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As the discount rate applied to a single amount (lump sum) future value increases, the present value:
a.
Stays the same
b.
Increases by some amount
c.
Doubles
d.
Decreases
d.
Decreases
Above-average -risk
projects are assigned a cost of capital that is higher than the corporate cost of capital.
True or False
True
Which of the following statements about payback (payback period) are correct?
a.
Payback is a measure of time to breakeven.
b.
Payback is a rough measure of risk.
c.
Payback is a rough measure of liquidity.
d.
Answers (a) and (b) are correct.
e.
Answers
(a), (b), and (c) are correct.
e.
Answers (a), (b), and (c) are correct.
The time value of money principle is based on the fact that money expected to be received in the future is worth more than cash in-hand.
True or False
False
Two years ago, you invested $1,000 in a healthcare stock. Your return during the first year was -50 percent, while your return in the second year was +50 percent. Your investment is now worth $1,000.
True or False
False
Which of the following statements concerning financial risk is not correct?
a.
Risk requires the possibility of at least one return less favorable than the expected return.
b.
Risk requires the possibility of more than one return.
c.
Risk is one of
the determinants of the project cost of capital (discount rate).
d.
The higher the risk, the lower the project cost of capital (discount rate).
d.
The higher the risk, the lower the project cost of capital (discount rate).
A net present value of zero ($0) signfies that the project's cash inflows will: (1) be sufficient to recover the project's costs, and; (2) earn a return equal to the project's opportunity cost of capital.
True or False
True
Which of the following statements about capital rationing is correct?
a.
Capital rationing occurs when a business does not have the capital necessary to fund all acceptable projects.
b.
Capital rationing occurs when a business has more capital available than needed to fund all acceptable projects.
c.
Under capital rationing, the typical
approach is to accept all projects with negative net present values.
d.
Answers (a) and (b) are correct.
a.
Capital rationing occurs when a business does not have the capital necessary to fund all acceptable projects.
Which of the following statements about the post-audit is (are) correct?
a.
It may improve forecasts.
b.
It may improve operations.
c.
It may reduce
losses.
d.
Answers (a) and (b) are correct.
e.
Answers (a), (b), and (c) are correct.
e.
Answers (a), (b), and (c) are correct.
Capital rationing is a condition where an organization has fewer acceptable projects than funds needed to undertake those projects.
True or False
False
Scenario
analysis examines the impact of several potential economic outcomes on the profitability of project.
True or False
True
Which of the following statements about project classifications is (are) correct?
a.
Projects are classified by purpose, such as replacement.
b.
Projects are classified by size, such as less than $1 million.
c.
Projects are classified by life, such as less than
five years.
d.
Answers (a) and (b) are correct.
e.
Answers (a), (b), and (c) are correct.
d.
Answers (a) and (b) are correct.
The internal rate of return of a capital investment:
a.
Changes when the cost of capital changes
b.
Must exceed the project cost of capital to make the investment financially acceptable
c.
Measures the dollar profitability of a project
d.
Must be less than the project cost of capital to make the investment financially acceptable
e.
Measures the length of time it takes a business to recover its initial investment in the project
b.
Must exceed the project cost of capital to make the investment financially acceptable
Which of the following statements about project cash flow estimation is not correct?
a.
Inflation
effects should be included.
b.
The effects on a business's other projects should be included.
c.
Opportunity costs should be included.
d.
Sunk costs should be included.
d.
Sunk costs should be included.
For investor-owned businesses, a capital investment financial analysis identifies projects expected to contribute to owner (shareholder) wealth.
True or False
True
The best way to incorporate inflation effects in a project's cash flows is to assume neutral inflation- that is, to assign the same rate of inflation to all cash flows.
True or False
False
Although sensitivity analysis has its limitations with regard to project risk assessment, it is useful for identifying cash flow components that are most critical to the analysis (i.e., have the largest impact on profitability).
True or False
True
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