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Corporate Finance

MCQ Unit 2
1. Which of the following investment rules does NOT use the time value of money concept?
A.Net present value
B.
Internal rate of return
C.
The payback period
D.
Profitability index

2. The following are measures used by firms when making capital budgeting decisions
EXCEPT:
A. payback period.
B.
internal rate of return.
C.
P/E ratio.
D.
net present value.
3. The survey of CFOs indicates that the NPV method is always, or almost always, used for
evaluating investment projects by approximately:
A. 12% of firms.

B.
C.
D.

20% of firms.
57% of firms.
75% of firms.

4. Which of the following investment rules has the value additivity property?
A. the payback period method
B.
the net present value method
C.
the book rate of return method
D.
the internal rate of return method
5. If the net present value (NPV) of project A is +$100, and that of project B is +$60, then
the net present value of the combined projects is:
A. +$100
B.
+$60
C.
+$160

D.

+$6,000

6. The net present value of a project depends upon the:


A. company's choice of accounting method.
B.
manager's tastes and preferences.
C.
project's cash flows and opportunity cost of capital.
D.
company's profitability index.
7. Which of the following investment rules may not use all possible cash flows in its
calculations?
A. NPV
B.
payback period
C.
IRR
D.
profitability index
8. The payback period rule accepts all projects for which the payback period is:
A. greater than the cut-off value.
B.
less than the cut-off value.

C.
D.

positive.
an integer.

9. Which of the following statements regarding the discounted payback period rule is true?
A. The discounted payback rule uses the time value of money concept.
B.
The discounted payback rule is better than the NPV rule.
C.
The discounted payback rule considers all cash flows.
D.
The discounted payback rule exhibits the value additivity property.
10. The cost of a new machine is $250,000. The machine has a five-year life and no salvage
value. If the cash flow each year is equal to 25% of the cost of the machine, calculate the
payback period for the project:
A. 2.0 years
B.
2.5 years
C.
3.0 years
D.
4.0 years

11. Internal rate of return (IRR) method is also called the:


A. discounted payback period method.
B.
discounted cash-flow (DCF) rate of return method.
C.
modified internal rate of return (MIRR) method.
D.
book rate of return method.
12. The quickest way to calculate the internal rate of return (IRR) of a project is by:
A. trial and error method.
B.
using the graphical method.
C.
using a financial calculator.
D.
doubling the opportunity cost of capital.
13. If an investment project (normal project) has an IRR equal to the cost of capital, the NPV
for that project is:
A. positive.
B.
negative.
C.
zero.

D.

unable to determine.

14. The following are some of the shortcomings of the IRR method except:
A. IRR is conceptually easy to communicate.
B.
Projects can have multiple IRRs.
C.
IRR cannot distinguish between a borrowing project and a lending project.
D.
It is very cumbersome to evaluate mutually exclusive projects using the IRR method.

15. One can use the profitability index most usefully for which situation?
A. when capital rationing exists
B.
evaluation of exceptionally long-term projects
C.
evaluation of nonnormal projects
D.
when a project has unusually high cash-flow uncertainty

16. The profitability index is the ratio of the:


A. future value of cash flows to investment
B.
net present value of cash flows to investment
C.
net present value of cash flows to IRR
D.
present value of cash flows to IRR
17. Which investment analysis technique is used the least by CFOs?
A. net present value
B.
internal rate of return
C.
payback
D.
book rate of return
18. Preferably, a financial analyst estimates cash flows for a project as:
A. cash flows before taxes.
B.
cash flows after taxes.
C.
accounting profits before taxes.

D.

accounting profits after taxes.

19. A reduction in the sales of existing products caused by the introduction of a new product
is an example of:
A. incidental effects.
B.
opportunity costs.
C.
sunk costs.
D.
allocated overhead costs.
20. The cost of a resource that may be relevant to an investment decision even when no
cash changes hand is called a(an):
A. sunk cost.
B.
opportunity cost.
C.
depreciation cost.
D.
average cost.
21. For the case of an electric car project, the following costs should be treated as
incremental costs when deciding whether to go ahead with the project EXCEPT:
A. the consequent reduction in sales of the company's existing gasoline models (i.e.,
incidental effects).
B.
interest payments on debt incurred to finance the project.

C.
the value of tools that will be transferred to the project from the company's existing
plants instead of being sold.
D.
the expenditure on new plants and equipment.
22. Costs incurred as a result of past, irrevocable decisions and irrelevant to future decisions
are called:
A. opportunity costs.
B.
sunk costs.
C.
incremental costs.
D.
marginal costs.
23. For project A in year 2, inventories increase by $12,000 and accounts payable increases by
$2,000. Accounts receivable remain the same. Calculate the increase or decrease in net
working capital for year 2.
A.
decreases by $14,000
B.
increases by $14,000
C.
decreases by $10,000
D.
increases by $10,000
24. If depreciation is $600,000 and the marginal tax rate is 35%, then the tax shield due to
depreciation is:
A.
$210,000.
B.
$600,000.
C.
$390,000.
D.
cannot be determined from the information given.
25. Capital equipment costing $250,000 today has 50,000 salvage value at the end of five
years. If the straight-line depreciation method is used, what is the book value of the
equipment at the end of two years?
A.
$200,000
B.
$170,000
C.
$140,000
D.
$150,000
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