Question 1

The net present value profile

Accepted Answer

The net present value profile graphically shows the relationship between the discount rate and the net present value, allowing managers to identify the discount rate at which a project's net present value is zero. Therefore, option C is the correct choice. Option A is incorrect because a negative net present value may still be included in the profile. Option B is incorrect as the net present value profile is a complementary tool to the IRR. Option D is incorrect as only option C is the correct choice.

Question 2

An equipment replacement decision, under resultant cash flow analysis, requires

Accepted Answer

The correct approach is to calculate the present value of all changes in cash flows from the old equipment to the new equipment, as this reflects the net impact of the replacement decision.

Question 3

Assuming that a firm has no capital rationing constraint and that a firm's investment alternatives are not mutually exclusive, the firm should accept all investment proposals

Accepted Answer

The best choice is option B, which states that the firm should accept all investment proposals that have a positive net present value. NPV is the measure of profitability of an investment by calculating the present value of expected cash inflows and deducting the initial investment. Accepting all proposals with a positive NPV ensures that the investments will generate value for the firm and increase the wealth of shareholders. The other options (A, C, and D) have limitations and do not account for profitability or value creation. Option A assumes that financing is the limiting factor, which may not always be the case. Option C does not account for the time value of money, and option D only ensures that the invested funds generate returns greater than the cost of debt, without considering the overall profitability of the investment.

Question 4

There are several disadvantages to the payback period, one of which is that

Accepted Answer

The payback period does not consider the time value of money, which means it does not take into account the fact that money today is worth more than the same amount of money in the future due to inflation and opportunity costs. This can lead to inaccurate evaluations of the profitability of a project.

Question 5

As the cost of capital increases

Accepted Answer

As the cost of capital increases, projects become less profitable and therefore less attractive to investors. This means that fewer projects will meet the required return on investment and be accepted for funding.

Question 6

Under the capital cost allowance system

Accepted Answer

Under the capital cost allowance system, recovery periods for different types of assets are broken down into categories. This allows for more accurate depreciation of assets based on their respective useful lives. The life span of an asset may vary from a few years to several decades, and assets are depreciated down to their respective residual or salvage value. Therefore, options A and B are incorrect.

Question 7

A firm is selling an old asset below book value in a replacement decision. As the firm's tax rate is raised, the net cash outflow (purchase price less proceeds from the sale of the old asset plus CCA effects) would

Accepted Answer

As the tax rate is raised, the tax savings from the CCA effects on the new asset will increase. This will reduce the net cash outflow, as the tax savings will offset some of the cost of purchasing the new asset. Therefore, the net cash outflow will go down.

Question 8

The Wet Corp. has an investment project that will reduce expenses by $15,000 per year for 3 years. The project's cost is $20,000, with a 20% CCA rate. Using a 40% tax rate, calculate the net cash flow at the end of year 1?

Accepted Answer

The answer of The Wet Corp. has an investment project...

Question 9

The reason cash flow is used in capital budgeting is because

Accepted Answer

Cash flow is used in capital budgeting because it reflects the actual cash available for investment and reinvestment, considers the present value of future cash inflows, and accounts for tax shields from amortization, which are all crucial for evaluating investment projects.

Question 10

The longer the life of an investment

Accepted Answer

The longer the life of an investment, the more significant the discount rate becomes because the present value of future cash flows is more sensitive to changes in the discount rate over a longer period.

Question 11

The payback period has several disadvantages, which include

Accepted Answer

Both options A and B are disadvantages of the payback period method. Payback does not consider the time value of money, which can lead to suboptimal investment decisions. Additionally, it ignores cash inflows that occur after the payback period, which can lead to undervaluation of projects with longer cash flow streams.

Question 12

For CCA amortization, automobiles and light trucks fit into the

Accepted Answer

The answer of For CCA amortization, automobiles and light trucks...

Question 13

The net present value method is a better method of evaluation than the internal rate of return method because

Accepted Answer

The NPV method discounts cash flows at the firm's more conservative cost of capital, taking into account the specific risk of the investment. In contrast, the IRR method assumes reinvestment of cash flows at the same rate of return, which may not be realistic. Therefore, the NPV method is generally considered a better method of evaluation.

Question 14

Firm X is considering the replacement of an old machine with one that has a purchase price of $70,000. The current market value of the old machine is $25,000 but the book value is $32,000. What is the net cash outflow for the new machine with consideration for the sale of the old machine?

Accepted Answer

The answer of Firm X is considering the replacement of...

Question 15

If the capital budgeting decision includes a replacement analysis, then

Accepted Answer

In replacement analysis, only incremental cash flows should be looked at because the decision is focused on whether to replace an old asset with a new one, and the relevant cash flows are only those that will change as a result of the replacement decision. The gain from the sale of the old asset would be considered a sunk cost and not an inflow because it is not related to the new project's cash flows. The sale price and tax savings from the old asset would not increase the cash inflows of the new asset's life.

Question 16

The Net Present Value Method is a more conservative technique for selecting investment projects than the Internal Rate of Return method because the NPV method

Accepted Answer

The Net Present Value (NPV) method discounts cash flows at the firm's weighted average cost of capital, which is a more conservative approach than using the project's internal rate of return. The WACC represents the cost of financing for the entire firm and takes into account the risk associated with the project, making it a more reliable measure of the project's profitability. Thus, the firm is less likely to select an unprofitable investment. Choice A is incorrect because using the project's IRR can lead to incorrect investment decisions in situations where projects have nonconventional cash flows. Choice B is incorrect because liquidity is not the primary concern when selecting investment projects. Choice D is incorrect because the NPV method is widely recognized as a conservative investment selection technique.

Question 17

The Dammon Corp. has the following investment opportunities: $\begin{array}{rrrr}
&\text { Machine A}&\text {  Machine B }&\text { Machine C }\

&(\$ 15,000)&(\$ 22,500)&(\$ 37,500)\
&\text { Inflows}&\text { Inflows }&\text { Inflows }\
\text { year 1 } & \$ 6,000 & \$ 12,000 & \$-0- \
\text { year 2 } & 9,000 & 12,000 & 30,000 \
\text { year 3 } & 3,000 & 10,500 & 30,000 \
\text { year 4 } & -0- & 10,500 & 15,000 \
\text { year 5 } & -0- & -0- & 15,000
\end{array}$ Under the payback period and assuming these machines are mutually exclusive, which machine(s) would Dammon Corp. choose?

Accepted Answer

The answer of The Dammon Corp. has the following investment...

Question 18

An investment tax credit (ITC)

Accepted Answer

The answer of An investment tax credit (ITC)
...

Question 19

Suppose that interest rates (and, therefore, the firm's Weighted Average Cost of Capital) increase. This WOULD NOT CHANGE the capital budgeting choices a firm would make if it

Accepted Answer

The answer of Suppose that interest rates (and, therefore, the...

Question 20

For acceptable investments, the discount rate assumption under the internal rate of return is generally

Accepted Answer

The answer of For acceptable investments, the discount rate assumption...

Quiz 12: The Capital Budgeting Decision