1. In essence, capital budgeting is the process of:
a. Deciding what to do with the firm’s money
b. Deciding how much capital the firm needs
c. Deciding where to get the money for capital investment projects
d. Deciding when to invest in a new project
2. Which of the following cash flows is an “incremental cash flow” for the purposes of capital budgeting?
a. Expenditures on plant and equipment for a new project
b. R& D expenditures for a new project during the last three years
c. Dividend payments
d. Reduction of a competitor’s sales as a result of the your company’s introduction of a new product
3. In capital budgeting, the payback period is the:
a. Amount of time it takes to receive all the future cash flows from a project
b. Amount of time it takes to pay back any money borrowed to finance the project
c. Amount of time it take for the project to be completed
d. Amount if time it takes to recoup the initial investment for the project
4. The Seattle Corporation has been presented with an investment opportunity which will yield cash flows of $30,000 per year in Years 1 through 4, $35,000 per year in Years 5 through 9, and $40,000 in Year 10. This investment will cost the firm $150,000 today, and the firm's cost of capital is 10 percent. At what point will the initial investment be paid back?
a. at the end of the 4th year
b. at the end of the 5th year
c. at the end of the 6th year
d. at the end of the 7th year
5. Consider the following income statement and answer the question that follows:
Sales (100 units)..............$200
Variable costs ($.20 ea)......20
Fixed Costs.......................80
EBIT................................100
Interest Expense................30
EBT.................................70
Income tax.......................24
Net Income.......................46
What is the firm’s Breakeven Point in units?
a. 1
b. 45
c. 56
d. 2,000
6. The net present value of an investment is its present value minus its future value.
a. True
b. False
7. If the NPV of a proposed project is positive, the NPV amount represents:
a. The amount of profit the firm will make if it adopts the project
b. The amount of cash that the project will produce if adopted
c. The amount of value that will be added to the firm if the project is adopted
d. The project’s expected rate of return
8. Joe the cut-rate bond dealer has offered to sell you a ten year zero-coupon bond for $300. (Remember, zero-coupon bonds pay their owners $1,000 at maturity and involve no other cash flows other than the purchase price.) If your required rate of return for cut-rate bonds is 20%, what is the NPV of Joe's deal?
a. about $161
b. about -$138
c. about $700
d. about -$200
e. about $1096
9. When using the IRR method to evaluate investments, those with positive IRRs are accepted and those with negative IRRs are rejected.
a. True
b. False
10. You've decided to give up playing the stock market and buy some zero-coupon bonds from Joe the cut-rate bond dealer instead. (Remember, zero-coupon bonds because they pay off a known amount, $1,000, at maturity and involve no other cash flows other than the purchase price.) Assume your required rate of return is 12%. If you buy some 10-year zero coupon bonds for $400 each today will the bonds meet your return requirements?
a. Yes
b. No
c. It depends