Practice Midterm 2 - Practice Midterm 2 with solutions i...

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Practice Midterm 2 with solutions i . Which of the following statements is CORRECT? a. Since depreciation is not a cash expense, it plays no role in capital budgeting. b. Under current laws and regulations, corporations must use straight line depreciation for all assets whose lives are 3 years or longer. c. Under MACRS depreciation, firms write off assets slower than they would under straight line depreciation, and as a result projects’ forecasted NPVs are normally lower than they would be if straight line depreciation were permitted for tax purposes. d. Under MACRS depreciation, firms can write off assets faster than they could under straight line depreciation, and as a result projects’ forecasted NPVs are normally lower than they would be if straight line depreciation were permitted for tax purposes. e. Under MACRS depreciation, firms can write off assets faster than they could under straight line depreciation, and as a result projects’ forecasted NPVs are normally higher than they would be if straight line depreciation had to be used for tax purposes. ii . Which of the following statements is CORRECT? a.If a firm is found guilty of cannibalization in a court of law, then it is judged to have taken unfair advantage of its competitors . Thus cannibalization is dealt with by society through the antitrust laws. b.If a firm is found guilty of cannibalization in a court of law, then it is judged to have taken unfair advantage of its customers . Thus cannibalization is dealt with by society through the antitrust laws. c. If cannibalization exists, then the cash flows associated with the project must be increased to offset these effects. Otherwise, the calculated NPV will be biased downward. d.If cannibalization is determined to exist, then this means that the calculated NPV considering cannibalization will be higher than the NPV that does not recognize these effects. e.Cannibalization is a type of externality that is not against the law because any harm it causes is done to the firm itself. iii . A company is considering a proposed expansion to its facilities. Which of the following statements is CORRECT? a. In calculating the project's operating cash flows, the firm should not deduct financing costs such as interest expense, because financing costs are handled by discounting at the WACC. If interest was deducted in the cash flow estimation, it would thus be “double counted.” b. Since depreciation is a non-cash expense, the firm does not need to know the depreciation rate to calculate the operating cash flows. c. When estimating the project’s operating cash flows, it is important to include any opportunity costs and sunk costs, but the firm should ignore cash flows from externalities since they are accounted for elsewhere. d. Capital budgeting analysis should be based on before-tax cash flows.
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This note was uploaded on 04/20/2008 for the course BUS 4243 taught by Professor Marko.tengesdal during the Spring '08 term at Texas Woman's University.

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Practice Midterm 2 - Practice Midterm 2 with solutions i...

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