Question 1

A project with more corporate risk than average will also have:

Accepted Answer

A)   less political risk.
B)   more beta risk.
C)   less project risk.
D)   less exchange rate risk.
E)   less depreciation riskF) A) and E)
G) None of the above

Question 2

Chovita Motors Corp. is considering a machine that costs $100,000 that will increase the net income of the company. The net income for the next 3 years is expected to be $30,000, $90,000, and $150,000. The depreciation expense for the next 3 years will be $5,000, $3,000, and $2,000. If the machine has no salvage value and then net present value (NPV)  of the project is _____. The expected rate of return is 10%. (Round off the answer to nearest units place.)

Accepted Answer

A)   $151,669
B)   $175,600
C)   $369,996
D)   $122,878
E)   $250,614F) C) and D)
G) C) and E)

Question 3

_____ is the risk of expropriation (seizure)  of a foreign subsidiary's assets by the host country.

Accepted Answer

A)   Pure play risk
B)   Political risk
C)   Beta risk
D)   Exchange rate risk
E)   Market riskF) B) and D)
G) C) and D)

Question 4

Zinc Corp is planning to purchase new machinery. The initial cash outlay is expected to be $40,000 and the expected return on investment is 9%. The cash flows for the next 3 years are $9,800, $11,720 and $9,640. Based on net present value (NPV)  analysis, Zinc Corp should:

Accepted Answer

A)   accept the project as the NPV is $14,500.
B)   reject the project as the NPV is $(13,700.84) .
C)   accept the project as the NPV is (28,900.25) .
D)   reject the project as the NPV is 40,500.
E)   accept the project as the NPV is $56.225.F) None of the above
G) A) and B)

Question 5

Klott Company used scenario analysis and estimated its expected net present value (NPV)  as $10,300 and expected standard deviation (σ)  as $12,083. The coefficient of variation (CVNPV)  of Klott's NPV is _____.

Accepted Answer

A)   0.25
B)   1.2
C)   5.6
D)   1.17
E)   0.45F) All of the above
G) C) and E) D

Question 6

Which of the following statements is true regarding a replacement decision?

Accepted Answer

A)   The benefits resulting from the new investment is treated as an inflow.
B)   The net cash flow from the sale of an old equipment is treated as an outflow at t = 0 (initial investment outlay) .
C)   The depreciation expenses on the new equipment is treated as an outflow.
D)   Any loss on the sale of the old equipment is multiplied by the tax rate and is treated as an outflow at t = 0 (initial investment outlay) .
E)   An increase in the net working capital is treated as an inflow when the project begins (initial investment outlay)  and as an outflow when the project ends (terminal cash flow) .F) A) and E)
G) None of the above

Question 7

A key difference between a replacement project analysis and an expansion project analysis is that only the expansion project uses the net present value (NPV) method for project evaluation.

Accepted Answer

A) True 
 B)False

Question 8

Which of the following is an incremental cash flow?

Accepted Answer

A)   Market research costs
B)   Change in working capital
C)   Sunk costs
D)   Opportunity costs
E)   ExternalitiesF) A) and E)
G) D) and E)

Question 9

If the firm is being operated so as to maximize shareholder wealth, and if our basic assumptions concerning the relationship between risk and return are true, then which of the following should be true?

Accepted Answer

A)   If the beta of the asset is larger than the firm's beta, then the required return on the asset is less than the required return on the firm.
B)   If the beta of the asset is smaller than the firm's beta, then the required return on the asset is greater than the required return on the firm.
C)   If the beta of the asset is greater than the corporate beta prior to the addition of that asset, then the corporate beta after the purchase of the asset will be smaller than the original corporate beta.
D)   If the beta of an asset is larger than the corporate beta prior to the addition of that asset, then the required return on the firm will be greater after the purchase of that asset than prior to its purchase.
E)   If the beta of an asset is larger than the firm's beta, then the required rate of return is equal to the beta.F) D) and E)
G) A) and B)

Question 10

Hill Top Lumber Company is considering building a sawmill in the state of Washington because the company doesn't have such a facility to service its growing customer base that is located on the west coast. Hill Top's executives believe that future growth in west coast customers will make the sawmill project a good investment. When evaluating the acceptability of the project, which of the following would be considered a relevant cash flow that should be included when determining its initial investment outlay?

Accepted Answer

A)   Hill Top spent $150,000 to prepare the feasibility report of the project.
B)   The cost of the project, $2 million, if invested in existing projects could have provided a return of $3.5milion
C)   The expected inflation during the project's life is 3%.
D)   It will cost $3 million to clear the land on which Hill Top wants to build the sawmill.
E)   It is estimated that $20 million of business from existing customers will move to the new sawmill.F) A) and D)
G) B) and C)

Question 11

Which of the following statements is correct?

Accepted Answer

A)   A relatively risky future cash outflow should be evaluated using a relatively high discount rate.
B)   If a firm's managers want to maximize the value of the stock, they should concentrate exclusively on the projects' market, or beta, risk.
C)   If a firm evaluates all projects using the same required rate of return to determine NPVs, then the riskiness of the firm as measured by its beta will probably decline over time.
D)   If a firm has a beta that is less than 1.0, say 0.9, this would suggest that its assets' returns are negatively correlated with the returns of most other firms' assets.
E)   Project risk estimation is independent of the beta coefficient.F) B) and D)
G) None of the above

Question 12

Carolina Insurance Company, an all-equity life insurance firm, is considering the purchase of a fire insurance company. The fire insurance company is expected to generate a return of 20 percent with a beta of 2.5. If the risk-free rate is 8 percent and the market risk premium is 6 percent, the expected return from the insurance company is _____.

Accepted Answer

A)   10%
B)   23%
C)   14%
D)   29%
E)   8%F) C) and E)
G) B) and D)

Question 13

Ziker Golf Company evaluated a project as a risky project. Ziker generally evaluates projects that are riskier than average by adjusting its required rate of return by 4 percent. If Ziker expects 12% return on average risk projects, then it should expect a return of _____ for a risky project.

Accepted Answer

A)   8%
B)   12%
C)   16%
D)   10%
E)   48%F) B) and C)
G) A) and E) C

Question 14

If the risk-free rate is 6 percent, the return on an average stock is 10 percent, and the beta of this project is 1.50, then the expected return from the project is _____.

Accepted Answer

A)   12%
B)   24%
C)   4%
D)   19%
E)   23%F) A) and E)
G) All of the above

Question 15

Stanton Inc. is considering the purchase of a new machine, which will reduce manufacturing costs by $5,000 annually and increase earnings before depreciation and taxes by $6,000 annually. Stanton will use the MACRS method to depreciate the machine, and it has estimated the depreciation expense for the first year as $8,000. Which of the following is the supplemental operating cash flow for the first year if Stanton's marginal tax rate is 40 percent?

Accepted Answer

A)   $15,000
B)   $23,000
C)   $40,000
D)   $9,800
E)   $4,500F) A) and E)
G) B) and C) D

Question 16

One of the differences between capital budgeting for domestic and foreign operations is that the:

Accepted Answer

A)   cash flow estimation is simple for foreign operations.
B)   repatriation of earnings does not occur for foreign operations.
C)   cash flows for foreign operations are subject to future exchange rate changes.
D)   foreign operations are free from taxes imposed by home-country and host-country.
E)   foreign operations are always less riskier than domestic operations.F) A) and B)
G) C) and E)

Question 17

Investing in foreign subsidiaries can be less risky when:

Accepted Answer

A)   laws to repatriate earnings are complex.
B)   the host country has higher tax rates.
C)   the host country is politically unstable.
D)   the exchange rates are volatile.
E)   there is international diversification.F) A) and D)
G) A) and C)

Question 18

Topsider Inc. is considering the purchase of a new leather-cutting machine to replace an existing machine that has zero salvage value. The net salvage value of the new machine is $6,000 and the return of net working capital is $3,520. Which of the following is the terminal cash value of the new machine?

Accepted Answer

A)   $6,000
B)   $3,520
C)   $9,520
D)   $7,000
E)   $3,000F) A) and B)
G) All of the above

Question 19

Which of the following statements is true while considering an expansion project?

Accepted Answer

A)   Depreciation expenses will be deducted from the net income to calculate supplemental operating cash flows.
B)   The expansion project will be accepted if the net cash flows are negative.
C)   Shipping and installation costs associated with preparing the machine to be used to produce the new product will be part of the initial outlay.
D)   The cost of a product analysis completed in the previous tax year and specific to the new product will be included in the calculation of initial outlay.
E)   Inflation rates during the new project's life will be incorporated in the cash flows.F) A) and E)
G) D) and E)

Question 20

When evaluating a new project, a firm should consider _____, as an incremental cash flow occurs only at the start of a project's life.

Accepted Answer

A)   initial investment outlay
B)   feasibility study cost
C)   sunk costs
D)   opportunity costs
E)   externalitiesF) A) and E)
G) All of the above

Exam 10: Project Cash Flows and Risk

A project with more corporate risk than average will also have:

Correct Answer
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Correct Answer
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_____ is the risk of expropriation (seizure) of a foreign subsidiary's assets by the host country.

Correct Answer
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Zinc Corp is planning to purchase new machinery. The initial cash outlay is expected to be $40,000 and the expected return on investment is 9%. The cash flows for the next 3 years are $9,800, $11,720 and $9,640. Based on net present value (NPV) analysis, Zinc Corp should:

Correct Answer
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Klott Company used scenario analysis and estimated its expected net present value (NPV) as $10,300 and expected standard deviation (σ) as $12,083. The coefficient of variation (CVNPV) of Klott's NPV is _____.

Correct Answer
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D

Which of the following statements is true regarding a replacement decision?

Correct Answer
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A key difference between a replacement project analysis and an expansion project analysis is that only the expansion project uses the net present value (NPV) method for project evaluation.

Correct Answer
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Which of the following is an incremental cash flow?

Correct Answer
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If the firm is being operated so as to maximize shareholder wealth, and if our basic assumptions concerning the relationship between risk and return are true, then which of the following should be true?

Correct Answer
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Correct Answer
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Which of the following statements is correct?

Correct Answer
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Ziker Golf Company evaluated a project as a risky project. Ziker generally evaluates projects that are riskier than average by adjusting its required rate of return by 4 percent. If Ziker expects 12% return on average risk projects, then it should expect a return of _____ for a risky project.

Correct Answer
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C

If the risk-free rate is 6 percent, the return on an average stock is 10 percent, and the beta of this project is 1.50, then the expected return from the project is _____.

Correct Answer
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D

One of the differences between capital budgeting for domestic and foreign operations is that the:

Correct Answer
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Investing in foreign subsidiaries can be less risky when:

Correct Answer
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Correct Answer
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Which of the following statements is true while considering an expansion project?

Correct Answer
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When evaluating a new project, a firm should consider _____, as an incremental cash flow occurs only at the start of a project's life.

Correct Answer
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Exam 10: Project Cash Flows and Risk

A project with more corporate risk than average will also have:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

_____ is the risk of expropriation (seizure) of a foreign subsidiary's assets by the host country.

Correct AnswerverifiedShow Answer

Zinc Corp is planning to purchase new machinery. The initial cash outlay is expected to be $40,000 and the expected return on investment is 9%. The cash flows for the next 3 years are $9,800, $11,720 and $9,640. Based on net present value (NPV) analysis, Zinc Corp should:

Correct AnswerverifiedShow Answer

Klott Company used scenario analysis and estimated its expected net present value (NPV) as $10,300 and expected standard deviation (σ) as $12,083. The coefficient of variation (CVNPV) of Klott's NPV is _____.

Correct AnswerverifiedD

Which of the following statements is true regarding a replacement decision?

Correct AnswerverifiedShow Answer

A key difference between a replacement project analysis and an expansion project analysis is that only the expansion project uses the net present value (NPV) method for project evaluation.

Correct AnswerverifiedShow Answer

Which of the following is an incremental cash flow?

Correct AnswerverifiedShow Answer

If the firm is being operated so as to maximize shareholder wealth, and if our basic assumptions concerning the relationship between risk and return are true, then which of the following should be true?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is correct?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Ziker Golf Company evaluated a project as a risky project. Ziker generally evaluates projects that are riskier than average by adjusting its required rate of return by 4 percent. If Ziker expects 12% return on average risk projects, then it should expect a return of _____ for a risky project.

Correct AnswerverifiedC

If the risk-free rate is 6 percent, the return on an average stock is 10 percent, and the beta of this project is 1.50, then the expected return from the project is _____.

Correct AnswerverifiedShow Answer

Correct AnswerverifiedD

One of the differences between capital budgeting for domestic and foreign operations is that the:

Correct AnswerverifiedShow Answer

Investing in foreign subsidiaries can be less risky when:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which of the following statements is true while considering an expansion project?

Correct AnswerverifiedShow Answer

When evaluating a new project, a firm should consider _____, as an incremental cash flow occurs only at the start of a project's life.

Correct AnswerverifiedShow Answer

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D

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C

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D

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