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FINC620 week 2 quiz

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Question;Question 1;Which of the following statements is CORRECT?;Since;depreciation is a cash expense, the faster an asset is depreciated, the;lower the projected NPV from investing in the asset.;Under;current laws and regulations, corporations must use straight-line;depreciation for all assets whose lives are 5 years or longer.;Corporations must use the same depreciation method for both stockholder reporting and tax purposes.;Using accelerated depreciation rather than straight line normally has the effect of speeding up cash flows and thus increasing a project's forecasted NPV.;Using;accelerated depreciation rather than straight line normally has no;effect on a project's total projected cash flows nor would it affect the;timing of those cash flows or the resulting NPV of the project.;2 points;Question 2;Fool;Proof Software is considering a new project whose data are shown below.;The equipment that would be used has a 3-year tax life, and the allowed;depreciation rates for such property are 33%, 45%, 15%, and 7% for;Years 1 through 4. Revenues and other operating costs are expected to be;constant over the project's 10-year expected life. What is the Year 1;cash flow?Equipment cost (depreciable basis)$65,000Sales revenues, each year$60,000Operating costs (excl. deprec.)$25,000Tax rate35.0%;$30,258;$31,770;$33,359;$35,027;$36,778;2 points;Question 3;A;firm is considering Projects S and L, whose cash flows are shown below.;These projects are mutually exclusive, equally risky, and not;repeatable. The CEO wants to use the IRR criterion, while the CFO favors;the NPV method. You were hired to advise the firm on the best;procedure. If the wrong decision criterion is used, how much potential;value would the firm lose?WACC:6.00%Year01234CFS-$1,025$380$380$380$380CFL-$2,150$765$765$765$765;$188.68;$198.61;$209.07;$219.52;$230.49;2 points;Question 4;Which of the following statements is CORRECT?;For a project to have more than one IRR, then both IRRs must be greater than the WACC.;If two projects are mutually exclusive, then they are likely to have multiple IRRs.;If a project is independent, then it cannot have multiple IRRs.;Multiple IRRs can occur only if the signs of the cash flows change more than once.;If a project has two IRRs, then the smaller one is the one that is most relevant, and it should be accepted and relied upon.;2 points;Question 5;Which of the following statements is CORRECT?;Sensitivity analysis is a good way to measure market risk because it explicitly takes into account diversification effects.;One;advantage of sensitivity analysis relative to scenario analysis is that;it explicitly takes into account the probability of specific effects;occurring, whereas scenario analysis cannot account for probabilities.;Well-diversified stockholders do not need to consider market risk when determining required rates of return.;Market risk is important, but it does not have a direct effect on stock prices because it only affects beta.;Simulation;analysis is a computerized version of scenario analysis where input;variables are selected randomly on the basis of their probability;distributions.;2 points;Question 6;Which of the following statements is CORRECT?;The MIRR and NPV decision criteria can never conflict.;The IRR method can never be subject to the multiple IRR problem, while the MIRR method can be.;One;reason some people prefer the MIRR to the regular IRR is that the MIRR;is based on a generally more reasonable reinvestment rate assumption.;The higher the WACC, the shorter the discounted payback period.;The MIRR method assumes that cash flows are reinvested at the crossover rate.;2 points;Question 7;Florida;Car Wash is considering a new project whose data are shown below. The;equipment to be used has a 3-year tax life, would be depreciated on a;straight-line basis over the project's 3-year life, and would have a;zero salvage value after Year 3. No new working capital would be;required. Revenues and other operating costs will be constant over the;project's life, and this is just one of the firm's many projects, so any;losses on it can be used to offset profits in other units. If the;number of cars washed declined by 40% from the expected level, by how;much would the project's NPV decline? (Hint: Note that cash flows are;constant at the Year 1 level, whatever that level is.)WACC10.0%Net investment cost (depreciable basis)$60,000Number of cars washed2,800Average price per car$25.00Fixed op. cost (excl. deprec.)$10,000Variable op. cost/unit (i.e., VC per car washed)$5.375Annual depreciation$20,000Tax rate35.0%;$28,939;$30,462;$32,066;$33,753;$35,530;2 points;Question 8;Which of the following statements is CORRECT?;One defect of the IRR method is that it does not take account of cash flows over a project's full life.;One defect of the IRR method is that it does not take account of the time value of money.;One defect of the IRR method is that it does not take account of the cost of capital.;One;defect of the IRR method is that it values a dollar received today the;same as a dollar that will not be received until sometime in the future.;One;defect of the IRR method is that it assumes that the cash flows to be;received from a project can be reinvested at the IRR itself, and that;assumption is often not valid.;2 points;Question 9;Assume;that the economy is in a mild recession, and as a result interest rates;and money costs generally are relatively low. The WACC for two mutually;exclusive projects that are being considered is 8%. Project S has an;IRR of 20% while Project L's IRR is 15%. The projects have the same NPV;at the 8% current WACC. However, you believe that the economy is about;to recover, and money costs and thus your WACC will also increase. You;also think that the projects will not be funded until the WACC has;increased, and their cash flows will not be affected by the change in;economic conditions. Under these conditions, which of the following;statements is CORRECT?;You should reject both projects because they will both have negative NPVs under the new conditions.;You;should delay a decision until you have more information on the;projects, even if this means that a competitor might come in and capture;this market.;You should recommend Project L, because at the new WACC it will have the higher NPV.;You should recommend Project S, because at the new WACC it will have the higher NPV.;You should recommend Project S because it has the higher IRR and will continue to have the higher IRR even at the new WACC.;2 points;Question 10;Taggart Inc. is considering a project that has the following cash flow data. What is the project's payback?Year0123Cash flows-$1,150$500$500$500;1.86 years;2.07 years;2.30 years;2.53 years;2.78 years;2 points;Question 11;Which of the following statements is CORRECT?;If a firm is found guilty of cannibalization in a court of law, then it is judged to have taken unfair advantage of its competitors. Thus, cannibalization is dealt with by society through the antitrust laws.;If a firm is found guilty of cannibalization in a court of law, then it is judged to have taken unfair advantage of its customers. Thus, cannibalization is dealt with by society through the antitrust laws.;If;cannibalization exists, then the cash flows associated with the project;must be increased to offset these effects. Otherwise, the calculated;NPV will be biased downward.;If;cannibalization is determined to exist, then this means that the;calculated NPV if cannibalization is considered will be higher than the;NPV if this effect is not recognized.;Cannibalization;as described in the text, is a type of externality that is not against;the law, and any harm it causes is done to the firm itself.;2 points;Question 12;Which of the following statements is CORRECT?;Sensitivity;analysis as it is generally employed is incomplete in that it fails to;consider the probability of occurrence of the key input variables.;In;comparing two projects using sensitivity analysis, the one with the;steeper lines would be considered less risky, because a small error in;estimating a variable such as unit sales would produce only a small;error in the project's NPV.;The;primary advantage of simulation analysis over scenario analysis is that;scenario analysis requires a relatively powerful computer, coupled with;an efficient financial planning software package, whereas simulation;analysis can be done efficiently using a PC with a spreadsheet program;or even with just a calculator.;Sensitivity;analysis is a type of risk analysis that considers both the sensitivity;of NPV to changes in key input variables and the probability of;occurrence of these variables' values.;As;computer technology advances, simulation analysis becomes increasingly;obsolete and thus less likely to be used as compared to sensitivity;analysis.;2 points;Question 13;Which;of the following statements is CORRECT? Assume that the project being;considered has normal cash flows, with one outflow followed by a series;of inflows.;The longer a project's payback period, the more desirable the project is normally considered to be by this criterion.;One;drawback of the regular payback for evaluating projects is that this;method does not properly account for the time value of money.;If a project's payback is positive, then the project should be rejected because it must have a negative NPV.;The regular payback ignores cash flows beyond the payback period, but the discounted payback method overcomes this problem.;If;a company uses the same payback requirement to evaluate all projects;say it requires a payback of 4 years or less, then the company will tend;to reject projects with relatively short lives and accept long-lived;projects, and this will cause its risk to increase over time.;2 points;Question 14;Which;of the following statements is CORRECT? Assume that the project being;considered has normal cash flows, with one cash outflow at t = 0;followed by a series of positive cash flows.;A project's MIRR is always greater than its regular IRR.;A project's MIRR is always less than its regular IRR.;If a project's IRR is greater than its WACC, then its MIRR will be greater than the IRR.;To;find a project's MIRR, we compound cash inflows at the regular IRR and;then find the discount rate that causes the PV of the terminal value to;equal the initial cost.;To;find a project's MIRR, the textbook procedure compounds cash inflows at;the WACC and then finds the discount rate that causes the PV of the;terminal value to equal the initial cost.;2 points;Question 15;Thorley;Inc. is considering a project that has the following cash flow data.;What is the project's IRR? Note that a project's IRR can be less than;the WACC or negative, in both cases it will be rejected.Year012345Cash flows-$1,250$325$325$325$325$325;9.43%;9.91%;10.40%;10.92%;11.47%

 

Paper#49788 | Written in 18-Jul-2015

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