Multiple Choice Answers

1.       (TCO 4) Which of the following is true regarding the evaluation of projects? (Points : 4)sunk costs should be included
erosion effects should be considered
financing costs need to be included
opportunity costs are irrelevant2. (TCO 4) There are several disadvantages to the payback method, among them: (Points : 4)payback ignores cash flows beyond the cutoff.payback can be used in conjunction with time adjusted methods of evaluation
3. (TCO 3 and 4) The net present value is: (Points : 4)
negative when a project’s benefits exceed its costs.
equal to the present value of an investment’s benefits.
equal to zero when the discount rate equals the IRR.
negative when a project’s IRR exceeds the required rate of return.
the current measure of a project’s cash inflows.
4. (TCO 3 and 4) What is the net present value of a project with the following cash flows, if the discount rate is 15 percent?Year           0         1            2         3         4
Cash flow  -$45,000     $11,520       $13,630       $16,470
$18,990
(Points : 4)
-$2,989.48
-$2,599.55
$1,153.37
$2,880.08
$3,312.09
5. (TCO 4) Leward Manufacturing is spending $115,000 to update its equipment. This is necessary if the firm wishes to be competitive in the marketplace and provide a wide array of product models. The company estimates that these updates will improve its cash inflows by $27,500 a year, for eight years. What is the payback period? (Points : 4)
4.18 years
5.82 years
6.62 years
7.79 years
This project never pays back
6. (TCO 4) Ignoring the option to expand: (Points : 4)
overestimates the internal rate of return on a project.
ignores the possibility that a negative net present value project might be positive, given changes over time.
ignores the possibility that one variable is the primary source of the forecasting risk associated with a project.
underestimates the net present value of a project.
7. (TCO 4) ____________, refers to the situation a firm faces when it has positive net present value projects, but cannot obtain financing for those projects. (Points : 4)
capital planning.
soft rationing.
capital rationing.
hard rationing.
a sunk cause.
8. (TCO 4) ABC Cameras is considering an investment that will have a cost of $10,000 and the following cash flows: $6,000 in year 1, $4,000 in year 2 and $3,000 in year 3. Assume the cost of capital is 10%. Which of the following is true regarding this investment? (Points : 4)
The net present value of the project is approximately $10,000
This project should be accepted because it has a positive net present value
This project’s payback period is 10 years or more
None of the above is true
9. (TCO 4) Assume Company X plans to invest $60,000 in industrial equipment. Using Tables 9.6 and 9.7 of your textbook (Page 277), which is the first year depreciation amount under MACRS? (Points : 4)
$12,000
$8,574
$19,800
None of the above
10. (TCO 1 and 4) Assume a corporation has earnings before depreciation, and taxes of $100,000, depreciation of $40,000, and that it has a 30 percent tax bracket. What are the after-tax cash flows for the company? (Points : 4)
$82,000
$110,000
$42,000
none of these11. (TCO 8) Which of the following statements is true regarding systematic risk? (Points : 4)
is diversifiable
is the total risk associated with surprise events
it is not project or firm specific
it is measured by standard deviation
12. (TCO 8) Which statement is not true regarding risk? (Points : 4)
the expected return is always the same as the actual return
a key to assess risk is determining how much risk an investment adds to a portfolio
risks can not always be diversified
the higher the risk, the higher the return investors require for the investment13. (TCO 8) The stock of Chocolate Galore is expected to produce the following returns, given the various states of the economy. What is the expected return on this stock?

State of Economy            Probability of State of Economy Rate of Return

Recession    .02     -.06
Normal          .88     .11
Boom .10     .17
(Points : 4)
7.33 percent
9.82 percent
11.26 percent
11.33 percent11.50 percent14. (TCO 8) You own a portfolio that consists of $8,000 in stock A, $4,600 in stock B, $13,000 in stock C, and $5,500 in stock D. What is the portfolio weight of stock B? (Points : 4)
14.79 percent
15.91 percent
18.42 percent
19.07 percent
19.46 percent
15. (TCO 8) You currently own a portfolio valued at $24,000 that has a beta of 1.1. You have another $8,000 to invest, and would like to invest it in a manner such that the risk of the new portfolio matches that of the overall market. What does the beta of the new security have to be? (Points : 4)
.46
.55
.61
.70
.90