Economics Chapter 12 2 Stone Inc Evaluating Project With Initial

66. Stone Inc. is evaluating a project with an initial cost of $9,500. Cash inflows are expected to be $1,500,

$1,500, and $10,000 in the three years over which the project will produce cash flows. If the discount rate is

6%, what is the net present value of the project?

67. Assuming that a firm has no capital rationing constraint and that a firm’s investment alternatives are not

mutually exclusive, the firm should accept all investment proposals

68. If projects are mutually exclusive

69. The internal rate of return and net present value methods

70. A characteristic of capital budgeting is that

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71. A project requires an investment of $2,500 and has a net present value of $430. If the internal rate of

return is 10%, what is the profitability index for the project?

72. With non-mutually exclusive projects,

73. The net present value method (NPV) is a more conservative technique for selecting investment projects

than the internal rate of return method because the NPV method

74. The _________ assumes returns are reinvested at the cost of capital.

75. In using the internal rate of return method, it is assumed that cash flows can be reinvested at

76. For acceptable investments, the reinvestment assumption under the internal rate of return is generally

77. The internal rate of return assumes that funds are reinvested at the

78. If an investment project has a positive net present value, then the internal rate of return is

79. As the cost of capital increases

80. The net present value (NPV) method is considered to be a better method of evaluation than the internal

rate of return (IRR) method because the NPV method

81. The modified internal rate of return (MIRR) assumes that

82. The modified internal rate of return (MIRR) is used to

83. Capital rationing

84. If a firm is experiencing no capital rationing, it should accept all investment proposals

85. A firm may adopt capital rationing because

86. Capital rationing assumes that

87. The net present value profile

88. Which of the following is not a step in creating the net present value profile?

89. Using higher discount rates,

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90. Which statement, or statements, are true about depreciation?

91. The Wet Corp. has an investment project that will reduce expenses by $25,000 per year for three

years. The project’s cost is $55,000. If the asset is part of the three-year MACRS category (33% first year

depreciation) and the company’s tax rate is 34%, what is the cash flow from the project in year 1?

92. An asset fitting into the 7-year MACRS category was purchased two years ago for $72,000. The book

value of this asset is now ________.

93. For MACRS depreciation, automobiles and light trucks fit into the

A. 3-year MACRS category.

94. With the exception of real estate investments, MACRS depreciation is beneficial to corporations

because it

95. A firm purchases an asset falling into the 3-year MACRS category for $48,000. The second year’s

depreciation expense for this asset would be ________.

96. Which of the following does MACRS depreciation provide to corporations?

97. Elective expensing has the following characteristic:

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98. At higher tax rates, depreciation is

99. If the capital budgeting decision includes a replacement analysis, then

100. An equipment replacement decision, under incremental analysis, requires

101. In a replacement decision, if an old asset sells below its book value

102. Firm X is considering the replacement of an old machine with one that has a purchase price of

$70,000. The current market value of the old machine is $18,000 but the book value is $32,000. The firm’s

tax rate is 30%. What is the net cash outflow for the new machine after considering the sale of the old

machine? Disregard the effect of depreciation of the new machine if acquired.

103. A firm is selling an old asset below book value in a replacement decision. As the firm’s tax rate is

raised, the net cash outflow (purchase price less proceeds from the sale of the old asset) would

104. Project X has a cost of $100,000 and provides the following annual earnings: year 1 $35,000; year 2

$25,000; year 3 $175,000; and year 4 $10,000. Under the payback method, in which year is the investment

recouped?

105. Project XYZ has a cost of $200,000 and provides the following annual cash inflows: year 1 $35,000;

year 2 $25,000; year 3 $175,000; and year 4 $10,000. What is the net present value of this investment,

assuming the discount rate is 8%?

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106. All of the following is information required to create a net present value profile except for which one?

107. A firm utilizes a strategy of capital rationing, which is currently $375,000 and is considering the

following two projects: Project A has a cost of $335,000 and the following cash flows: year 1 $140,000;

year 2 $150,000; and year 3 $100,000. Project B has a cost of $365,000 and the following cash flows: year

1 $220,000; year 2 $110,000; and year 3 $150,000. Using a 6% cost of capital, which decision should the

financial manager make?

108. A firm utilizes a strategy of capital rationing, which is currently $375,000 and is considering the

following two projects: Project A has a cost of $335,000 and the following cash flows: year 1 $140,000;

year 2 $150,000; and year 3 $100,000. Project B has a cost of $365,000 and the following cash flows: year

1 $220,000; year 2 $110,000; and year 3 $150,000. Using a 6% cost of capital, what is the net present

value of project A?

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109. A firm utilizes a strategy of capital rationing, which is currently $375,000 and is considering the

following two projects: Project A has a cost of $335,000 and the following cash flows: year 1 $140,000;

year 2 $150,000; and year 3 $100,000. Project B has a cost of $365,000 and the following cash flows: year

1 $220,000; year 2 $110,000; and year 3 $150,000. Using a 6% cost of capital, what is the internal rate of

return of project B?

110. Technology Corp. is considering a $238,160 investment in a new marketing campaign that it

anticipates will provide annual cash flows of $52,000 for the next five years. The firm has a 6% cost of

capital. What should the analysis indicate to the firm’s managers?

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Chapter 12 Test Bank – Static Summary