Exam
Name___________________________________
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1)
In which two ways may double counting occur when considering interest on borrowing to finance
a project?
1)
A)
As discounted cash flow and as an element in profits
B)
As cash flow and as an element in profits
C)
As cash flow and as an element in the discount rate
D)
As sunk costs and as an element in the discount rate
2)
What is meant by the term ‘opportunity costs’?
2)
A)
The cost of investigating an opportunity
B)
The interest payable on borrowing funds to take up an opportunity
C)
The cost of using an asset which has alternative employment
D)
The income from using an asset
3)
Allocation of the historic costs of fixed assets against the annual revenue they generate is called
3)
A)
amortisation.
B)
gross profits.
C)
depreciation.
D)
net profits.
4)
Which three of the following statements accurately relate to profits and cash flows?
4)
A)
Project planning decisions should be focused primarily on a search for profit.
B)
Profit is a poor substitute for cash flow.
C)
Depreciation is not a cash flow and should be excluded from profit figures.
D)
Working capital adjustments may be needed to modify profit figures for NPV analysis.
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5)
An asset has a purchase cost £100,000, incurred installation costs of £10,000, and has an estimated
salvage value of zero, is being depreciated over a 5–year period on a straight–line basis. What is the
depreciation expense in year 1?
5)
A)
£12,750
B)
£11,250
C)
£15,000
D)
£22,000
6)
A business has an initial value of £2m. In the following four years its value is assessed as £2.4m,
£2.7m, £2.76m, and £2.8m. The discount rate is 15 per cent. At the end of which year should the
business be sold?
6)
A)
Year 1
B)
Year 2
C)
Year 3
D)
Year 4
A
7)
What is meant by the term ‘sunk costs’?
7)
A)
Costs of appraising a project’s viability
B)
Costs that will be lost if the project is a failure
C)
Costs which will not change, regardless of the decision to proceed with a project
D)
Costs that have already been spent on a project
C
8)
Relevant cash flows for a project are best described as
8)
A)
incremental cash flows.
B)
sunk cash flows.
C)
accounting cash flows.
D)
incidental cash flows.
A
9)
“Profit is a poor substitute for cash flow.” Which two of the following examples accurately apply to
that statement?
9)
A)
Profit only affects incremental aspects of cash flow.
B)
Profit rather than cash flow is crucial for long term increases in investor value.
C)
Working capital adjustments may be needed to modify the profit figures for NPV analysis.
D)
Depreciation is not a cash flow and should be excluded.
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D
10)
Which of the following factors should form the primary focus of project analysis?
10)
A)
Incremental profit figures
B)
Incremental cash flows
C)
Allocated overheads
D)
Raw cash flows
11)
Cash flows that could be realised from the best alternative use of an owned asset are called
11)
A)
incremental costs.
B)
lost resale opportunities.
C)
sunk costs.
D)
opportunity costs.
12)
A company is considering expanding operations to meet growing demand. With the capital
expansion the working capital requirements are expected to change. Management expects cash to
increase by £10,000, accounts receivable by £20,000, and inventories by £30,000. At the same time
accounts payable will increase by £40,000, accruals by £30,000, and long–term debt by £80,000. The
change in net working capital is
12)
A)
a decrease of £10,000.
B)
an increase of £10,000.
C)
a decrease of £90,000.
D)
an increase of £80,000.
13)
Cash outlays that had been previously made and have no effect on the cash flows relevant to a
current decision are called
13)
A)
opportunity costs foregone.
B)
sunk costs.
C)
incremental past expenses.
D)
incremental historical costs.
14)
________ is a series of equal annual cash flows.
14)
A)
A conventional
B)
A mixed stream
C)
A non–conventional
D)
An annuity
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15)
What term is used for the difference between the cash flow if a project is implemented, and the cash
flow if it is not?
15)
A)
Differential cash flow
B)
Opportunity cost
C)
Incremental cash flow
D)
Internal return
16)
Which of the following factors are of major importance when considering raw data?
16)
A)
Reliability
B)
Accuracy
C)
Timeliness
D)
All of them
17)
The change in net working capital when evaluating a capital budgeting decision is
17)
A)
the change in current assets minus the change in current liabilities.
B)
the change in current liabilities minus the change in current assets.
C)
the increase in current liabilities.
D)
the increase in current assets.
18)
Cash disbursements may include all of the following EXCEPT
18)
A)
fixed asset outlays.
B)
rent payments.
C)
tax payments.
D)
depreciation expense.
19)
Which of the following statements correctly relates to project appraisal?
19)
A)
The effect of a new project on other parts of a business is irrelevant when trying to decide
whether to go ahead with the new project.
B)
Changes in working capital as a result of implementing a project should be included in the
project appraisal.
C)
Depreciation is a legitimate cost of a project and should be included in a project appraisal.
D)
The costs of surveys and feasibility studies incurred prior to the decision to implement a
project should be included in the project appraisal, as they are a cost of the project.
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20)
Initial cash flows and subsequent operating cash flows for a project are sometimes referred to as
20)
A)
ordinary cash flows.
B)
necessary cash flows.
C)
relevant cash flows.
D)
consistent cash flows.
TRUE/FALSE. Write ‘T’ if the statement is true and ‘F’ if the statement is false.
21)
An opportunity cost is a cash flow that could be realised from the best alternative use of an owned
asset.
21)
22)
Relevant cash flows are the incremental cash outflows and inflows associated with a proposed
capital expenditure.
22)
23)
When evaluating a proposed project, incremental operating cash inflows are relevant cash flows.
23)
24)
Depreciation is considered to be an outflow of cash since the cash must be drawn from somewhere.
24)
25)
If a new asset is being considered as a replacement for an old asset, the relevant cash flows would
be found by adding together the expected cash flows still remaining on the old asset to the expected
cash flows for new asset.
25)
26)
Opportunity costs should be included as cash flows when determining a project’s incremental cash
flows.
26)
27)
The relevant cash flows for a proposed capital expenditure are the incremental after–tax cash
outflows and resulting subsequent inflows.
27)
28)
Accounting figures and cash flows are not necessarily the same due to the presence of certain
non–cash expenditures on the firm’s income statement.
28)
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29)
Firms are permitted to systematically charge a portion of the market value of fixed assets, as
depreciation, against annual revenues.
29)
30)
Sunk costs are cash outlays that have already been made and therefore have no effect on the cash
flows relevant to the current decision. As a result, sunk costs should not be included as relevant in
computing a project’s incremental cash flows.
30)
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Answer Key
Testname: C3
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