Sample Questions 2

Sample Questions 2

16- The discounted payback period is best defined as the length of time until the:

            A)     Sum of the discounted cash flows is equal to the average book value.

            B)     Sum of the discounted cash flows is equal to the initial investment.

            C)     Sum of the cash inflows is equal to the sum of the cash outflows.

            D)     Sum of the discounted cash flows from project A equals the sum of the discounted cash flows from project B.

            E)     Sum of the discounted net income is equal to the cost of the project.

17- When the decision to accept or reject one project does not affect the decision to accept or reject any other project, the project is said to be:

            A)     Mutually exclusive.

            B)     Mutually inclusive.

            C)     Independent.

            D)     A crossover project.

            E)     Acceptable.

18- A conventional cash flow is defined as a series of cash flows where:

            A)     The total of the cash flows is positive.

            B)     All of the cash flows are positive.

            C)     The sum of the cash flows is equal to zero.

            D)     The present value of the cash flows is equal to zero.

            E)     Only the initial cash flow is negative.

19- The __________ decision rule is considered the "best" in principle.

            A)     internal rate of return

            B)     payback period

            C)     average accounting return

            D)     net present value

            E)     profitability index

20- A project whose NPV equals zero ______________.

            A)     should be rejected

            B)     has a profitability index that is greater than one

            C)     is expected to earn a return equal to the firm's required return

            D)     has a discounted payback period that is shorter than the life of the project

            E)     should be accepted even if the firm has alternative investments with positive NPVs

21- The changes in the firm's future cash flows that are a direct consequence of accepting a project are called:

            A)     Incremental cash flows.

            B)     Stand-alone cash flows.

            C)     Aftertax cash flows.

            D)     Net present value cash flows.

            E)     Erosion cash flows.

22- The evaluation of a project based solely on its incremental cash flows is the basis of the:

            A)     Incremental cash flow method.

            B)     Stand-alone principle.

            C)     Dividend growth model.

            D)     Aftertax salvage value analysis.

            E)     Discounted payback method.

23- A cost that has already been paid, or the liability to pay has already been incurred, is a(n):

            A)     Salvage value expense.

            B)     Net working capital expense.

            C)     Sunk cost.          

            D)     Opportunity cost.

            E)     Erosion cost.

24- The cash flows of a new project that come at the expense of a firm's existing projects are:

            A)     Salvage value expenses.

            B)     Net working capital expenses.

            C)     Sunk costs.

            D)     Opportunity costs.

            E)     Erosion costs.

25- The most valuable investment given up if an alternative investment is chosen is a(n):

            A)     Salvage value expense.

            B)     Net working capital expense.

            C)     Sunk cost.

            D)     Opportunity cost.

            E)     Erosion cost.

26- Incremental cash flows are defined as:

            A)     The total cash flows of a firm from the point at which a project is implemented until the point at which the project ends.

            B)     Any change in the future net income of a firm that results from a new project being implemented.

            C)     The cash flows that are foregone when a new project or activity is accepted.

            D)     Those cash flows that have already occurred and will not change whether or not a new project is accepted.

            E)     The changes in the firm's future cash flows that are a direct consequence of accepting a project.

27- Sunk costs can be defined as:

            A)     The costs that have already been incurred and will not change whether or not a project is accepted.

            B)     The initial, or start-up, costs of a project that cannot be recouped should the new project be implemented.

            C)     Any and all fixed costs that are incurred as the result of accepting a new project or activity.

            D)     The costs resulting from losses in current projects due to the implementation of a new project.

            E)     Any and all costs necessary to implement a new project or activity.

28- The future rental income that could have been earned if a building had not been sold is called a(n) ______ cost.

            A)     Sunk

            B)     Incremental

            C)     Opportunity

            D)     Side

            E)     Stand-alone

29- The reduction in the sale of hamburgers when hot dogs are added to a menu is called the_____ cost.

            A)     Sunk

            B)     Opportunity

            C)     Incremental

            D)     Stand-alone

            E)     Erosion

30- It is important to identify and use only incremental cash flows in capital investment decisions:

            A)     Because they are the simplest to identify.

            B)     Only when the stand-alone principle fails to hold.

            C)     Because ultimately it is the change in a firm's overall future cash flows that matter.

            D)     To accommodate unforeseen changes that might occur.

            E)     Whenever sunk costs are involved.