Financial Management Quiz Solution 6qm2e

DEI DISTANCE MBA PROGRAMME FINANCIAL MANAGEMENT – MBM 102 QT 4 (2013) 1. All of the following influence capital budgeting cash flows EXCEPT: a. accelerated depreciation. b. salvage value. c. tax rate changes. d. method of project financing used. 2. In proper capital budgeting analysis we evaluate incremental __________ cash flows a. ing b. operating c. before-tax d. financing 3. The estimated benefits from a project are expressed as cash flows instead of income flows because: a. it is simpler to calculate cash flows than income flows. b. it is cash, not ing income, that is central to the firm's capital budgeting decision. c. this is required by the Internal Revenue Service. d. this is required by the Securities and Exchange Commission 4. In estimating "after-tax incremental operating cash flows" for a project, you should include all of the following EXCEPT: a. sunk costs. b. opportunity costs. c. changes in working capital resulting from the project, net of spontaneous changes in current liabilities. d. effects of inflation. 5. A capital investment is one that a. a large proportion of fixed assets b. long-term debt c. retained earnings d. All of the above answers are 6 . Taxing authorities allow the fully installed cost of an asset to be written off for tax purposes. This amount is called the asset's a. cost of capital. b. initial cash outlay. c. depreciable basis. d. sunk cost. 7. Under the Modified Accelerated Cost Recovery System (MACRS), an asset in the "5year property class" would typically be depreciated over years.

a. Four

c. five

b. Six

d. seven

8. A profitability index (PI) of .92 for a project means that __________. a. the project's costs (cash outlay) are (is) less than the present value of the project's benefits b. the project's NPV is greater than zero c. the project's NPV is greater than 1 d. the project returns 92 cents in present value for each current dollar invested (cost) 9. Which of the following statements is incorrect regarding a normal project? a. If the NPV of a project is greater than 0, then its PI will exceed 1. b. If the IRR of a project is 8%, its NPV, using a discount rate, k, greater than 8%, will be less than 0. c. If the PI of a project equals 0, then the project's initial cash outflow equals the PV of its cash flows. d. If the IRR of a project is greater than the discount rate, k, then its PI will be greater than 1. 10. What do we call a formal comparison of the actual costs and benefits of a project with original estimates? a. Post-completion audit. b. audit. c. Cost-benefit analysis. d. Business scorecard report. 11. Increasing the credit period from 30 to 60 days, in response to a similar action taken by all of our competitors, would likely result in: a. an increase in the average collection period. b. a decrease in bad debt losses. c. an increase in sales. d. higher profits. .12 . A project whose acceptance precludes the acceptance of one or more alternative projects is referred to as __________. a. a mutually exclusive project. b. an independent project. c. a dependent project. d. a contingent project. 13. Costs of not carrying enough inventory include: a. lost sales. b. customer disappointment. c. possible worker layoffs. d. all of these 14. In finance, "working capital" means the same thing as a. total assets.

c. fixed assets.

b. current assets.

d. current assets minus current liabilities.

15 . The method provides correct rankings of mutually exclusive projects, when the firm is not subject to capital rationing. a. net present value

c. internal rate of return

b. payback period

d. profitability index