Finmkt Finals

1.
As used in capital budgeting analysis, the internal rate of return uses which of the
following items in the computation?
Net Incremental Investment (YES), Incremental average operating income (NO), Net annual
cash flows (YES)
Net Incremental Investment (YES), Incremental average operating income (YES), Net
annual cash flows (NO)
Net Incremental Investment (NO), Incremental average operating income (NO), Net annual
cash flows (YES)
Net Incremental Investment (NO), Incremental average operating income (YES), Net annual
cash flows (YES)
2. At what stage of capital budgeting process would management most likely apply
present value technique?
Identification stage
Search stage
Selection/Evaluation stage
Financing stage
3. An organization has four investment proposals with the following costs and
expected cash inflows: If project A has an internal rate of return of 15%, then it has a
cost of
*
Your answer
4. The internal rate of return is the
Rate of interest that equated the present value of cash outflow and the present value of
cash inflow
Minimum acceptable rate of return for a proposed investment
Risk adjustment rate of return
Required rate of return
5. SFF Co is investing in machinery with a 3 year life. The machine is expected to

reduce annual cash operating costs by P30,000 in each of the first 2 years and
P20,000 in year 3.
PV of an annuity of 1 at 14% are, Period 1 .88, Period 2 1.65 and period 3 2.32.
Using 14% cost of capital, what is the present value of these future savings?
Your answer
6. SFF Co is negotiating for the purchase of equipment that would cost P100,000, with
the expectation that P20,000 per year could be saved in after-tax cash costs if the
equipment were acquired. The equipment’s estimated useful life is ten years
depreciated using straight line method. The payback period is? (just write the
number of year)
Your answer
7. Which of the following is an advantage of the accounting rate of return?
It considers depreciation
It corresponds to the measure that is often used to evaluate performance
It considers the time value of money
It considers the risk of the investment
8. The discount rate (hurdle rate if return) must be determined in advance for the
Payback period method

Time adjusted rate of return method
Net present value method
Internal rate of return method
9. How is the discounted payback method an improvement over the payback method
in evaluating investment projects?
It involves better estimates of cashflows

It considers the overall profitability of the investment
It considers the variability of the return
10. A firm with 18% cost of capital, is considering the following projects on January
2018: Project B’s internal rate of return is closest to?
*
Your answer
11. SFF Co. is reviewing the following data relating to an energy saving investment
proposal:
What would be the annual savings needed to make the investment realize a 12% yield?
P8,189
P11,111
P12,306
P13,889
12. A firm with 18% cost of capital, is considering the following projects on January
2018: Using the net present value method, Project A net present value is?
Your answer
13. SFF Co. is planning to invest in a 2 year project that is expected to yield cash flows’
from operations, net of income taxes of P50,000 in the first year and P80,000 in the
second year. SFF requires an internal rate of return of 15%. The PV of 1 for one
period at 15% is 0.870 and for two periods at 15% is 0.756. The future value of 1 for
one period at 15% is 1.150 and for two periods at 15% is 1.323. The maximum that
Kern should invest immediately is?
Your answer
14. The capital budgeting technique known as payback period uses
Revenue over life of project (NO), Depreciation expense (YES)

Revenue over life of project (NO), Depreciation expense (NO)
Revenue over life of project (YES), Depreciation expense (NO)
Revenue over life of project (YES), Depreciation expense (YES)
15. Which of the following is a strength of the payback method?
It considers cash flows for all years of the project

It distinguishes the source of cash inflows
It is easy to understand
16. For the next two years, a lease is estimated to have an operating net cash inflow of
P7,500 per annum. Before adjusting for P5,000 per annum tax basis lease
amortization and 40% tax rate. The PV of ordinary annuity of 1 per year at10% for
two years is 1.74. what is the lease’s after tax present value using 10% discount
factor.
Your answer
expected cash inflows: If the discount rate is 10%, the net present value of project B
is
*
Your answer
18. SFF Co. is buying a machinery it expects will increase average annual operating
income by P40,000. The initial increase in the required investment is P60,000 and
the average increase in required investment is P30,000. To compute the accrual
accounting rate of return, what amount should be used as the numerator ratio?
Your answer
19. The capital budgeting technique known as payback period uses
Depreciation expense (YES), Time value of Money (YES)

Depreciation expense (YES), Time value of Money (NO)
Depreciation expense (NO), Time value of Money (NO)
Depreciation expense (NO), Time value of Money (YES)
20. If a P1000 bonds sells for P1125, which of the following statements are correct?
I and IV
I and V
II and IV
II and V
21. A project’s net present value, ignoring income tax considerations, is normally
affected by
Proceeds from the sale if asset to be replaced

Carrying amount of the asset to be replaced by the project
Amount of annual depreciation on the asset to be replaced
Amount of annual depreciation on fixed asset used directly on the project.
22. All of the following capital budgeting analysis techniques use cash flows as the
primary basis for the calculation except for the
Net present value

Payback period
Discounted payback period
Accounting rate of return
23. If an investment project has a profitability index of 1.15, then the
Project’s internal rate of return is 15%

Project’s cost of capital is greater than its internal rate of return
Project’s internal rate of return exceeds its net present value
Net present value of the project is positive.
expected cash inflows: The payback period of project C is
*
Your answer
25. The Net present value method of investment project analysis assumed that the
project’s cash flows are reinvested at the
Computed internal rate of return

Risk free interest rate
Discount rate used in the NPV calculation
Firm’s accounting rate of return

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1.

4. The internal rate of return is the

5. SFF Co is investing in machinery with a 3 year life. The machine is expected to

7. Which of the following is an advantage of the accounting rate of return?

Payback period method

It involves better estimates of cashflows

14. The capital budgeting technique known as payback period uses

Revenue over life of project (NO), Depreciation expense (YES)

15. Which of the following is a strength of the payback method?

It considers cash flows for all years of the project

19. The capital budgeting technique known as payback period uses

Depreciation expense (YES), Time value of Money (YES)

Proceeds from the sale if asset to be replaced

Net present value

23. If an investment project has a profitability index of 1.15, then the

Project’s internal rate of return is 15%

Computed internal rate of return

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