Multiple Choice Questions(Enter your answers on the enclosed answer sheet)1) Zellars, Inc. is considering two mutually exclusive projects, A and B. Project A costs$75,000 and is expected to generate $48,000 in year one and $45,000 in year two.Project B costs $80,000 and is expected to generate $34,000 in year one, $37,000in year two, $26,000 in year three, and $25,000 in year four. Zellars, Inc.s requiredrate of return for these projects is 10%. The net present value for Project A is:a. $5,826b. $6,347c. $18,000d. $9,4582) Zellars, Inc. is considering two mutually exclusive projects, A and B. Project A costs$75,000 and is expected to generate $48,000 in year one and $45,000 in year two.Project B costs $80,000 and is expected to generate $34,000 in year one, $37,000in year two, $26,000 in year three, and $25,000 in year four. Zellars, Inc.s requiredrate of return for these projects is 10%. The net present value for Project B is:a. $18,097b. $42,000c. $34,238d. $21,3783) Zellars, Inc. is considering two mutually exclusive projects, A and B. Project A costs$75,000 and is expected to generate $48,000 in year one and $45,000 in year two.Project B costs $80,000 and is expected to generate $34,000 in year one, $37,000in year two, $26,000 in year three, and $25,000 in year four. Zellars, Inc.s requiredrate of return for these projects is 10%. The internal rate of return for Project B is:a. 18.64%b. 16.77%c. 20.79%d. 26.74%4) All of the following are criticisms of the payback period criterion except:a. Time value of money is not accounted for.b. It deals with accounting profits as opposed to cash flows.c. Cash flows occurring after the payback are ignored.d. None of the above; they are all criticisms of the payback period criteria.5) A significant disadvantage of the payback period is that it:a. Does not properly consider the time value of money.b. Is complicated to explain.c. Increases firm risk.d. Provides a measure of liquidity.Unit 3 Examination137Introduction to Financial Management6) A one-sign-reversal project should be accepted if it ________.a. generates an internal rate of return that is higher than the profitability indexb. produces an internal rate of return that is greater than the firms discount ratec. results in an internal rate of return that is above a projects equivalent annual annuityd. results in a modified internal rate of return that is higher than the internal rate ofreturn7) A significant disadvantage of the internal rate of return is that it:a. It does not give proper weight to all cash flows.b. It is expressed as a percentage.c. Does not fully consider the time value of money.d. Can result in multiple rates of return (more than one IRR).8) The recapture of net working capital at the end of a project will ________.a. increase terminal year free cash flowb. decrease terminal year free cash flow by the change in net working capital times thecorporate tax ratec. increase terminal year free cash flow by the change in net working capital times thecorporate tax rated. have no effect on the terminal year free cash flow because the net working capitalchange has already been included in a prior year9) Determine the five-year equivalent annual annuity of the following project if the appropriate discount rate is 16%:Initial Outflow = $150,000Cash Flow Year 1 = $40,000Cash Flow Year 2 = $90,000Cash Flow Year 3 = $60,000Cash Flow Year 4 = $0Cash Flow Year 5 = $80,000a. $9,872b. $8,520c. $7,058d. $9,454Unit 3 Examination138Introduction to Financial Management10) A project would be acceptable if:a. The net present value is positive.b. The payback is greater than the discounted equivalent annual annuity.c. The equivalent annual annuity is greater than or equal to the firms discount rate.d. The profitability index is greater than the net present value.11) Which of the following methods of evaluating investment projects can properly evaluate projects of unequal lives?a. The equivalent annual annuity.b. The internal rate of return.c. The payback.d. The net present value.12) Taste Good Chocolates develops a new candy bar and plans to sell each bar for $1.Taste Good predicts that 1 million candy bars will be sold in the first year if the newcandy bar is produced and sold, and includes $1 million of incremental revenues inits capital budgeting analysis. A senior executive in the company believes that 1 million candy bars will be sold, but lowers the estimate of incremental revenue to$700,000. What would explain this change?a. excessive marketing costs to sell the 1 million candy barsb. a lower discount ratec. cannibalization of 300,000 of Taste Good Chocolates other candy barsd. a higher selling price for the new candy bars13) JW Enterprises is considering a new marketing campaign that will require the additionof a new computer programmer and new software. The programmer will occupy anoffice in JWs current building and will be paid $8,000 per month. The softwarelicense costs $1,000 per month. The rent for the building is $4,000 per month. JWscomputer system is always on, so running the new software will not change thecurrent monthly electric bill of $900. The incremental expenses for the new marketing campaign are:a. $8,000 per month.b. $13,000 per month.c. $13,900 per month.d. $9,000 per month.14) Increased depreciation expenses affect tax-related cash flows bya. increasing taxable income, thus increasing taxes.b. decreasing taxable income, thus reducing taxes.c. pushing a corporation into a higher tax bracket.d. decreasing taxable income, with no effect on cash flow since depreciation is a noncash expense.Unit 3 Examination139Introduction to Financial Management15) When terminating a project for capital budgeting purposes, the working capital outlayrequired at the initiation of the project willa. not affect the cash flow.b. decrease the cash flow because it is an outlay.c. increase the cash flow because it is recaptured.d. decrease the cash flow because it is a historical cost.16) If depreciation expense in year one of a project increases for a highly profitablecompany, ________.a. net income decreases and incremental free cash flow decreasesb. net income increases and incremental free cash flow increasesc. the book value of the depreciating asset increases at the end of year oned. net income decreases and incremental free cash flow increases17) Which of the following is NOT considered in the calculation of incremental cashflows?a. tax saving due to increased depreciation expenseb. interest payments if new debt is issuedc. increased dividend payments if additional preferred stock is issuedd. both b and c18) If bankruptcy costs and/or shareholder under diversification are an issue, what measure of risk is relevant when evaluating project risk in capital budgeting?a. Total project riskb. Beta riskc. Capital rationing riskd. Contribution-to-firm risk19) The average cost associated with each additional dollar of financing for investmentprojects is ________.a. the incremental returnb. the marginal cost of capitalc. CAPM required returnd. the component cost of capitalUnit 3 Examination140Introduction to Financial Management20) A firm with positive MVA is ________.a. controlling operating expenses extremely wellb. using investments to produce what investors perceive to be positive net presentvaluesc. experiencing monetary volatility accelerationd. likely to have an unhappy group of common stockholders21) Two factors that cause the investors required rate of return to differ from thecompanys cost of capital are ________.a. taxes and riskb. taxes and transactions costsc. transactions costs and riskd. risk and opportunity cost differences22) Royal Mediterranean Cruise Lines common stock is selling for $22 per share. Thelast dividend was $1.20, and dividends are expected to grow at a 6% annual rate.Flotation costs on new stock sales are 5% of the selling price. What is the cost ofRoyals retained earnings?a. 12.09%b. 11.45%c. 11.78%d. 5.73%23) Cost of capital isa. the average cost of the firms assets.b. a hurdle rate set by the board of directors.c. the coupon rate of debt.d. the rate of return that must be earned on additional investment if firm value is toremain unchanged.Unit 3 Examination141Introduction to Financial Management24) Acme Conglomerate Corporation operates three divisions. One division involves significant research and development, and thus has a high-risk cost of capital of 15%.The second division operates in business segments related to Acmes core business,and this division has a cost of capital of 10% based upon its risk. Acmes core business is the least risky segment, with a cost of capital of 8%. The firms overall weighted average cost of capital of 11% has been used to evaluate capital budgeting projects for all three divisions. This approach willa. favor projects in the core business division because that division is the least risky.b. favor projects in the research and development division because the higher risk projects look more favorable if a lower cost of capital is used to evaluate them.c. not favor any division over the other because they all use the same company-wideweighted average cost of capital.d. favor projects in the related businesses division because the cost of capital for thisdivision is the closest to the firms weighted average cost of capital.25) Market value added is equal toa. the current stock price per share minus the par value per share of stock.b. the total market value of the company minus total invested capital.c. the total market value of the company less retained earnings.