D362 Corporate Finance - Set 1 - Part 2

Test your knowledge of technical writing concepts with these practice questions. Each question includes detailed explanations to help you understand the correct answers.

Question 21: Mutually exclusive projects are best defined as competing projects which:

Both require the use of the same limited resource.

Can be accepted simultaneously.

Have the same cash flows.

Have no impact on one another.

Question 22: Net present value (NPV) is:

The best method of analyzing mutually exclusive projects.

The most widely used method of capital budgeting.

The simplest method for evaluating projects.

A method that ignores cash flows.

Question 23: Net working capital:

Has no impact on project cash flows.

Can create either a cash inflow or a cash outflow at time zero of a project.

Is only relevant in the final year of a project.

Does not need to be considered in capital budgeting.

Question 24: Pro forma statements for a proposed project should:

Be compiled on a stand-alone basis.

Exclude incremental cash flows related to the project.

Include all costs associated with the company's other projects.

Include interest expenses.

Question 25: Scenario analysis is best suited to accomplishing which one of the following when analyzing a project?

Identifying the potential range of reasonable outcomes.

Determining the sensitivity of NPV to a single variable.

Calculating the expected value of a project.

Eliminating uncertainty.

Question 26: Sensitivity analysis is based on:

Varying a single variable and measuring the resulting change in the NPV of a project.

Testing the impact of multiple variables changing at once.

The worst-case scenario.

Applying fixed values to all variables.

Question 27: Southern Chicken is considering two projects. Which of the following methods should the firm rely most heavily on when deciding which project to accept?

Payback period.

Profitability index.

Internal rate of return.

Net present value.

Question 28: The annual annuity stream of payments that has the same present value as a project's costs is referred to as which one of the following?

Equivalent annual cost.

Payback period.

Profitability index.

Internal rate of return.

Question 29: The bid price always assumes which one of the following?

The NPV of the project is positive.

The project generates no cash inflows.

The project has zero risk.

The NPV of the project is zero.

Question 30: The bottom-up approach to computing the operating cash flow applies only when:

The interest expense is equal to zero.

There is depreciation involved.

The project is cash flow positive.

Sales and costs are constant.

Question 31: The depreciation tax shield is best defined as:

The reduction in taxable income resulting from depreciation.

The amount of tax that is saved because of the depreciation expense.

The future value of depreciation.

The net present value of depreciation.

Question 32: The difference between a firm's future cash flows if it accepts a project and the firm's future cash flow if it does not accept the project is referred to as the project's:

Sunk costs.

Incremental cash flows.

Net present value.

Opportunity costs.

Question 33: The equivalent annual cost considers which of the following?

Depreciation expense only.

Operating cost and replacement costs.

Only capital costs.

Initial outlay only.

Question 34: The internal rate of return is defined as:

The discount rate that causes the NPV of a project to be zero.

The discount rate at which cash inflows equal cash outflows.

The project's required rate of return.

The return generated by the company on all projects.

Question 35: The internal rate of return:

Is difficult to compute without a financial calculator or computer.

Is the simplest method of calculating project returns.

Should only be used when comparing mutually exclusive projects.

Is equal to the profitability index.

Question 36: The length of time a firm must wait to recoup, in present value terms, the money it has invested in a project is referred to as the:

Payback period.

Discounted payback period.

Break-even point.

Profitability index.

Question 37: The present value of an investments future cash flows divided by the initial cost of the investment is called the:

Profitability index.

Net present value.

Internal rate of return.

Payback period.

Question 38: The stand-alone principle advocates that project analysis should be based solely on which one of the following costs?

Sunk costs.

Opportunity costs.

Incremental costs.

Fixed costs.

Question 39: There are two distinct discount rates at which a particular project will have a zero net present value. In this situation, the project is said to:

Have multiple rates of return.

Be unacceptable.

Be at break-even.

Have no feasible solution.

Question 40: Webster Iron Works started a project last year. As it turns out, the project is operating at its cash break-even level. This implies the project:

Has positive operating cash flow.

Is generating sufficient revenue to cover all expenses except depreciation.

Is operating at a level that does not affect NPV.

Is not covering its initial outlay.

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