Question

The NPV profile graphs:

the project’s NPV over a range of discount rates.

the project’s IRR over a range of discount rates.

the project’s cash flows over

The NPV profile graphs:

the project’s NPV over a range of discount rates.

the project’s IRR over a range of discount rates.

the project’s cash flows over a range of NPVs.

the project’s IRR over a range of NPVs.

Question 2. 2.Which of the following statements is false? 

The IRR investment rule will identify the correct decision in many, but not all, situations.

By setting the NPV equal to zero and solving for r, we find the IRR.

If you are unsure of your cost of capital estimate, it is important to determine how sensitive your analysis is to errors in this estimate.

The simplest investment rule is the NPV investment rule.

Question 3. 3.Which of the following statements is false?

In general, the IRR rule works for a stand-alone project if all of the project’s positive cash flows precede its negative cash flows.

There is no easy fix for the IRR rule when there are multiple IRRs.

The payback rule is primarily used because of its simplicity.

No investment rule that ignores the set of alternative investment alternatives can be optimal.

Question 4. 4.You are trying to decide between three mutually exclusive investment opportunities. The most appropriate tool for identifying the correct decision is:

NPV.

profitability index.

IRR.

incremental IRR.

Question 5. 5.Which of the following statements is false? 

When evaluating a capital budgeting decision, the correct tax rate to use is the firm’s average corporate tax rate.

To determine the capital budget, firms analyze alternative projects and decide which ones to accept through a process called capital budgeting.

A new product typically has lower sales initially, as customers gradually become aware of the product.

Sunk costs have been or will be paid regardless of the decision whether or not to proceed with the project.

Question 6. 6.Which of the following statements is false? We begin the capital budgeting process by determining the incremental earnings of a project.

The marginal corporate tax rate is the tax rate the firm will pay on an incremental dollar of pre-tax income.

Investments in plant, property, and equipment are directly listed as expense when calculating earnings.

The opportunity cost of using a resource is the value it could have provided in its best alternative use.

Question 7. 7.Ford Motor Company is considering launching a new line of plug-in electric SUVs. The heavy advertising expenses associated with the new SUV launch would generate operating losses of $35 million next year. Without the new SUV, Ford expects to earn pre-tax income of $80 million from operations next year. Ford pays a 30% tax rate on its pre-tax income. The amount that Ford Motor Company owes in taxes next year without the launch of the new SUV is closest to __________.

$24.0 million

$56.0 million

$31.5 million

$13.5 million

Question 8. 8.Which of the following cash flows are relevant incremental cash flows for a project that you are currently considering investing in? 

The tax savings brought about by the project’s depreciation expense

The cost of a marketing survey you conducted to determine demand for the proposed project

Interest payments on debt used to finance the project

Research and development expenditures you have made

Question 9. 9.Which of the following questions is false? Net Working Capital = Current Assets – Current Liabilities.

Because depreciation is not a cash flow, we do not include it in the cash flow forecast.

Tax loss carry backs allow corporations to take losses during the current year and use them to offset income in future years.

Earnings are an accounting measure of firm performance.

Question 10. 10.Which of the following statements is false? 

We can use scenario analysis to evaluate alternative pricing strategies for our project.

Scenario analysis considers the effect on NPV of changing multiple project parameters.

The difference between the IRR of a project and the cost of capital tells you how much error in the cost of capital it would take to change the investment decision.

Scenario analysis breaks the NPV calculation into its component assumptions and shows how the NPV varies as each one of the underlying assumptions change.