All of the following are incremental costs of commuting to college

Question 1

All of the following are incremental costs of commuting to college in your hometown
except:
Answer
Costs of books
Tuition
Student fees
Room and
board
4 points
Question 2

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Tanya believes noncash expenses should be ignored when making capital budgeting
decisions because they have no impact on cash flows. She is mistaken because:
Answer
noncash expenses increase net income and must be added back to
appropriately calculate cash flows
noncash expenses decrease the cost of goods sold and therefore increase
cash flows
noncash expenses reduce taxable income, decrease tax payments, and
increase cash flows
noncash expenses (such as depreciation) allow a firm to spread the cost of
fixed assets over many years and therefore balance cash outflows
noncash expenses increase net working capital and therefore are cash
outflows
4 points
Question 3

Which of the following should not be included as a cash flow in evaluating a new piece of
equipment for manufacturing?
Answer
Portion of current fixed administrative costs
Salvage value
Cost reductions
Reduction in production from other equipment if new equipment is put in
place
4 points
Question 4

A(n) __________ in working capital represents a(n) __________.
Answer
increase; cash inflow
decrease; cash inflow
decrease; cash outflow
increase; equivalent annual cost
(EAC)
decrease; equivalent annual cost
(EAC)
4 points
Question 5

Why is accelerated depreciation (MACRs) useful for a firm?
Answer
Since depreciation is not a cash flow, it is not useful, merely required by the
tax code

Accelerating the depreciation reduces book value; increasing book-value
based return ratios
MACRs is consistently applied in other countries
MACRS reduces taxes and increases cash flow
4 points
Question 6

The acronym MACRS stands for:
Answer
Modified Accelerated Curve Residual
System
Modified Accelerated Curve Resource
Source
Most Accelerated Cost Residual System
Modified Accelerated Cost Recovery
System
4 points
Question 7

Everafter, Inc. is considering two substitutable devices to replace aging, low-tech
equipment. The first device costs less initially, will last 7 years, and has higher
maintenance costs than the second device. The second device will last 8 years. When
evaluating these alternatives, it would be most efficient to find the device with:
Answer
the lowest equivalent annual cost
(EAC)
the highest equivalent annual cost
(EAC)
the lowest net present value (NPV)

the highest net present value (NPV)
the lowest maintenance costs
4 points
Question 8

When evaluating a firm with excess capacity, which of the following statements is false?
Answer
Excess capacity is often treated as a free asset.
Firms operating at less than full capacity can effectively measure the cost of
using excess capacity.
The cost of using an asset with excess capacity is zero because there is no
short run marginal cost associated with using the asset.
The cost of using the asset must consider the fact that more capacity may be
needed more quickly in the future.
4 points
Question 9

Which statement concerning cash flows included in the capital budgeting process is
accurate?
Answer
An increase in the cash account would represent a cash inflow when
considering a working capital change.
Depreciation expense is included as a cash outflow.
Year-end profits represent the bottom line cash flow used for each year of the
project’s life.
Only incremental cash flows are considered.
4 points
Question 10

When a U.S. firm uses accelerated depreciation for tax purposes and straight-line
depreciation for financial reporting:
Answer
only accelerated depreciation should be used when determining project cash
flows
only straight-line depreciation should be used when determining project cash
flows
NPV analysis of a given project must consider cash flows under both
depreciation methods
potential tax benefits are not being maximized
someone might go to jail
4 points
Question 11

Ideally, weights in the WACC formula should be determined using
Answer
market value of equity and market value of
debt
book value of equity and market value of
debt
market value of equity and book value of
debt
book value of equity and book value of debt
4 points
Question 12

Identifying a(n) __________ is tantamount to identifying future points at which it may be
possible for managers to create and sustain competitive advantage.

Answer
asset beta
real option
debt beta
pure play
project
beta
4 points
Question 13

A real estate developer considers buying land that currently has substantial pine trees
(pine trees are a desired timber). The development will not occur for several years and is
somewhat flexible, but when it does, the pine trees will be harvested. The developer
determines that the price uncertainty of the timber will increase over the next few years
(future prices are expected to be very volatile). Does this increase or decrease the value
of the land to the developer?
Answer
It decreases the value of the land as the timber price is more uncertain
It decreases the value of the land because increased volatility increases the
discount rate
It decreases the value of the land because the value of the timber option
decreases
It increases the value of the land because the value of the timber option
increases
4 points
Question 14

Which of the following would explain a positive NPV calculation?
Answer

Perfect competition
Perfect capital
markets
Capital market
frictions
Barriers to entry
4 points
Question 15

Operating and financial leverage may exist for firms. Which of the following statements is
accurate concerning leverage?
Answer
The presence of common equity creates financial leverage.
The presence of high levels of variable costs creates operating
leverage.
The presence of higher sales prices creates financial leverage.
The presence of debt creates financial leverage.
4 points
Question 16

All of the following are examples of real options facing corporations EXCEPT:
Answer
Expansion options
Abandonment options
Follow-on investment
options
Executive stock options

Flexibility options
4 points
Question 17

If the firm applies its WACC to all projects, it will tend to accept some negative-NPV
projects that are
Answer
of shorter lifetime than the firm’s existing
operations
of longer lifetime than the firm’s existing
operations
riskier than the firm’s existing operations
Safer than the firm’s existing operations
4 points
Question 18

Requiring that all projects with risk comparable to that of the firm as a whole earn at least
the __________ means that firms will only invest in projects that have positive NPVs.
Answer
Operational
efficiency
Cost of debt
Cost of equity
WACC
4 points
Question 19

Two firms have the same asset beta but different equity betas. The direct cause is likely:
Answer
The importance of variable costs varies across these
firms
The firms have different proportions of debt relative to
equity
One firm’s sales are more cyclical than the other
The importance of variable costs is the same across
these firms
4 points
Question 20

Which of the following is not a competitive advantage for a firm?
Answer
superior engineering
superior R & D
low-cost manufacturing
process
unique marketing programs
superior executive
compensation