1. The future value of a dollar _________ as the interest rate increases and _________ the farther in the future an initial deposit is to be received.

(a) decreases; decreases.

(b) decreases; increases.

(c) increases; increases.

(d) increases; decreases.

2. Find the future value at the end of year 3 of the following stream of cash flows received at the end of each year, assuming the firm can earn 17 percent on its investments.

(a) $20,724

(b) $20,127

(c) $23,550

(d) $23,350

3. The present value of $1,000 received at the end of year 1, $1,200 received at the end of year 2, and $1,300 received at the end of year 3, assuming an opportunity cost of 7 percent, is:

(a) $2,500.

(b) $3,043.

(c) $6,516.

(d) $2,856.

4. Jean Chretien plans to fund his individual retirement account (IRA) with the maximum contribution of $2,000 at the end of each year for the next 20 years. If Jean can earn 12 percent on his contributions, how much will he have at the end of the twentieth year?

(a) $19,292

(b) $14,938

(c) $40,000

(d) $144,104

5. A man owns stock in a company which has consistently paid a growing dividend over the last 10 years. The first year he owned the stock, he received $4.50 per share and in the 10th year, he received $4.92 per share. What is the growth rate of the dividends over the last 10 years?

(a) 5 percent.

(b) 4 percent.

(c) 2 percent.

(d) 1 percent.

6. A ski chalet in Aspen now costs $250,000. Inflation is expected to cause this price to increase at 5 percent per year over the next 10 years before Lois and Clark retire from successful investment banking careers. How large an equal annual end-of-year deposit must be made into an account paying an annual rate of interest of 13 percent in order to buy the ski chalet upon retirement?

(a) $ 8,333

(b) $13,572

(c) $25,005

(d) $22,109

7. Ron McDonald borrows $10,500 from the bank at 11 percent annually compounded interest to be repaid in six equal annual installments. The interest paid in the first year is:

(a) $1,155.

(b) $2,481.

(c) $144.

(d) $1,327.

8. In comparing an ordinary annuity and an annuity due, which of the following is true?

(a) The future value of an annuity due is always greater than the future value of an otherwise identical ordinary annuity.

(b) The future value of an ordinary annuity is always greater than the future value of an otherwise identical annuity due.

(c) The future value of an annuity due is always less than the future value of an otherwise identical ordinary annuity, since one less payment is received with an annuity due.

(d) All things being equal, one would prefer to receive an ordinary annuity compared to an annuity due.

9. How long would it take for you to save an adequate amount for retirement if you deposit $40,000 per year into an account starting today that pays 12 percent per year if you wish to have a total of $1,000,000 at retirement?

(a) 11.5 years.

(b) 12.23 years.

(c) 14.5 years.

(d) 16.5 years.

10. Which asset would the risk-averse financial manager prefer?

(a) Asset A.

(b) Asset B.

(c) Asset C.

(d) Asset D.

11. The _________ the coefficient of variation, the _________ the risk.

(a) lower; lower.

(b) higher; lower.

(c) lower; higher.

(d) higher; higher.

12. Last year a woman bought 100 shares of Dallas Corporation common stock for $53 per share. During the year she received dividends of $1.45 per share. The stock is currently selling for $60 per share. What rate of return did she earn over the year?

(a) 11.7 percent.

(b) 13.2 percent.

(c) 14.1 percent.

(d) 15.9 percent.

13. Using the values in the table below, the expected value, standard deviation of returns, and coefficient of variation for asset A are:

(a) 10 percent, 8 percent, and 1.25, respectively.

(b) 9.33 percent, 8 percent, and 2.15, respectively.

(c) 9.35 percent, 4.68 percent, and 2, respectively.

(d) 9.35 percent, 2.76 percent, and 0.3, respectively.

14. In general, the lower (less positive and more negative) the correlation between asset returns,

(a) the less the potential diversification of risk.

(b) the greater the potential diversification of risk.

(c) the lower the potential profit.

(d) the less the assets have to be monitored.

15. As randomly selected securities are combined to create a portfolio, the _________ risk of the portfolio decreases until 20 to 40 securities are included. The portion of the risk eliminated is _________ risk, while that remaining is _________ risk.

(a) diversifiable; nondiversifiable; total.

(b) relevant; irrelevant; total.

(c) total; diversifiable; nondiversifiable.

(d) total; nondiversifiable; diversifiable.

16. When making replacement decisions, the development of relevant cash flows is complicated when compared to expansion decisions, due to the need to calculate

_________ cash inflows.

(a) conventional

(b) non-conventional

(c) incremental

(d) initial

17. A corporation is considering expanding operations to meet growing demand. With the capital expansion, the current accounts are expected to change. Management expects cash to increase by $20,000, accounts receivable by $40,000, and inventories by $60,000. At the same time, accounts payable will increase by $50,000, accruals by $10,000, and long-term debt by $100,000. The change in net working capital is

(a) an increase of $120,000.

(b) a decrease of $40,000.

(c) a decrease of $120,000.

(d) an increase of $60,000.

18. A corporation has decided to replace an existing asset with a newer model. Two years ago, the existing asset originally cost $30,000 and was being depreciated under MACRS using a five-year recovery period. The existing asset can be sold for $25,000. The new asset will cost $75,000 and will also be depreciated under MACRS using a five-year recovery period. If the assumed tax rate is 40 percent on ordinary income and capital gains, the initial investment is _________.

(a) $42,000

(b) $52,440

(c) $54,240

(d) $50,000

19. The evaluation of capital expenditure proposals to determine whether they meet the firm's minimum acceptance criteria is called

(a) the ranking approach.

(b) an independent investment.

(c) the accept-reject approach.

(d) a mutually exclusive investment.

20. A corporation is evaluating the relevant cash flows for a capital budgeting decision and must estimate the terminal cash flow. The proposed machine will be disposed of at the end of its usable life of five years at an estimated sale price of $15,000. The machine has an original purchase price of $80,000, installation cost of $20,000, and will be depreciated under the five-year MACRS. Net working capital is expected to decline by $5,000. The firm has a 40 percent tax rate on ordinary income and long-term capital gain. The terminal

cash flow is

(a) $24,000.

(b) $16,000.

(c) $14,000.

(d) $26,000.

21. You are preparing to recommend a highly risky electronics manufacturing investment. Your MARR is 18%. The first alternative has a return of 21.3% and a payback of 5 years. The second has a return of 21.1% and a payback of 3 years. Both options require the same initial investment. Which one do you pick and why?

(a) You recommend the first alternative because it has a longer payback and hence you are getting paid back for a longer time.

(b) You recommend the second alterative because it has a lower return hence it must be lower risk.

(c) You recommend the first alternative because it has a substantially higher return hence you make more money.

(d) You recommend the second alternative because it has a shorter payback hence you get paid back quicker.

22. You are given the following financial data:

Simple payback occurs at the end of year:

a) 2

b) 3

c) 4

d) 8

23. When evaluating projects using internal rate of return,

(a) projects having lower early-year cash flows tend to be preferred at higher discount rates.

(b) projects having higher early-year cash flows tend to be preferred at higher discount rates.

(c) projects having higher early-year cash flows tend to be preferred at lower discount rates.

(d) the discount rate and magnitude of cash flows do not affect internal rate of return.

24. Two mutually exclusive projects A and B have IRR (A) = 15%, IRR (B) = 14%, and IRR (A-B) = 13%. Both projects require the same initial investment of $10,000 and have the same life of five years. Which project should be chosen at MARR = 12%?

a) Both projects

b) Project A

c) Project B

d) Neither project

25. A company is considering the purchase of one of three mutually exclusive projects. The firm's cost of capital is 12% and the initial investment and cash inflows over the life of each project are in the table below. You are asked to use the annualized net present value

approach to evaluate and rank the projects in descending order. The correct answer is:

(a) A, B, C

(b) C, B, A

(c) B, A, C

(d) B, C, A

**Cost Estimation and Financial Analysis**

1. The convention regarding the timing of payments used in the calculation of the time value of money assumes that the payments occur at the mid-point of the payment period.

2. Commercial borrowing is always based on the belief that the borrower can create value at a higher rate than the cost of money.

3. The larger the difference betwe en an asset's worst outcome f rom its best outcome, the higher the risk of the asset.

4. Mutually exclusive projects are those whose cash flows are unrelated to one another; the acceptance of one does not eliminate the others from further consideration.

5. Sunk costs are cash outlays that have already been made and therefore have no effect on the cash flows relevant to the current decision. As a result, sunk costs should not be included in a project's incremental cash flows.

6. One weakness of the payback method is its failure to recognize cash flows that occur after the payback period.

7. If the NPV of a project at MARR is negative, the project is definitely losing money.

8. Although differences in the magnitude and timing of cash flows explai n conflicting rankings under the NPV and IRR techniques, the underly ing cause is the implicit assumption concerning the reinvestment of intermediate cash inflows - i.e. cash inflows received prior to

the termination of a project.

9. Comparing mutually exclusive projects solely on the basis on their NPV is sufficient.

10. The Benefit-Cost Ratio method is most commonly used to evaluate public projects.

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