100.
The law firm of Bushmaster, Cobra and Asp is considering investing in a complete small
business computer system. The initial investment will be $35,000 and the hardware, which will
be used for 10 years with a salvage value of $5,000, and software of

101.Tabletop Ranches, Inc. is considering the purchase of a new helicopter for $325,000. The firm's
old helicopter has a book value of $85,000, but can only be sold for $60,000.
The new helicopter will be subject to 25% CCA. It is expected to save $62,000

112.Explain the Net Present Value (NPV) method of evaluating investment proposals. What are the
advantages of this method in comparison with the other methods discussed in the text?
113.Explain the Internal Rate of Return (IRR) method of evaluating invest

115.
The Accidental Petroleum Company is trying to determine its weighted average cost of capital
for use in making a number of investment decisions. The firm's bonds were issued 6 years ago
and have 14 years left until maturity. They carried an 8% coupon

39.
If one project has a higher standard deviation than another
A. it has a greater risk.
B. it has a higher expected value.
C. it has more possible outcomes.
D. it may be riskier, but this can only be determined by the coefficient of variation.
Block - C

67.
Beta is a better risk measure than standard deviation when the firm
A. is effectively diversified.
B. focused on total risk.
C. uses the CAPM in its cost of capital calculation.
D. has a beta that is close to 1.0.
Block - Chapter 013 #67
Difficulty: M

49. The coefficient of variation (V) can be defined as the
A. expected value multiplied by the standard deviation.
B. standard deviation divided by the mean (expected value).
C. mean (expected value) divided by the standard deviation.
D. standard deviatio

26. As the time horizon becomes shorter, more uncertainty enters the forecast.
True
False
27. As the time horizon increases, the standard deviation for each forecast of cash flow usually
increases.
True
False
28. Simulation models allow the analyst to tes

Chapter 13 Key
1.
A basic assumption in financial theory is that most investors and managers are risk seekers.
FALSE
Block - Chapter 013 #1
Difficulty: Easy
Learning Objective: 3
Type: Con
2.
In order to reduce risk, one should diversify into areas that a

119.
Explain the payback period method for evaluating capital expenditures. What are the
disadvantages and advantages of this method?
The payback periodmethod computes the time required to recoup the initial investment.
In using the payback period to sele

Type: Con
104.
Creative Impulse has done development work on an exciting new product, Yuppo. To date, it
has spent $1,000,000 on research and development and is wondering whether or not to
continue the development and eventual production of Yuppo. The wor

92.
NPV is superior to average accounting return as a capital budgeting technique because
A. it employs the accounting definition of income.
B. it values each cash flow equally based on dollar value.
C. it employs the actual cost of an investment.
D. it e

Type: Con
112.
Explain the Net Present Value (NPV) method of evaluating investment proposals. What are the
advantages of this method in comparison with the other methods discussed in the text?
The net present value (NPV)of an investment discounts all the

64.
A firm is selling an old asset below book value in a replacement decision. As the firm's tax rate
is raised, the net cash outflow (purchase price less proceeds from the sale of the old asset plus
CCA effects) would
A. go up.
B. go down.
C. remain the

Learning Objective: 6
Type: Con
78.
An equipment replacement decision, under resultant cash flow analysis, requires
A. calculating the present value of all cash flows associated with the new equipment minus the
salvage value of the old asset.
B. calculati

66. Using the risk-adjusted discount rate approach, the cost of capital is applied to projects with
A. normal risk.
B. high risk.
C. no risk.
D. low risk.
67. Beta is a better risk measure than standard deviation when the firm
A. is effectively diversifie

74. Bill Broodiest, star quarterback for the Spring Bay Smashers, would like to invest a small portion of
his earnings in stocks of one of three firms. His estimated dividends and the probabilities of their
occurrence follow.
A) Calculate the expected cas

Exchange and the over-the-counter market.
108.Match each key term with its more correct definition statement.
1. Transact security trades over-the-counter
from their own inventory of stocks and bonds.
three sector
economy _
2. Financial standards that cor

71. Security markets are efficient when each of the following exist except
A. security prices follow the leading indicators such as the S&P/TSX Composite very closely.
B. the markets can absorb large dollar amounts of stock without destabilizing the price

91. The accumulated debt of the federal government at its peak in 1996 was approximately
A. $600 billion.
B. $200 billion.
C. $ 40 billion.
D. $ 30 billion.
92. During the mid-1980s, high-yield junk bonds boosted overall levels of debt financing due to th

48. Canadian banks are significant players in the investment dealing industry.
True
False
49. Amortization represents the majority of internally generated corporate funds.
True
False
50. The increase in retained earnings during recent economic expansions

10. The efficient market hypothesis is based on the belief that the stock market is in short-run
equilibrium.
True
False
11. In a capital intensive economy, a shortage of capital could drive interest rates down and stock
prices up.
True
False
12. Financia

85.
What is the coefficient of variation of the outcomes?
A. 1.29
B. 0.19
C. 0.44
D. cannot be determined with the information given
Block - Chapter 013 #85
Difficulty: Hard
Learning Objective: 2
Type: Con
86.
A project has the following projected outcome

53.
A "what if" simulation using a computer helps to:
A. reduce the risk associated with a particular investment.
B. determine the effects of changes in certain variables.
C. increase the accuracy of the inputs.
D. more than one of the above are true
Bloc

74.
Bill Broodiest, star quarterback for the Spring Bay Smashers, would like to invest a small
portion of his earnings in stocks of one of three firms. His estimated dividends and the
probabilities of their occurrence follow.
A) Calculate the expected cas

22.
The capital budgeting decisions of a firm will have no effect on the share price of the common
stock.
FALSE
Block - Chapter 013 #22
Difficulty: Med
Learning Objective: 4
Type: Con
23.
Choosing projects with returns equal to the company norm but having

50.
Which of the following is not a time-adjusted method for ranking investment proposals?
A. net present value method
B. payback period
C. internal rate of return method
D. All of these are time-adjusted methods
Block - Chapter 012 #50
Difficulty: Easy
L

90. At higher tax rates, CCA amortization is
A. more beneficial.
B. less beneficial.
C. unaffected.
D. none of the other answers are correct
91. The first step in the capital budgeting process is
A. collection of data.
B. idea development.
C. assigning pr

9.
The internal rate of return is the average annual rate of return from the investment.
FALSE
Block - Chapter 012 #9
Difficulty: Easy
Learning Objective: 3
Type: Mem
10.
Non-mutually exclusive alternatives can be accepted at the same time.
TRUE
Block - C

113.Match each key term with its most correct definition statement.
1. The cost of the most recent dollars of funds
raised.
flotation costs _
2. Determines the value of a share of stock by
weighted
taking the present value of the expected future
average c