Question : 65) The most frequently encountered error when accounting for inflation in : 1196198

 

65)

The most frequently encountered error when accounting for inflation in capital budgeting is 65)

______ A)

determining the nominal discount rate. B)

keeping net cash flows in real terms and using a nominal discount rate. C)

keeping net cash flows in nominal terms and using a real discount rate. D)

increasing the nominal rate by the inflation rate. E)

determining the amount of net cash flows after taxes.

66)

A company’s General Ledger recorded sales of $545,000 last year, when the inflation rate adjusted for the year, was 4.0%. If the company’s required rate of return was 10%, what are the real cash flows, and the nominal cash flows, respectively? 66)

______ A)

$478,070 and $514,151 B)

$524,038 and $545,000 C)

$514,151 and $495,455 D)

$495,455 and $545,000 E)

$478,070 and $545,000

67)

The required rate of return is a critical variable in discounted cash flow analysis because it 67)

______ A)

is the firm’s after-tax discount rate. B)

equals the accrual accounting rate of return, net of tax. C)

is the rate of return that the firm forgoes by investing in a particular project rather than investing in an alternative project of comparable risk. D)

sets the minimum which management will accept for a capital budgeting decision. E)

measures the risk of the return.

68)

Companies adjust for risk in capital budgeting by all of the following methods EXCEPT 68)

______ A)

adjusting the estimated future cash flows. B)

changing the level of amortization to an accelerated method. C)

varying the payback period. D)

adjusting the required rate of return. E)

estimating the probability distribution of future cash flows.

69)

Which of the following statements about non-profit organizations and capital budgeting is TRUE? 69)

______ A)

Non-profit organizations discounted cash-flow analysis for short-term projects almost exclusively. B)

In the non-profit sector, there is a tendency to cut capital-budget projects first when there is a strong push to balance a budget or cut a deficit. C)

Cost-benefit analysis is more important to non-profit organizations than capital budgeting analysis. D)

Because non-profit organizations are funded each year, they do not find capital budgeting to be worthwhile on a cost-benefit basis. E)

Only profit organizations must have required rates of return for capital budgeting decisions.

70)

Using the certainty equivalent approach means that 70)

______ A)

the expected cash flows are reduced for projects perceived to have higher risk. B)

the expected cash flows are increased and the required rate of return is increased for projects perceived to have higher risk. C)

the expected cash flows are increased for projects perceived to have higher risk. D)

the expected cash flows are reduced and the required rate of return is increased for projects perceived to have higher risk. E)

the required rate of return is increased for projects perceived to have higher risk.

71)

The excess present value index is 71)

______ A)

the total value of future cash flows divided by the number of years of the investment. B)

also called the certainty equivalent approach. C)

the total present value of future net cash inflows divided by the total present value of the initial investment. D)

the investment divided by the payback period. E)

the amount that present value exceeds future value in a decision model divided by the payback period.

72)

For project Gemini of Space Company the net investment was $400,000. The net present value of all future net cash inflows was $800,000. The company’s tax rate is 40 percent. The profitability index was 72)

______ A)

0.50 B)

1.20 C)

1.60 D)

0.83 E)

2.00

73)

For the capital budgeting decision regarding the acquisition of a new piece of equipment the following is available: investment, $60,000; present value of net cash inflows, $40,000; cash-flow tax savings from CCA, $20,000. What is the excess present value index? 73)

______ A)

3.00 B)

0.67 C)

1.50 D)

0.00 E)

There is insufficient data to determine the excess present value index.

74)

Which of the following is FALSE concerning the profitability index? 74)

______ A)

Profitable projects are indicated by a profitability index of greater than 100%. B)

It measures the profit per dollar invested. C)

It is helpful when investment funds are limited. D)

It measures the profit per dollar invested, and profitable projects are indicated by a profitability index of greater than 100%. E)

It assumes that risk is equal in each alternative.

 

75)

Which of the following statements is FALSE? 75)

______ A)

The internal rate of return method can rank projects differently from the net present value method if the alternative projects have unequal lives, or unequal investments. B)

The net present value method always indicates the project that maximizes the net present value of present and future cash flows. C)

The internal rate of return assumes that the reinvestment rate is equal to the indicated rate of return. D)

The internal rate of return method can rank projects differently from the net present value method if the alternative projects have uneven lives. E)

The profitability index is superior to the internal rate of return on small projects.

 

 

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