Deck 22: Financial Analysis

Question 1

To calculate straight-line depreciation,you divide the purchase price of the investment by the asset's expected economic life.

Answer 1

False

Question 2

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

Answer 2

True

Question 3

The process of compounding results in interest that has been paid on principle accumulating its own interest.

Answer 3

True

Question 4

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 5

The interest rate is also called the discount rate.

Question 6

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 7

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

Question 8

Straight-line depreciation is an accelerated depreciation method.

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

The net present value (NPV)method evaluates an investment by calculating the present values of all after-tax total cash flows and then subtracting the original investment amount from their total.

Question 11

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 12

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

Question 13

Depreciation is not a legitimate cash flow.

Question 14

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

Question 15

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

Question 16

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 17

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.

Question 18

If an invested amount and its accumulated interest is continually reinvested,its future value is the principle multiplied by one plus the interest rate raised to the number of periods the investment continues.

Question 19

Straight-line depreciation is the simplest way to calculate depreciation and usually is adequate for internal planning purposes.

Question 20

If you are promised $10,000 a few years from now,typically you would receive less than $10,000 is you demanded it be paid immediately.

Question 21

Depreciation:

A)is not an allowance for the consumption of capital.
B)is not a legitimate cash flow.
C)does not act as a tax shield.
D)does not consider the salvage value of an item.

Question 22

The NCX10 now features a coffee brewing subassembly,so Alex budgets the following cash outlays and incomes for the next five years.If the interest rate is 8%,what is the present value of this investment after the second year?

A)$3264
B)$5572
C)-$3871
D)-$9444

Question 23

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 $60,000 by the time your son is ready to enroll as a student.If prevailing interest rates will average 5 percent,what amount should you invest now to pay his first year's tuition eight years from now?

A)less than $35,000
B)between $35,000 and $38,000
C)between $38,000 and $41,000
D)more than $41,000

Question 24

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

Question 25

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

Question 26

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 27

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 28

The present value factors found in Table F.1 were calculated by changing the values of ________ and ________.

Question 29

A(n)annuity is composed of a series of ________ payments.

Question 30

The reduction of the value of money received in the future when the interest rate is known is called ________.

Question 31

The NCX10 now features a coffee brewing subassembly,so Alex budgets the following cash outlays and incomes for the next five years.If the interest rate is 5%,what is the present value of this investment?

A)$3264
B)$3397
C)$3422
D)$3344

Question 32

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

Question 33

In the formula P = the term r is ________.

Question 34

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)future value of an investment (FVI).

Question 35

The NCX10 now features a coffee brewing subassembly,so Alex budgets the following cash outlays and incomes for the next three years.If the interest rate is 25%,what is the present value of this investment?

A)-$3264
B)-$3397
C)-$3422
D)-$3480

Question 36

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

Question 37

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 38

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 F.3 is appended to your exam.

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

Question 39

The NCX10 now features a coffee brewing subassembly,so Alex budgets the following cash outlays and incomes for the next five years.If the interest rate is 10%,what is the present value of this investment?

A)$1632
B)$1583
C)$1749
D)$1805

Question 40

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 41

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

Question 42

Jake buys a new work truck every four years regardless of the condition of his current vehicle.His next truck will cost $45,000 and Jake estimates it will have a salvage value of $20,000 when it's time to buy a replacement.What is the annual depreciation?

Question 43

Nathan would have to wait until he was 35 to receive his inheritance,which was entirely too long in light of his impressive shopping list.He had almost given up hope when he saw an interesting offer one afternoon while watching television.In the advertisement,a company expressed a willingness to give him cash now if he would sign over his inheritance 11 years from now.If they use a 15% interest rate,what percentage of his inheritance will Nathan receive today?

Question 44

What is the future value of an investment of $10,000 at 8% interest after 10 years?

Question 45

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

Question 46

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

Question 47

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

Question 48

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

Question 49

Acapella University offers to lock-in a student's tuition for a four year period.If tuition is $30,000 per year (payable at the end of each year)and the interest rate is currently 8%,what amount of money now would enable you to withdraw the $30,000 figure at the end of each of the next four years?

Question 50

Describe the basic techniques of financial analysis.

Question 51

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 52

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

Question 53

________ is an allowance for the consumption of capital.

Question 54

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

Question 55

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

Question 56

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 57

What are the different types of depreciation? What are the advantages and disadvantages of each?

Question 58

________ are the amounts of cash that flow into and out of the organization solely because of the project.

Question 59

What is payback from the financial perspective? Why would a manager choose to use this approach to investment analysis?

Question 60

Explain the time-value-of-money concept.