Class:  FIN 101  Business Finance 
Subject:  Finance 
University:  California State University  Sacramento 
Term:  Fall 2013 
net present value
the internal rate of return.
operating income less taxes plus depreciation
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.
evaluating investment alternatives.
Collection of data
The payback method does not consider the time value of money.
payback ignores the time value of money.
a and b.
Investment X should be selected
Machine A
uses payback period analysis.
More than $50,000 and less than $60,000
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 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 aftertax 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 aftertax cash flows for the project?  18000 
Which of the following is not a timeadjusted 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 
Front 
Back 


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 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 aftertax 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 aftertax cash flows for the project?  18000  
Which of the following is not a timeadjusted 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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