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Class:FIN 101 - Business Finance
Subject:Finance
University:California State University - Sacramento
Term:Fall 2013
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The _________ assumes returns are reinvested at the cost of capital.

net present value


In using the internal rate of return method, it is assumed that cash flows can be reinvested at

the internal rate of return.


Cash flow can be said to equal

operating income less taxes plus depreciation


The reason cash flow is used in capital budgeting is because

A. cash rather than income is used to purchase new machines.

B. cash outlays need to be evaluated in terms of the present value of the resultant cash inflows.

C. to ignore the tax shield provided from depreciation ignores the cash flow provided by the machine

which should be reinvested to replace old worn out machines.

D. all of these.


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The first step in the capital budgeting process is idea development
Capital budgeting is primarily concerned with

evaluating investment alternatives.


An appropriate capital budgeting process requires that the following steps are taken in which order?

Collection of data


Assume a corporation has earnings before depreciation and taxes of $82,000, depreciation of $45,000, and that it has a 30 percent tax bracket. What are the after-tax cash flows for the company? 70,900
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Assume a project has earnings before depreciation and taxes of $15,000, depreciation of $25,000, and that the firm has a 30 percent tax bracket. What are the after-tax cash flows for the project? 18000
Which of the following is not a time-adjusted method for ranking investment proposals? Payback Method
Which of the following statements about the "payback method" is true?

The payback method does not consider the time value of money.


There are several disadvantages to the payback method, among them:

payback ignores the time value of money.


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The payback method has several disadvantages, among them:

a and b.


Assume a $6,500 investment and the following cash flows for two

Investment X should be selected


The Dammon Corp. has the following investment

Machine A


Suppose that interest rates (and, therefore, the firm's Weighted Average Cost of Capital) increase. This WOULD NOT CHANGE the capital budgeting choices a firm would make if it

uses payback period analysis.


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You buy a new piece of equipment for $7,360, and you receive a cash inflow of $1,000 per year for 10 years. What is the internal rate of return? 6%
You require an IRR of 14% to accept a project. If the project will yield $10,000 per year for 10 years, what is the maximum amount that you would be willing to invest in the project?

More than $50,000 and less than $60,000


Stone Inc. is evaluating a project with an initial cost of $9,500. Cash inflows are expected to be $1,500, $1,500 and $10,000 in the three years over which the project will produce cash flows. If the discount rate is 9%, what is the net present value of the project? more than 800
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 The _________ assumes returns are reinvested at the cost of capital.

net present value


 In using the internal rate of return method, it is assumed that cash flows can be reinvested at

the internal rate of return.


 Cash flow can be said to equal

operating income less taxes plus depreciation


 The reason cash flow is used in capital budgeting is because

A. cash rather than income is used to purchase new machines.

B. cash outlays need to be evaluated in terms of the present value of the resultant cash inflows.

C. to ignore the tax shield provided from depreciation ignores the cash flow provided by the machine

which should be reinvested to replace old worn out machines.

D. all of these.


 The first step in the capital budgeting process isidea development
 Capital budgeting is primarily concerned with

evaluating investment alternatives.


 An appropriate capital budgeting process requires that the following steps are taken in which order?

Collection of data


 Assume a corporation has earnings before depreciation and taxes of $82,000, depreciation of $45,000, and that it has a 30 percent tax bracket. What are the after-tax cash flows for the company?70,900
 Assume a project has earnings before depreciation and taxes of $15,000, depreciation of $25,000, and that the firm has a 30 percent tax bracket. What are the after-tax cash flows for the project?18000
 Which of the following is not a time-adjusted method for ranking investment proposals?Payback Method
 Which of the following statements about the "payback method" is true?

The payback method does not consider the time value of money.


 There are several disadvantages to the payback method, among them:

payback ignores the time value of money.


 The payback method has several disadvantages, among them:

a and b.


 Assume a $6,500 investment and the following cash flows for two

Investment X should be selected


 The Dammon Corp. has the following investment

Machine A


 Suppose that interest rates (and, therefore, the firm's Weighted Average Cost of Capital) increase. This WOULD NOT CHANGE the capital budgeting choices a firm would make if it

uses payback period analysis.


 You buy a new piece of equipment for $7,360, and you receive a cash inflow of $1,000 per year for 10 years. What is the internal rate of return?6%
 You require an IRR of 14% to accept a project. If the project will yield $10,000 per year for 10 years, what is the maximum amount that you would be willing to invest in the project?

More than $50,000 and less than $60,000


 Stone Inc. is evaluating a project with an initial cost of $9,500. Cash inflows are expected to be $1,500, $1,500 and $10,000 in the three years over which the project will produce cash flows. If the discount rate is 9%, what is the net present value of the project?more than 800
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