Q: Which formula correctly calculates the after-tax salvage value (ATSV) of an asset sold at the end of a project?

$$\text{ATSV} = \text{Salvage Value} - T \times (\text{Salvage Value} - \text{Book Value})$$

Question 1

Which of the following statements best describes the Net Present Value (NPV) method for evaluating investment projects?

Accepted Answer

NPV is the present value of all future cash inflows minus the initial investment cost, representing the net gain in wealth.

Question 2

A project has the following cash flows: Year 0: $$-100, Year 1: 10$$, Year 2: $$60, Year 3: 80. If $$the required rate of return is 10%, what is the NPV of the project? (Round to two decimal places)

Accepted Answer

$18.78

Question 3

Which of the following is NOT a limitation of the payback period method?

Accepted Answer

It always provides the same project ranking as NPV.

Question 4

Given the following information, calculate the payback period for a project: Initial investment = $$100, Year 1 cash flow = 10$$, Year 2 cash flow = $$60, Year 3 cash flow = 80.$$

Accepted Answer

$$2.375$$ years

Question 5

Which of the following best describes a sunk cost in capital budgeting?

Accepted Answer

A cost that has already been incurred and cannot be recovered, regardless of the project decision.

Question 6

A company is considering using an idle machine for a new project. The machine could be sold for $5,000 if not used. What is the opportunity cost associated with using the machine for the project?

Accepted Answer

$5,000, because this is the value forgone by not selling the machine.

Question 7

Which formula correctly calculates the after-tax salvage value (ATSV) of an asset sold at the end of a project?

Accepted Answer

$$	ext{ATSV} = 	ext{Salvage Value} - T 	imes (	ext{Salvage Value} - 	ext{Book Value})$$

Question 8

Which of the following statements about the Internal Rate of Return (IRR) is TRUE?

Accepted Answer

IRR is the discount rate that makes the NPV of a project equal to zero.

Question 9

A project has a profitability index (PI) of 1.2. What does this indicate?

Accepted Answer

The present value of inflows is 1.2 times the present value of outflows.

Question 10

Which of the following is a relevant cash flow when evaluating a new project?

Accepted Answer

Incremental cash flows

Question 11

A firm is evaluating two mutually exclusive projects. Project A has an NPV of $$18.78 and Project B has an NPV of 19.98. $$Which project should the firm choose?

Accepted Answer

Project B, because it has the higher NPV.

Question 12

Which of the following best describes erosion (cannibalization) costs?

Accepted Answer

Costs that arise when a new project reduces the sales of existing products.

Question 13

If a company increases its net working capital by $20,000 at the start of a project and recovers it at the end, how should this be reflected in the project's cash flows?

Accepted Answer

As a $$20,000 outflow at the start and a 20$$,000 inflow at the end.

Question 14

Which formula is used to calculate straight-line depreciation?

Accepted Answer

$$D = \frac{	ext{Initial Cost} - 	ext{Salvage Value}}{	ext{Useful Life}}$$

Question 15

A company issues a bond with a coupon rate of 7%, a face value of $$1,000, and a current price of 960. $$Coupons are paid semiannually. What is the approximate before-tax cost of debt (YTM)?

Accepted Answer

7.38%

Question 16

Which formula is used to calculate the cost of preferred stock?

Accepted Answer

$$R_p = \frac{D}{P}$$

Question 17

According to the Capital Asset Pricing Model (CAPM), which formula is used to calculate the cost of equity?

Accepted Answer

$$R_e = R_f + \beta (E(R_m) - R_f)$$

Question 18

Which of the following is TRUE about the Efficient Market Hypothesis (EMH)?

Accepted Answer

In a strong-form efficient market, prices reflect all public and private information.

Question 19

If a stock is purchased for $$25, pays a 2 $$dividend, and is sold one year later for $35, what is the total percent return?

Accepted Answer

48%

Question 20

Which of the following statements about geometric and arithmetic average returns is correct?

Accepted Answer

The geometric average return is always less than or equal to the arithmetic average return, unless all returns are equal.

Capital Budgeting and Cash Flow Analysis: Exam 3 Review Study Notes

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