3010 Pexam3s01.mconly

3010 - FNCE 3010 Practice Exam 3 Name S013 1 A company is considering an expansion project The companys CFO plans to calculate the projects NPV by

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FNCE 3010 Practice Exam 3 Name: S013 1. A company is considering an expansion project. The company’s CFO plans to calculate the project’s NPV by discounting the relevant cash flows (which include the initial up- front costs, the operating cash flows, and the terminal cash flows) at the company’s cost of capital (WACC). Which of the following factors should the CFO include when estimating the relevant cash flows? a. Any sunk costs associated with the project. b. Any interest expenses associated with the project. c. Any opportunity costs associated with the project. d. Answers b and c are correct. e. All of the answers above are correct. 2. Other things held constant, which of the following would increase the NPV of a project being considered? a. A shift from MACRS to straight-line depreciation. b. Making the initial investment in the first year rather than spreading it over the first 3 years. c. A decrease in the discount rate associated with the project. d. The sale of the old machine in a replacement decision at a capital loss rather than at book value e. An increase in required working capital. 3. Which of the following statements is correct? a. An asset that is sold for less than book value at the end of a project’s life will generate a loss for the firm and will cause an actual cash outflow attributable to the project. b. Only incremental cash flows are relevant in project analysis and the proper incremental cash flows are the reported accounting profits because they form the true basis for investor and managerial decisions. c. It is unrealistic to expect that increases in net working capital that are required at the start of the expansion project are simply recovered at the project’s completion. Thus, these cash flows are included only at the start of a project. d. Equipment sold for more than its book value at the end of a project’s life will increase income and, despite increasing taxes, will generate a greater cash flow than if the same asset is sold at book value. e. All of the statements above are false. 4. Suppose the firm’s WACC is stated in nominal terms, but the project’s expected cash flows are expressed in real dollars. In this situation, other things held constant, the calculated NPV would a. Be correct. b. Be biased downward. c. Be biased upward. d. Possibly have a bias, but it could be upward or downward. e. More information is needed; otherwise, we can make no reasonable statement. 1
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5. Given the following information, what is the required cash outflow associated with the acquisition of a new machine; that is, in a project analysis, what is the cash outflow at t = 0? Purchase price of new machine
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This note was uploaded on 04/28/2011 for the course FIN 1 taught by Professor Prakash during the Spring '11 term at IIT Bombay.

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3010 - FNCE 3010 Practice Exam 3 Name S013 1 A company is considering an expansion project The companys CFO plans to calculate the projects NPV by

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