F

IN072_
FINMAR2 QUI
Z#1

Na
me: Da
te:

I
nst
ruc
tor
: Ra
ting
:

Name: Dat
e:

I
nst
ruct
or: Rat
ing:
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IN072_
FINMAR2 QUI
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Par
tI:
MULTI
PLECHOI
CE.Wr
it
etheCAPI
TALLETTERofy
ouranswerbef
oret
henumber
.(1pt
)

1.The_ ____ ___ _ist heexactamountoft i

mei ttakest hefirmtor ecov eritsini
ti
al i
nvest ment.
(a) av er ager at eofr eturn
(b) i nter nal rat eofr etur n
(c) netpr esentv alue
(d) pay backper i
od
2. Amongt her easonsmanyf i
rmsuse, thepay backper i
odasagui deli
nei ncapitali
nv estment
decisionsar eal l ofthef ol l
owi ngEXCEPT
(a) i tgi vesani mplicitconsi derat iontot het imingofcashf lows.
(b) i trecogni zescashf lowswhi choccuraf t
erthepay backper i
od.
(c) i tisameasur eofr iskexposur e.
(d) i tiseasyt ocal culat e.
3. Sophist icat edcapi t
al budget ingt echni quesdonot
(a) exami net hesi zeoft heiniti
al outl
ay .
(b) usenetpr ofitsasameasur eofr eturn.
(c) expl i
ci t
lyconsi dert het i
mev alueofmoney .
(d) t akei ntoaccountanunconv entional cashf l
owpat t
ern.
4. The_ __ __ ____i st hedi scountr atet hatequat esthepr esentv alueoft hecashi nfl
owswi ththe
i
niti
al inv est ment .
(a) pay backper i
od
(b) av er ager at eofr eturn
(c) costofcapi tal
(d) i nter nal rat eofr etur n
5. Whent henetpr esentv aluei snegat ive,theint er
nal r
ateofr etur nis_ _____
_ __thecostofcapi tal
.
(a) gr eat ert han
(b) gr eat ert hanorequal t
o
(c) l esst han
(d) equal to.
6. Whenev al uat i
ngpr ojectsusi ngi nt ernalrateofr eturn,
(a) pr oject shav i
ngl owerear ly-
y earcashf lowst endt obepr eferredathi gherdiscountr ates.
(b) pr oject shav i
nghi gherear ly
-y earcashf lowst endtobepr eferredathi gherdiscountr ates.
(c) pr oject shav i
nghi gherear ly
-y earcashf lowst endtobepr eferredatlowerdi scountr ates.
(d) t hedi scountr ateandmagni tudeofcashf l
owsdonotaf f ectinternalrateofr etur
n.
7. __ _______i st hepr ocessofev aluati
ngandsel ect i
ngl ongt ermi nvestment s
consistentwi tht hef irm’sgoal ofownerweal t
hmaxi mizati
on.
(a) Recapi talizingasset s
(b) Capi tal budget i
ng
(c) Rat ioanal ysis
(d)Rest ruct ur i
ngdebt

8. A$60, 000outl
ayf oranewmachi
newi
thausabl
eli
feof15y
ear
siscal
l
ed
(a) capi
talexpendit
ure.
(b) operat
ingexpenditure.
(c) repl
acementexpendi tur
e.
(d) noneoft heabove.

9.Proj
ectsthatcompetewit
honeanot
her
,sot
hatt
heaccept
anceofoneel
i
minat
est
heot
her
sfr
om
fur
therconsider
ati
onarecal
led
F
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FINMAR2 QUI
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(a) i ndependentpr ojects.

(b) mut uallyexcl usivepr oject
s.
(c) r eplacementpr ojects.
(d) Noneoft heabov e.
10.I
nit
ial
cashf lowsandsubsequentoper at
ingcashfl
owsforapr
ojectar
esometi
mesref
err
edtoas
(a) necessar ycashf lows.
(b) r el
ev antcashf l
ows.
(c) consi stentcashf lows.
(d) or dinarycashf l
ows.
11.Whenev aluat i
ngacapi talbudgeti
ngproj
ectthechangei
nnetworki
ngcapi
tal
mustbeconsi
der
ed
aspartof
(a) t heoper ati
ngcashi nfl
ows.
(b) t heini t
ialinvest ment .
(c) t heincr ement aloper ati
ngcashinfl
ows.
(d)theoper atingcashout f
lows

12.Thebasicvari
abl
esthatmustbeconsideredindet
ermi
ningt
hei
nit
ial
inv
est
mentassoci
atedwi
th
acapit
alexpenditur
eareallofthefol
lowi
ngEXCEPT
(a) i ncrementalannualsavi
ngsproducedbythenewasset
.
(b) costoft henewasset .
(c) pr oceedsfr
om thesaleoftheexi
sti
ngasset.
(d) t axesont hesaleofanexisti
ngasset.

13.Benefi
tsexpectedf r
om pr oposedcapit
alexpenditur
esmustbeonanaftert
axbasi
sbecause
(a) t axesarecashout flows.
(b) nobenef i
tsmaybeusedbyt hefi
rm unti
ltaxcl
aimsar
esati
sfi
ed.
(c) t heremayal sobet axbenef it
stobeev al
uated.
(d)itiscommon, accept
edpr act
icetodoso.

14.Onebasictechni
queusedt oevaluat
eaftert
axoper at
ingcashf
lowsi
sto
(a) addnoncashchar gest onetincome.
(b) subt r
actdepreci
ati
onf r
om operati
ngrevenues.
(c) addcashexpensest onetincome.
(d)subtr
actcashexpensesf r
om noncashcharges.

15.Theevaluationofcapi talexpenditur
epr oposal
stodet
erminewhethertheymeetthefi
rm’s
minimum accept ancecr iteri
ai scall
ed
(
a) t her ankingappr oach.
(
b) ani ndependenti nvest ment.
(
c) t heaccept -
rejectappr oach.
(
d) amut uallyexclusivei nvest
ment .
16.Inchoosingf rom amut uallyexclusi
veinvestment
sthemanagershouldnormall
yselectt
heone
wi
thhighest
(
a) NPV.
(
b) I RR.
(
c) Pr of i
tabili
tyindex .
(
d) bookr ateofr eturn.
17.Whichamongt hef oll
owingi strueaboutpr of
it
abi
li
tyi
ndexifani
nvestmenthaspositi
veNPV?
(
a) Apr ofitabil
it
yi ndexl essthanone.
(
b) Apr ofitabil
it
yi ndexofone.
(
c) Aposi ti
veprof it
abili
tyindex.
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(d) Apr of i
tabil
i
tyindexgr eaterthanone.
18.Cashretur niscomput edas
(a) Neti ncomeaf tertaxpl usdepr eciationexpense.
(b) Neti ncomeaf tertaxl essdepr eciati
onexpense.
(c) Neti ncomebef or etaxpl usdepr eciati
onexpense
(d) Neti ncomebef or etaxl essdepr eci
at i
onexpense.
19.Thediff
er encebet weent hepr esentvalueofal lcashi
nflowslessi
nit
ial
invest
ment.
(a) pr esentv al
ue
(b) i nt
er nal r
ateofr eturn
(c) pay backper iod.
(d) answernotgi v
en.
20.Themet hodt hatdoesnotusecashf l
owi s
(a) pay back.
(b) NPV.
(c) account i
ngrateofr et
ur n.
(d) answernotgi v
en.
21.Afi
rmiseva lua
tingthreec apit
a l
pr oj
ect
s.T hene tpr
esentv
aluesf
orthepr
oject
sareasf
oll
ows
:
Pr
oject NPV
1 $100
2 $0
3 –$100
T
hef
ir
mshoul
d:

(
a)acc
eptProje c
ts1a nd2a ndrej
ectProj
ect3.
(
b)acceptPr
oje ct
s1a nd3a ndrej
ectProj
ect2.
(
c)acc
eptProje c
t1a ndrej
ec tPr
oje
cts2and3.
(
d)rej
ectall
pr oj
ects
.
22.
Afirmwi t
hac ostofcapit
alof13percenti
se v
alua
tingt
hre
eca
pit
alpr
oje
cts
.Thei
nte
rna
lra
tesofr
etur
nar
e
asf
oll
ows:

I
nter
nalRate
Pr
oject ofRetur
n
1 12%
2 15
3 13

T
hef
ir
mshoul
d:

(
a)ac
ceptPr
ojec
t2a ndrej
ectPr
ojec
ts1and3.
(
b)acc
eptPr
ojects2and3andrej
ectProj
ect1.
(
c)a
cceptPr
oje
ct1a ndre
jectPr
oje
cts2and3.
(
d)acc
eptPr
oject3andrej
ectPr
oject
s1and2.

23-
24i
sba
sedont
hef
oll
owi
ngi
nfor
mat
ion:
Af
ir
mise
val
uat
ingt
wopr
oje
ctst
hata
remut
ual
l
yex
clus
ivewi
thi
ni
ti
ali
nve
stme
ntsa
ndc
ashf
lowsa
sfol
l
ows
:

Tabl
e9.
1
Pr
ojectA Pr
ojectB
I
nit
ial End-
of-
Year I
nit
ial End-
of-
Year
I
nvest
ment CashFl
ows I
nvest
ment CashFl
ows
F
IN072_
FINMAR2 QUI
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$40,
000 $20,
000 $90,
000 $40,
000
20,
000 40,
000
20,
000 80,
000

23.
Ift
hef
ir
minT
abl
e9.
1ha
sar
equi
redpa
yba
ckoft
wo(
2)y
ear
s,t
heys
houl
d
(
a)ac
ceptproj
ectsAa ndB.
(
b)acc
eptproj
ectAa ndreje
ctB.
(
c)r
ejectpr
oje
ctAa nda c
ceptB.
(
d)r
ejectbot
h.
24.Thenewfi
nanci
alanal
ystdoesnotl
i
kethepa
yba c
ka ppr
oac
h(Tabl
e9.
1)a
ndde
ter
mine
stha
tthef
ir
m’s
requi
redr
ateofre
turnis15perc
e nt
.Hi
sre
comme ndat
ionwouldbeto

(a)acceptproj
ectsAa ndB.
(b)acceptproj
ectAa ndr e
jectB.
(c)rej
e c
tprojec
tAa nda cceptB.
(d)rejectbot
h.
25.
Wha tistheARRf orthefoll
owi ngproje
ctifit
sini
ti
ali
nves
tmentcos
tis$5,
000,
000a
nditi
sex
pe c
tedt
o
providea f
ter
-t
axne ti
ncomeof$1, 800,000inyea
r1,$1,
900,
000inyear2,
$1,
700,
000i
nyear3and
$1,300,000inyear4?T axrateis30%
(a)23.45%.
(b)32.45%.
(c)33.50%.
(d)Noneoft heabov e
.

Pa
rtI
I
1.Tabl
e1.
A
Ope
rat
ingCa
shI
nfl
ows

$25,
000 $10,
000 $50,
000 $10,
000 $10,
000 $60,
000

–$100,
000
(
Ini
ti
alout
lay
)

Gi
vent
hei
nfor
mat
ioni
nTa
ble1.
Aand15pe
rce
ntc
ostofc
api
tal
,

(
a)c
omput
ethene
tpr
ese
ntv
alue
.(3pt
s)

(
b)s
houl
dthepr
oje
ctbea
cce
pte
d?(
1pt
)

Ans
wer
s:

(
a)
Year CF PVI
F15%,
t PV
1 $25,
000 0.
870 $21,750
2 10,
000 0.
756 7,560
3 50,
000 0.
658 32,900
F
IN072_
FINMAR2 QUI
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4 10,
000 0.
572 5,
720
5 10,
000 0.
497 4,
970
6 60,
000 0.
432 25,
920
$98,
820

NPV98,820–100,000–$1,180<0
(
b)Si
nceNPV<0,t
hepr
ojects
houl
dberej
ect
ed.

2. T
angshanMini
ngCompanyisconsi
deri
nginve
stinginane wmi ningproject
.Thefi
rm’scos
tofca
pit
al
i
s12perce
ntandthepr
ojec
tise x
pecte
dt ohaveanini
t i
alaftertaxc
os tof$5,
000,000.
Furt
her
more,
t
heproj
ectise
xpect
edtoprov
idea f
ter
-ta
xope r
a t
ingcashflowsof$2,500,000in
y
ear1,$2,
300,
000inye
ar2,$2,200,
000inyear3a nd($1,300,000)i
ny ear4?

(
a)Ca
lcul
atet
hepr
oje
ct’
sNPV.
(3pt
s)

(
b)Ca
lcul
atet
hepr
oje
ct’
sIRR.
(3pt
s)

(
c)Comput
ethepr
oje
ct’
spa
yba
ckpe
riod(
2pt
)

Ans
wer
:

Ti
me CashFl ow PVI
F(12%) PVofCF
0 $(
5,000,000) 1.
0000 $(
5,000,000)
1 $2,500,000 0.
8929 $2,232,143
2 $2,300,000 0.
7972 $1,833,546
3 $2,000,000 0.
7118 $1,423,560
4 $(
1,300,000) 0.
6355 $(826,174)
NPV $(336,924)
IRR 6.
80%

Ti
me CashFl
ow Bal No.ofy
ear
0 5,000,000
1 $2,500,000 2,500,000 1
2 $2,300,000 200,000 1
3 $2,000,000 0 .
10
4 $(1,300,000)
Pay
back 2.
10

3. DegnanDanceCompany,Inc.
,amanufact
urerofdanceandexer
ciseapparel
,isconsi
der
ing
replaci
ngan existi
ngpieceofequipmentwi
thamor esophist
icat
edmachine.Thefoll
owingi
nfor
mat
ioni
s
given.

Tabl
e3.
2
Fact
s
Exist
ingMachi ne ProposedMachine
Cost$100, 00 Cost$150,000
Purchased2y earsago I
nstall
ati
on$20,000
Depreciat
ionusingStrai
ght
-li
ne Depreci
ati
on—usingstr
aight
-l
ine
depreciat
ion depreci
ati
on
Currentmarketvalue$50,000
Sixyearli
feremaining Sixyearl
if
eexpected
F
IN072_
FINMAR2 QUI
Z#1

T
hei
ncomet
axr
atei
s30%.
Cal
cul
atet
hei
ni
ti
ali
nve
stme
ntr
equi
redf
ort
hene
was
set
.(3pt
s)

Ans
wer
:

Costofnewequi pment $150,

000
Install
ationcost 20,
000
Pr oceeds f r
om t he sal
e of exi
sti
ng (50,
000)
equi pment
Taxef f
ectonsaleofexi
sti
ngequi
pment 7,
500
( 50,000–75, 000)
*.3
Initi
alinvest
ment $124,
000

“
Rat
herf
ail
edwi
thhonort
hansucceedbyf
raud.
”