Question 1

The amount received today that would be equivalent in value to a future payment or series of payments represents the:
A) present value.
B) discounted value.
C) equivalent value.
D) future value.
E) net present value.

Accepted Answer

The amount received today that is equivalent in value to a future payment or series of payments is known as the present value. It takes into account factors such as interest rates and the time value of money to determine the current value of future cash flows. Therefore, option A is the correct choice.

Question 2

The net cash flow of a project is equal to any increase in revenues brought about by the project less any increase in operating expenses and depreciation brought about by the project, plus the incremental depreciation associated with the project.

Accepted Answer

Net cash flow of a project is equal to any increase in revenues minus any increase in operating expenses, but depreciation is not subtracted because it is a non-cash expense. Instead, the tax shield benefit of depreciation is often added back to calculate cash flows.

Question 3

The amount that would be accumulated at some future date if we invested a sum of money held today at a particular rate of interest is called the:
A) present value.
B) discounted value.
C) equivalent value.
D) future value.
E) net present value.

Accepted Answer

The amount accumulated at a future date after investing a sum of money today is referred to as the future value. Thus, option D is the correct answer. Option A (present value) refers to the amount invested today, while option B (discounted value) is the present value of an expected future cash flow, discounted to reflect its current value. Option C (equivalent value) is not a commonly used financial term, and option E (net present value) is the difference between the present value of cash inflows and outflows of an investment.

Question 4

The net cash flow of a project is equal to any increase in revenues brought about by the project less any increase in operating expenses and depreciation brought about by the project, multiplied by 1 - T), where T is the firm's marginal income tax rate.

Accepted Answer

Net cash flow of a project is equal to any increase in revenues minus any increase in operating expenses (not including depreciation, as depreciation is a non-cash charge), and then the tax effect is applied to this net operating income before adding back depreciation (since depreciation affects taxes but does not represent a cash outflow).

Question 5

The marginal cost of capital MCC) is calculated as a weighted average of the after-tax cost of funds from each source.

Accepted Answer

The marginal cost of capital (MCC) is indeed calculated as a weighted average of the after-tax cost of funds from each source, such as common equity, preferred equity, debt, etc. This is because the cost of each source of funding varies based on factors such as risk level, tax implications, and market conditions. By considering the proportional weight of each source of funding, the company can determine its overall MCC and use this information to make strategic financial decisions.

Question 6

In determining the price or initial cash outlay of a project, it is necessary to consider the following items:
A) initial outlays for land, buildings and equipment.
B) developmental costs for the undertaking itself and the product it is intended to produce.
C) the cost to the firm of any increase in working capital requirements attributable to the project.
D) if applicable, the after tax salvage value of any existing equipment.
E) all of the above.

Accepted Answer

All of the options (A) through (D) are necessary considerations when determining the price or initial cash outlay of a project. Initial outlays for land, buildings, and equipment are the tangible assets required to start the project, developmental costs for the undertaking and the product are necessary to ensure the project's success, the cost of any increase in working capital requirements is a consideration for financing the project, and the after-tax salvage value of existing equipment can potentially offset the total project cost.

Question 7

An investment project is acceptable if its NPV is less than or equal to zero.

Accepted Answer

An investment project is acceptable if its NPV is greater than or equal to zero, not less than or equal to zero. A negative NPV indicates a project that will not generate enough income to cover the costs and is therefore not a desirable investment.

Question 8

The analysis of alternative investment opportunities by a firm is the focus of:
A) the concept of equivalency.
B) compounding.
C) discounting.
D) capital budgeting.
E) cost of capital analysis.

Accepted Answer

Capital budgeting is the process of evaluating and selecting long-term investments that are consistent with the goal of shareholders' wealth maximization. It involves analyzing various investment opportunities to determine which will generate the highest return on investment.

Question 9

An investment project is acceptable if its NPV is greater than or equal to zero.

Accepted Answer

A project's NPV represents the present value of its expected cash flows minus the initial cost of the investment. If the NPV is zero or positive, it means the project is expected to generate enough cash flows to recover the initial investment and provide a return that is at least equal to the required rate of return. Therefore, a project with a positive or zero NPV is acceptable, while a project with a negative NPV should be rejected.

Question 10

The net cash flow of a project is equal to any increase in revenues brought about by the project less any increase in operating expenses and depreciation brought about by the project, multiplied by 1 - T), where T is the firm's marginal income tax rate, plus the incremental depreciation associated with the project.

Accepted Answer

This is the formula for calculating the net cash flow of a project, taking into account the tax implications and incremental depreciation.

Question 11

A project should be accepted as long as:
A) the present value of the expected net receipts it generates equals or exceeds its price the net outlay required).
B) the present value of the expected net receipts it generates is less than its price the net outlay required).
C) its NPV is greater than zero.
D) its NPV is less than zero.
E) its IRR is less than the cost of capital.

Accepted Answer

A project should be accepted if the present value of the expected net receipts it generates equals or exceeds its price (the net outlay required). This ensures that the project will provide a positive net present value (NPV) and a return on investment that is greater than the cost of capital. B and D are incorrect because the present value of expected net receipts should be greater than the price and the NPV should be positive, respectively. C is a correct statement, but it does not specify the exact threshold for the NPV. E is incorrect because the IRR should be greater than the cost of capital for a project to be accepted.

Question 12

The internal rate of return IRR) for a project is the discount rate that will result in the largest possible net present value for the project.

Accepted Answer

The internal rate of return (IRR) is the discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero.

Question 13

The net present value NPV) of an investment is the present value of its net cash inflows.

Accepted Answer

The answer of The net present value NPV) of an...

Question 14

The marginal cost of capital MCC) is the discount rate which represents the marginal cost of investment funds to the firm.

Accepted Answer

This statement is true. The MCC is the cost of obtaining additional funds to finance new investments or projects. It reflects the cost of raising capital through the issuance of new stocks, bonds or other securities.

Question 15

The internal rate of return IRR) for a project is the discount rate that will result in a net present value of zero for the project.

Accepted Answer

This statement is true. IRR is the discount rate that results in a net present value of zero.

Question 16

The marginal cost of capital MCC) is the discount rate which represents the marginal cost of investment funds to the firm, and is calculated as a weighted average of the after-tax cost of funds from each source.

Accepted Answer

This statement accurately describes the calculation of the marginal cost of capital.

Question 17

Capital budgeting is:
A) the analysis of alternative investment opportunities by a firm.
B) the planning of cash flows for projects that last longer than one year.
C) the planning for the investment of excess capital.
D) the planning for obtaining funds to meet short term cash flow needs.
E) the development of methods for obtaining outside capital for firm expansion.

Accepted Answer

Capital budgeting involves the analysis and evaluation of different investment opportunities to determine which ones are worthy of investment by a firm. It involves assessing the potential cash flows, risks, and returns associated with each investment opportunity to make informed investment decisions. The other options listed (B, C, D, and E) do not fully encompass the scope of capital budgeting.

Question 18

The process by which we determine the present value of an amount to be received at some time in the future is called:
A) the concept of equivalency.
B) compounding.
C) discounting.
D) capital budgeting.
E) future value.

Accepted Answer

Discounting is the process of determining the present value of an amount to be received in the future. This is usually done by applying a discount rate to the future amount, which represents the time value of money and the risk associated with delaying the receipt of the funds. The other choices are either unrelated or refer to different financial concepts.

Question 19

The process of computing the value of a current sum of money at some future date is called:
A) discounting.
B) capital budgeting.
C) present value analysis.
D) compounding.
E) net present value analysis.

Accepted Answer

Compounding is the process through which the value of an investment grows exponentially over time due to the earnings on both the original principal and the accumulated earnings from preceding periods. This concept is used to determine the future value of a current sum of money.

Question 20

The marginal cost of capital MCC) is the discount rate which represents the average cost of investment funds to the firm, and is calculated as a weighted average of the after-tax cost of all funds used in the capital budget.

Accepted Answer

The marginal cost of capital (MCC) is the cost of obtaining one more dollar of new capital, not the average cost of investment funds. It reflects the cost of the last unit of capital raised.

Quiz 13: Fundamentals of Project Evaluation

The amount received today that would be equivalent in value to a future payment or series of payments represents the:

The net cash flow of a project is equal to any increase in revenues brought about by the project less any increase in operating expenses and depreciation brought about by the project, plus the incremental depreciation associated with the project.

The amount that would be accumulated at some future date if we invested a sum of money held today at a particular rate of interest is called the:

The net cash flow of a project is equal to any increase in revenues brought about by the project less any increase in operating expenses and depreciation brought about by the project, multiplied by 1 - T), where T is the firm's marginal income tax rate.

The marginal cost of capital MCC) is calculated as a weighted average of the after-tax cost of funds from each source.

In determining the price or initial cash outlay of a project, it is necessary to consider the following items:

An investment project is acceptable if its NPV is less than or equal to zero.

The analysis of alternative investment opportunities by a firm is the focus of:

An investment project is acceptable if its NPV is greater than or equal to zero.

A project should be accepted as long as:

The internal rate of return IRR) for a project is the discount rate that will result in the largest possible net present value for the project.

The net present value NPV) of an investment is the present value of its net cash inflows.

The marginal cost of capital MCC) is the discount rate which represents the marginal cost of investment funds to the firm.

The internal rate of return IRR) for a project is the discount rate that will result in a net present value of zero for the project.

The marginal cost of capital MCC) is the discount rate which represents the marginal cost of investment funds to the firm, and is calculated as a weighted average of the after-tax cost of funds from each source.

Capital budgeting is:

The process by which we determine the present value of an amount to be received at some time in the future is called:

The process of computing the value of a current sum of money at some future date is called:

The marginal cost of capital MCC) is the discount rate which represents the average cost of investment funds to the firm, and is calculated as a weighted average of the after-tax cost of all funds used in the capital budget.