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29. The weighted average cost of capital that is used to evaluate a specific project

should bebased on thea. mix of capital components that was used to finance a

project from last year.b. overall capital structure of the corporation.c. cost of capital

for other corporations with similar investments.d. mix of capital components for all

capital acquired in the most recent fiscal year.ANSWER: b EASY30. Debt in the capital

structure could be treated as if it were common equity in computingthe weighted

average cost of capital if the debt werea. callable.b. participating.c. cumulative.d.

convertible.ANSWER: d MEDIUM31. The weighted average cost of capital approach

to decision making is

not

directly affectedby thea. value of the common stock.b. current budget for capital

expansion.c. cost of debt outstanding.d. proposed mix of debt, equity, and existing

funds used to implement the project.ANSWER: b EASY32. The

___________________ is the highest rate of return that can be earned from the

mostattractive, alternative capital project available to the firm.a. accounting rate of

returnb. internal rate of returnc. hurdle rated. opportunity cost of capitalANSWER: d

MEDIUM

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33. If an analyst desires a conservative net present value estimate, she will assume

that allcash inflows occur ata. mid year.b. the beginning of the year.c. year end.d.

irregular intervals.ANSWER: c EASY34. The salvage value of an old lathe is zero. If

instead, the salvage value of the old lathe was$20,000, what would be the impact on

the net present value of the proposal to purchase anew lathe?a. It would increase

the net present value of the proposal.b. It would decrease the net present value of

the proposal.c. It would not affect the net present value of the proposal.d.

Potentially it could increase or decrease the net present value of the new

lathe.ANSWER: a EASY35. The net present value method of evaluating proposed

investmentsa.

b. ignores cash flows beyond the payback period.c. applies only to mutually

exclusive investment proposals.d. discounts cash flows at a minimum desired rate of

return.ANSWER: d EASY36. Which of the following statements is

true

regarding capital budgeting methods?a.

b. The internal rate of return measure used for capital project evaluation has

moreconservative assumptions than the net present value method, especially

forprojects that generate a positive net present value.c. The net present value

method of project evaluation will always provide the sameranking of projects as the

profitability index method.d. The net present value method assumes that all cash

inflows can be reinvested at

ANSWER: d EASY

investments. Information relating to the companyand the investments follow:Fisher

rate for the three projects 7%Cost of capital 8%Based on this information, we know

thata. all three projects are acceptable.b. none of the projects are acceptable.c. the

capital budgeting evaluation techniques profitability index, net present value,and

internal rate of return will provide a consistent ranking of the projects.d. the net

present value method will provide a ranking of the projects that is superiorto the

ranking obtained using the internal rate of return method.ANSWER: c MEDIUM38. If

a project generates a net present value of zero, the profitability index for the

projectwilla. equal zero.b. equal 1.c. equal -1.d. be undefined.ANSWER: b EASY39.

ANSWER: a EASY40.

a. discount rate is above its cost of capital.b. internal rate of return is less than

zero.c. payback period is infinite.d. net present value is negative.ANSWER: d EASY

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41. The profitability index isa. the ratio of net cash flows to the original investment.b.

the ratio of the present value of cash flows to the original investment.c. a capital bu

Which method of evaluating capital projects assumes that cash inflows can be

reinvestedat the discount rate?a. internal rate of returnb. payback periodc.

profitability indexd. accounting rate of returnANSWER: c MEDIUM43. If the total

cash inflows associated with a project exceed the total cash outflows

a. net present value is greater than zero.b. internal rate of return is greater than

zero.c. profitability index is greater than 1.d. payback period is acceptable.ANSWER:

b EASY44. The net present value and internal rate of return methods of decision

making in capitalbudgeting are superior to the payback method in that theya. are

easier to implement.b. consider the time value of money.c. require less input.d.

reflect the effects of sensitivity analysis.ANSWER: b EASY

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45. If an investment has a positive net present value, thea. internal rate of return is

higher than the discount rate.b. discount rate is higher than the hurdle rate of

return.c. internal rate of return is lower than the discount rate of return.d. hurdle

rate of return is higher than the discount rate.ANSWER: a EASY46.

The rate of interest that produces a zero net present value when a project’s

discounted

cash operating advantage is netted against its discounted net investment is thea.

cost of capital.b. discount rate.c. cutoff rate.d. internal rate of return.ANSWER: d

EASY47. For a profitable company, an increase in the rate of depreciation on a

specific projectcoulda.

c.

d.

control techniques has beencriticized because it might mistakenly imply that

earnings are reinvested at the rate of return earned by the investment?a. payback

methodb. accounting rate of returnc. net present value methodd. internal rate of

returnANSWER: d EASY

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49. If the discount rate that is u

sed to evaluate a project is equal to the project’s internal rateof return, the

project’s _____________ is zero.

net present valueANSWER: d EASY50. As the marginal tax rate goes up, the benefit

from the depreciation tax shielda. decreases.b. increases.c. stays the same.d.

can move up or down depending on whether the firm’s cost of capital is high or

the after-tax cash flow on the salewilla. exceed the pre-tax cash flow on the sale.b.

be less than the pre-tax cash flow on the sale.c. be the same as the pre-tax cash flow

on the sale.d. increase the corpora

discounted cash flow analysis,depreciation expense is assumed to accrue ata. the

beginning of the period.b. the middle of the period.c. the end of the period.d.

irregular intervals over the life of the investment.ANSWER: c EASY

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