H
AAS
S
CHOOL
OF
B
USINESS
U
NIVERSITY
OF
C
ALIFORNIA
AT
BERKELEY
BA 103 S
UMMER
2007
A
VINASH
V
ERMA
P
RACTICE
P
ROBLEMS
1.
Cash flows for a project are estimated as:
A)
Cash flows after taxes
B)
Cash flows before taxes
C)
Accounting profits before taxes
D)
Accounting profits after taxes
Answer: A Page: 113 (Page numbers refer to the 8
th
edition of the text)
2.
Investment in inventories includes investment in: (I) Raw material (II) Workinprogress (III)
Finished goods.
A)
I only
B)
I and II only
C)
I, II, and III
D)
III only
Answer: C Page: 115
3.
A firm has a generalpurpose machine, which has a book value of $400,000 and is sold for
$600,000 in the market.
If the tax rate is 30%, what is the opportunity cost of using the machine
in a project?
A)
$600,000
B)
$540,000
C)
$400,000
D)
None of the above
Answer: B Page: 116 [600,000  (600,000 – 400,000) * 0.30 = 540,000]
4.
A reduction in the sales of existing products caused by the introduction of a new product is an
example of:
A)
incidental effects
B)
opportunity cost
C)
sunk cost
D)
none of the above
Answer: A Page: 116
5.
A firm owns a building with a book value of $150,000 and a market value of $250,000.
If the
building is utilized for a project, then the opportunity cost ignoring taxes is:
A)
$100,000
B)
$150,000
C)
$250,000
D)
None of the above
Answer: C Page: 116
6.
A cash flow to be received at t=2 is expected to be $10,816.
If the real rate of interest is 4%
and the inflation rate is 4%, what is the expected real cash flow at t=2?
A)
$11,236
B)
$10,816
C)
$10,000
D)
$9,246
Answer: C Page: 117 [Real cash flow = 10,816/(1.04^2) = 10,000]
7.
The NPV obtained by discounting nominal cash flows using the nominal discount rate is:
(I) The same as the NPV obtained by discounting real cash flows using the real discount rate
(II) The same as the NPV obtained by discounting real cash flows using the nominal discount rate
Practice Problems
with Answers
1
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AAS
S
CHOOL
OF
B
USINESS
U
NIVERSITY
OF
C
ALIFORNIA
AT
BERKELEY
BA 103 S
UMMER
2007
A
VINASH
V
ERMA
(III) The same as the NPV obtained by discounting nominal cash flows using the real discount
rate
A)
I only
B)
II only
C)
III only
D)
II and III only
Answer: A Page: 117
8.
Real cash flow occurring in year2 is 60,000.
If the inflation rate is 5% per year, calculate
nominal cash flow for year2.
A)
60,000
B)
55,422
C)
66,150
D)
None of the above
Answer: C
Page: 117 [Nominal cash flow = (60,000)(1.05)^2 = 66,150]
9.
Proper treatment of inflation in the NPV calculation involves:
(I)
Discounting nominal cash flows using the nominal discount rate
(II)
Discounting real cash flows using the real discount rate
(III)
Discounting nominal cash flows using the real discount rates
A)
I only
B)
II only
C)
III only
D)
I and II only
Answer: D Page: 117
10.
Capital equipment costing $250,000 today has 50,000 salvage value at the end of 5 years.
If
the straight line depreciation method is used, what is the book value of the equipment at the end
of two years?
A)
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 Spring '08
 MCCULLOUGH
 Capital Asset Pricing Model, Interest, Net Present Value, HAAS SCHOOL OF BUSINESS

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