FNAN 522: FINAL EXAM ALL EXAM QUESTIONS AND CORRECT ANSWER

FNAN 522: FINAL EXAM ALL EXAM QUESTIONS AND CORRECT ANSWER. Since the focus of capital budgeting is cash flows, changes in non-cash accounts such as depreciation and working capital would not be relevant to the analysis. True of false. - CORRECT ANSWER False. 2. The most important advantage of the NPV approach is that it is the most theoretical correct method. True or False. - CORRECT ANSWER True. 3. Relevant financial data for a project are best described as a) EBDT, b) incremental cash flows, c) incremental profits, or d) accounting cash flows - CORRECT ANSWER b) incremental cash flows 4. The change in net working capital when evaluating a capital budgeting decision is... - CORRECT ANSWER ...changes in current assets minus the change in current liabilities 5. Some firms use the payback period as a decision criterion or as a supplement to sophisticated decision making techniques because.... - CORRECT ANSWER ...it can be viewed as a measure of risk exposure 6. In the context of capital budgeting, risk refers to... - CORRECT ANSWER ...the degree of variability of the cash inflows 7. One advantage of the NPV approach is that it always provides the right answer. True or false. - CORRECT ANSWER True. 8. Mutually exclusive projects are projects whose cash flows are related to one another, the acceptance of one does eliminate the others from further considerations. True or false. - CORRECT ANSWER True. 9. Which of the following would decrease the NPV of a project being considered: a) an increase in the cost of capital (discount rate), b) the sale of a machine at a capital gain rather than book value, c) an initial required decrease in net working capital, or d) a lowering of the tax rate - CORRECT ANSWER a) an increase in the cost of capital 10. The risk-adjusted discount rate (RADR) is the most theoretically correct method and is the rate of return that must be earned on a given project to compensate the firm's owners for risk, thereby resulting in the maintenance or improvement of share price. True or False. - CORRECT ANSWER False. 11. Sensitivity analysis is a statistically based approach used in capital budgeting to get a feel for risk by applying predetermined probability distributions and random numbers to estimate risky outcomes. True or False. - CORRECT ANSWER False. 12. The higher the risk of a project, the higher its risk-adjusted discount rate and thus the lower the net present value for a given stream of cash inflows. True or False. - CORRECT ANSWER True.