1.) Which statement best describes the treatment of an equipment purchase and the related depreciation expense in the calculation of net cash flows used for capital investment analysis.
A.) The cost of the equipment should be treated as an asset and the related depreciation as an expense.
B.) The entire cost of the equipment should be treated as a cash outflow and the depreciation expense as a cash inflow.
C.) The entire cost of the equipment should be treated as a cash outflow and the depreciation expense should not be included, because it is a non-cash expense.
D.) Either a or b, depending upon the nature of the investment.
2.) Which of the following transactions reduces cash flow used in the Net Present Value (NPV) analysis of a capital investment decision?
A.) Depreciation expense on the purchase of a capital asset.
B.) Reduction of the labor cost for producing a product that is part of the investment.
C.) Taxes related to the savings on labor costs.
D.) Taxes related to the depreciation expense.
3.) Which of the following transactions increases cash flow used in the Net Present Value (NPV) analysis of a capital investment decision? The company pays taxes at the rate of 35% of net taxable income.
A.) Depreciation expense on the purchase of a capital asset.
B.) Reduction of the labor cost for producing a product that is part of the investment.
C.) Reduction of the labor cost for producing a product that is part of the investment.
D.) Taxes related to the gain on the sale of the asset at the end of its estimated useful life (assume the asset is expected to be sold at a price that exceeds its book value).
4.) A positive net present value indicates that:
A.) the Internal Rate of Return (IRR) is less than the discount rate.
B.) the cost of capital is greater than the present value of the future cash inflows.
C.) the projected return on the investment is expected to exceed the cost of capital plus the cost of the initial investment
D.) the Internal Rate of Return (IRR) is less than the cost of capital.
5.) Which of the following is NOT used to calculate Internal Rate of Return (IRR)?
A.) The present value of the project cost.
B.) The weighted cost of capital.
C.) The number of periods (usually years) of the project's expected life.
D.) The cash flows each period.
6.) Capital budgeting is the process of making decisions that often involve large outlays of cash for long periods.
A.) True
B.) False
7.) The Internal Rate of Return is the discount rate that results in the present value of cash outflows being greater than the present value of cash inflows from an investment.
A.) True
B.) False