,albumin height,yolk color,and Haugh units all at the touch of a button.The unit will cost $6900 and is expected to last 10 years at which point it can be sold for $500 to a farmer in a less stringently controlled egg market.What is the annual depreciation under the straight line method?

A) $640
B) $690
C) $50
D) $740

Question 14

It is estimated that the cost for the first year of college at Massive University,the state school with the best operations management program,will be $20,000 by the time your son is ready to matriculate.If prevailing interest rates will average 5 percent,what amount should you invest now to pay his tuition eight years from now?

A) Less than $13,000
B) Between $13,000 and $14,000
C) Between $14,000 and $15,000
D) More than $15,000

Question 15

Straight-line depreciation is an accelerated depreciation method.

Question 16

The value of an investment at the end of the period over which interest is compounded is called the:

A) time value of money.
B) present value of an investment.
C) future value of an investment.
D) None of the above.

Question 17

The hurdle rate is the interest rate that is the highest desired return on an investment.

Question 18

Depreciation is not a legitimate cash flow.

Question 19

Discounting is the process by which interest on an investment accumulates,and then earns interest itself for the remainder of the investment period.

Question 20

An investor puts $10,000 in an account earning 4 percent compounded interest.At the end of three years,the account will have a value of

A) less than $11,000.
B) between $11,000 and $11,200.
C) between $11,200 and $11,400.
D) more than $11,400.

Question 21

The ________ is the concept that a dollar in hand today is worth more than a dollar to be received in the future.

Question 22

Which of the following is an accelerated depreciation method?

A) Straight-line depreciation
B) MACRS
C) Net present value
D) After-tax cash flow

Question 23

The term ________ is often used to describe the common U.S.business practice of focusing on short-term results from low-risk projects via analysis by NPV or IRR calculations.

Question 24

The cash flow from the sale or disposal of plant and equipment at the end of a project's life is its ________.

Question 25

Explain the time-value-of-money concept.

Question 26

________ is an allowance for the consumption of capital.

Question 27

The ________ is used to evaluate projects by calculating the amount of time that will elapse before the total of after-tax cash flows will equal the initial investment.

Question 28

Cash flows should be converted to ________ amounts before applying the net present value,payback,or internal rate of return method to them.

Question 29

A(n)________ is a series of payments of a fixed amount for a specified number of years.

Question 30

The amount that must be invested now to accumulate to a certain amount in the future at a specified interest rate is called the ________.

Question 31

The ________ is the interest rate that is the lowest desired return on an investment.

Question 32

The value of an investment at the end of the period over which interest is compounded is called the ________.

Question 33

A flexible manufacturing system is expected to cost $25,000,000 but has present values of after-tax cash flow as shown in the table.The interest rate used is 10 percent.What is the payback of this investment?

A) Less than two years
B) Between two and three years
C) Between three and four years
D) More than four years

Question 34

A poultry farmer is interested in purchasing an industrial egg tester that can measure weight,albumin height,yolk color,and Haugh units all at the touch of a button.The unit will cost $6900 and is expected to last 10 years at which point it can be sold for $1000 to a farmer in a less stringently controlled egg market.What is the annual depreciation for year 4 under the MACRS method? A copy of Table J.3 is below.
Table J.3
$$\begin{array} { c } { \text { Class of Investment } } \\\begin{array} { | c | c | c | c | c | } \hline \text { Year } & \text { 3-Year } & \text { 5-Year } & \text { 7-Year } & \text { 10-Year } \\\hline 1 & 33.33 & 20.00 & 14.29 & 10.00 \\\hline 2 & 44.45 & 32.00 & 24.49 & 18.00 \\\hline 3 & 14.81 & 19.20 & 17.49 & 14.40 \\\hline 4 & 7.41 & 11.52 & 12.49 & 11.52 \\\hline 5 & & 11.52 & 8.93 & 9.22 \\\hline 6 & & 5.76 & 8.93 & 7.37 \\\hline 7 & & & 8.93 & 6.55 \\\hline 8 & & & 4.45 & 6.55 \\\hline 9 & & & & 6.55 \\\hline 10 & & & & 6.55 \\\hline 11 & & & & 3.29 \\\hline\end{array}\end{array}$$

A) $862
B) $795
C) $737
D) $680

Question 35

Describe the basic techniques of financial analysis.

Question 36

________ is the cash that will flow into and out of the organization.

Question 37

The ________ method of calculating annual depreciation is the simplest,and usually is adequate for internal planning purposes.

Question 38

Since 1986,the only acceptable accelerated depreciation method is the ________.

Question 39

The process by which interest on an investment accumulates and then earns interest itself for the remainder of the investment period is called ________.

Question 40

The ________ is the discount rate that makes the NPV of a project zero.

Question 41

What are the problems and advantages of managing by the numbers?