Home / Questions / Which is true? To make a project accept/reject decision using a decision tree you start i
Which is true?
To make a project accept/reject decision using a decision tree you start in the middle of the decision tree and work both forward and backward through the decision process.
pTo make a project accept/reject decision using a decision tree you start with the decisions that lie furthest into the future.
To make a project accept/reject decision using a decision tree you make the decisions in the top half of the tree prior to those in the bottom half.
To make a project accept/reject decision using a decision tree you begin with the decision at Time 0.
None of the above.
Acme is considering a project with a 5-year life and an initial cost of $120,000. The discount rate is 12 percent. The firm expects to sell 2,100 units a year with a cash flow per unit of $20. The firm will have the option to abandon this project after three years at which time it expects it could sell the project for $50,000. The firm is interested in knowing how the project will perform if the sales forecast for Years 4 and 5 of the project are revised such that there is a 50 percent chance that the sales will be 1,400 units and a 50 percent chance they will be 2,500 units a year. What is the net present value of this project given your sales forecasts?
$23,617
$23,719
$25,002
$26,877
None of the above.
Which one of these statements is correct?
Monte Carlo simulations are now used by the vast majority of firms.
Including the option to wait into the analysis will increase the net present value of any project.
Financial managers prefer accounting profit break-even analysis over financial break-even analysis.
The option to expand may increase, decrease, or not affect the final net present value of a project.
None of the above.
4. Which is true?
The present value of an investment’s future cash flows divided by the initial cost of the investment is called the average accounting return.
The present value of an investment’s future cash flows divided by the initial cost of the investment is called the internal rate of return.
The present value of an investment’s future cash flows divided by the initial cost of the investment is called the profitability index.
The present value of an investment’s future cash flows divided by the initial cost of the investment is called the profile period.
None of the above.
5. A project has initial cost of $26,410, a discount rate of 8 percent, and one cash inflow of $42,500 in Year 2. What is the discounted payback period?
.72 years
1.39 years
.62 years
1.72 years
None of the above.
6. What is the payback period for a project that costs $4,600 and has cash inflows of $450, $970, $2,800, and $500 a year for Years 1 to 4, respectively?
1.03 years
2.36 years
2.89 years
3.76 years
None of the above.
7. Acme is analyzing two machines to determine which one it should purchase. Whichever machine is purchased will be replaced at the end of its useful life. The company requires a 12 percent rate of return and uses straight-line depreciation to a zero book value over the life of the machine. Machine A has a cost of $276,000, annual operating costs of $18,000, and a 3-year life. Machine B costs $220,000, has annual operating costs of $22,000, and a 2-year life. The firm currently pays no taxes. Which machine should be purchased and why?
Machine A; because it will save the company about $18,600 a year
Machine A; because it will save the company about $19,261 a year
Machine B; because it will save the company about $21,202 a year
Machine B; because it will save the company about $19,315 a year
None of the above.
8. A project that will produce sales of $47,500 and increase cash expenses by $22,500. If the project is implemented, taxes will increase by $7,600. The additional depreciation expense will be $10,100. An initial cash outlay of $7,300 is required for net working capital. What is the amount of the operating cash flow using the top-down approach?
$10,100
$20,200
$18,200
$17,400
None of the above.
9. A project has average net income of $4,160 a year over its 4-year life. The initial cost of the project is $65,000 which will be depreciated using straightline depreciation to a zero book value over the life of the project. The firm wants to earn a minimal average accounting return of 11.65 percent. Should the project be accepted or rejected? What is the AAR?
Accepted; 10.24%.
Accepted; 11.08%.
Accepted; 12.80%.
Rejected; 10.24%.
None of the above.
10. Project A has an initial cost of $211,415 and projected cash flows of $121,300 in Year 1 and $176,300 in Year 2. Project B has an initial cost of $415,000 and projected cash flows of $187,500 in Year 1 and $236,600 in Year 2. The discount rate is 8.5 percent and the projects are independent. Which project(s), if either, should be accepted based on its profitability index value?
Accept both Project A and B
Reject both Project A and B
Accept Project A and reject Project B
Accept Project B and reject Project A
None of the above.
11. Which one of the following is the best example of two mutually exclusive projects?
Building a warehouse and a retail outlet side by side on company property
Buying sufficient inventory to stock both the warehouse and the retail outlet
Using the company’s sales force to sell items to both individuals and other retailers
Assigning an employee to work in the retail outlet rather than in the warehouse
None is a good example.
12. Acme is considering two independent projects.. Project A has a required rate of return is 11.25 percent while Project B has a required rate of return of 11.85 percent. Project A has an initial cost of $38,900 and cash inflows of $11,400, $16,900, and $26,200 for Years 1 to 3, respectively. Project B has an initial cost of $41,300 and cash inflows of $20,000 a year for three years. Which project(s), if either, should you accept?
Accept both A and B
Reject both A and B
Accept A and reject B
Accept B and reject A
None of the above.
13. Project A has an initial cost of $639,700 and projected cash flows of $288,000, $319,000, and $165,000 for Years 1 to 3, respectively. Project B has an initial cost of $411,200 and projected cash flows of $186,000, $178,000, and $145,000 for Years 1 to 3, respectively. What is the incremental IRR of these two mutually exclusive projects?
8.67%
10.93%
8.77%
1.06%
None of the above.
14. Acme is analyzing a proposed project using standard sensitivity analysis. The company expects to sell 4,500 units, Â±11 percent. The expected variable cost per unit is $13 and the expected fixed costs are $12,000. Cost estimates are considered accurate within a Â± 5 percent range. The depreciation expense is $5,000. The sale price is estimated at $22 a unit, Â±2 percent.
What is management’s best guess of the contribution margin value?
$2.67
$10.33
$9.00
$7.00
None of the above.
15. Which is true?
The sale of an asset creates an aftertax cash flow in an amount equal to the Sales price – Book value.
The sale of an asset creates an aftertax cash flow in an amount equal to the Sales price.
The sale of an asset creates an aftertax cash flow in an amount equal to the Sale price – Tax rate Ã— (Sales price – Book value).
The sale of an asset creates an aftertax cash flow in an amount equal to the Sales price + Tax rate Ã— (Sales price – Book value).
None of the above.
16. Which is true?
The internal rate of return is more reliable as a decision making tool than net present value when considering mutually exclusive projects.
The internal rate of return is the discount rate that makes the net present value of a project equal to one.
The internal rate of return is easier to apply than net present value when cash flows are unconventional.
The internal rate of return will provide the same accept/reject decision as NPV when cash flows are conventional and projects are independent.
None of the above.
17. Which is true?
The most valuable investment given up if an alternative investment is chosen is referred to as a sunk cost.
The most valuable investment given up if an alternative investment is chosen is referred to as an opportunity cost.
The most valuable investment given up if an alternative investment is chosen is referred to as a salvage value expense.
The most valuable investment given up if an alternative investment is chosen is referred to as an equivalent annual cost.
None of the above.
18. Which is true?
All else constant, the accounting profit break-even level of sales will decrease when the fixed costs increase.
All else constant, the accounting profit break-even level of sales will decrease when the contribution margin decreases.
All else constant, the accounting profit break-even level of sales will decrease when the depreciation expense decreases.
All else constant, the accounting profit break-even level of sales will decrease when the variable costs per unit increase.
None of the above.
19. Acme has spent $134,000 on research developing a new product. For this product to now be manufactured, the firm will need to expand into an empty building that it currently owns. The firm was offered $229,000 last week for that building. An additional $342, 000 will be required for new equipment and building improvements. Labor and material costs are estimated at $4.98 per pair of shoes. Interest expense on the loan needed to finance the production of this new shoe will be $17,800 a year. Which one of these correctly identifies the sunk costs?
$229,000 value of the building
$134,000 for research
$229,000 value of the building plus $342,000 for new equipment and improvements
$17,800 for interest plus $134,000 for research
None of the above.
20. Acme is analyzing a proposed 3-year project using standard sensitivity analysis. The company expects to sell 12,000 units, Â±4 percent. The expected variable cost per unit is $7 and the expected fixed costs are $36,000. The fixed and variable cost estimates are considered accurate within a Â±6 percent range. The sales price is estimated at $14 a unit, Â±5 percent. The project requires an initial investment of $90,000 for equipment that will be depreciated using the straight-line method to zero over the project’s life. The equipment can be sold for $39,000 at the end of the project. The project requires $11,200 in net working capital for the three years. The discount rate is 11 percent and tax rate is 34 percent
What is the earnings before interest and taxes estimate under the expected case scenario?
$18,000
$24,000
$36,000
$48,000
None of the above.
21. Carl is concerned that his variable cost per unit projection for a project may not be reliable. What is true?
Monte Carlo simulation will help him determine the effect that an incorrect variable cost estimate will have on the final outcome of the project
Financial break-even analysis pwill help him determine the effect that an incorrect variable cost estimate will have on the final outcome of the project
Sensitivity analysis will help him determine the effect that an incorrect variable cost estimate will have on the final outcome of the project
Contribution margin analysis will help him determine the effect that an incorrect variable cost estimate will have on the final outcome of the project
None of the above
22. Acme expects to sell 5,000 units, Â±5 percent. The expected variable cost per unit is $8 and the expected fixed costs are $20,000. Cost estimates are considered accurate within a Â± 5 percent range. The depreciation expense is $6,000. The sale price is estimated at $18 a unit, Â±3 percent.
What is the sales revenue under the optimistic case scenario?
$75,000
$83,760
$88,000
$97,335
None of the above.
23. What is true?
Net Present Value can be ignored in project analysis because any expenditure is normally recouped by the end of the project.
Net Present Value requirements generally, but not always, create a cash outflow at the beginning of a project.
Net Present Value expenditures commonly occur at the end of a project.
Net Present Value is ignored in project analysis because any change in net working capital is a sunk cost.
None of the above.
24. Acne has fixed costs of $.63 per unit given an average daily sales level of 500 units. It charges $3.79 a unit for top-grade. The variable cost per unit is $2.99. The tax rate is 35 percent. The accounting profit break-even point is 487.5 units. What is the amount of the depreciation expense?
$67
$75
$90
$82
None of the above.
25. Which is true?
All else equal, an increase in employee salaries will increase the operating cash flow.
All else equal, an increase in office rent will increase the operating cash flow.
All else equal, an increase in building maintenance will increase the operating cash flow.
All else equal, an increase in equipment rental will increase the operating cash flow.
None of the above.
26. A cost-cutting project has an initial cost of $1,200 and annual costs of $380 for each year of the project’s 4-year life. Which is true?
The equivalent annual cost for this project is best described as the 4-year annuity payment that has the same net present value as the project’s costs given a stated discount rate.
The equivalent annual cost for this project is best described as the 4-year total of all costs divided by four.
The equivalent annual cost for this project is best described as the annual sales needed to offset these additional costs.
The equivalent annual cost for this project is best described as the lump sum payment at Time 0 that is equal to these additional costs at a given discount rate.
None of the above.
27. Which is true?
A company that uses the MACRS system of depreciation cannot expense any of the cost of a new asset during the first year of the asset’s life.
A company that uses the MACRS system of depreciation will expense the entire cost of an asset over the asset’s class life.
A company that uses the MACRS system of depreciation will fully depreciate most assets over a 3-year period.
A company that uses the MACRS system of depreciation will forgo any benefits normally derived from the depreciation tax shield.
None of the above.
28. Which is true?
The cash flows of a project should include all financing costs related to new debt acquired to finance the project.
The cash flows of a project should include all sunk costs and opportunity costs.
The cash flows of a project should be applied to the year when the related expense or income is recognized by GAAP.
The cash flows of a project should include all incremental costs, including opportunity costs.
None of the above.
29. Acme is considering a making widgets. The project will cost $49,100 in startup costs and is expected to produce cash flows of $47,500 in Year 1 and $18,600 in Year 2. The toy will be discontinued after the second year. The discount rate assigned to the toy is 14.9 percent. Should the toy be produced? What is the IRR?
Yes; 26.65%
Yes; 41.79%
Yes; 38.03%
No; 26.65%
None of the above.
30. Acme is considering a project using a discount rate of 12 percent. If the firm starts the project today, it will incur an initial cost of $38,260 and will receive cash inflows of $18,320 a year for three years. If the firm waits one year to start the project, the initial cost will rise to $40,500 and the cash flows will increase to $18,640 a year for three years. What is the value of the option to wait?
$848.29
-$1,471.42
$489.20
-$681.04
None of the above.
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