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Finance: 5 multiple Choice Questions

(1) Suppose you have an investment that pays $75 at the end of the year for each of the next five. If your opportunity cost of money is 12%, how much is the investment worth?
A) $270.36
B) $375.00
C) $132.18
D) $250.71

(2) In computing the terminal value on a piece of equipment that will be disposed of in 5 years, which of the following WOULD NOT be considered in the analysis?
A) the net tax effect on losing the depreciation of the equipment from the disposal point on.
B) anticipated salvage value.
C) costs to be incurred in removing the equipment when it is disposed of
D) working capital that would be freed up by the termination of use of the equipment.

(3) A project showing a positive NPV may actually turn out to be unprofitable. Which of the following WOULD NOT be listed as a probable cause of this happening?
A) inflation rates were overestimated
B) future sales were underestimated
C) the nature bias toward choosing projects with overestimated cash flows
D) lack of consistency in how inflation rates were forecasted within the project

(4) Anchor Corporation is considering the purchase of a new machine that will boost sales by $50,000 a year, reduce costs by $60,000 per year and increase taxes by $8,000 a year. What's the annual after-tax cash flow associated with the new machine?
A) $18,000
B) -$18,000
C) $102,000
D) $118,000

(5) Incremental cash flows from proposed projects can be very difficult to pinpoint in a large company engaging in international trade. When analyzing capital budgeting, such a company should:
A) focus attention on those cash flows that are easiest to pin down - those for the project alone.
B) calculate the NPV using higher discount rates than normal since there tends to be more uncertainty in foreign projects.
C) project cash flows for the firm as a whole for analysis purposes.
D) ignore cross cash flow effects, particularly if they occur in foreign operations.

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Solution Preview

1 - A (you can use pv function on excel) (=pv(12%,5,75,0,0)

2 - B) anticipated ...

Solution Summary

The solution answers 5 multiple choice questions in finance.