# Introduction to Corporate Finance What Companies Do, 3rd Edition by John Graham – Test Bank

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## Introduction to Corporate Finance What Companies Do, 3rd Edition by John Graham – Test Bank

## ISBN-10:1111222282 , ISBN-13:978-1111222284

MULTIPLE CHOICE

1. The capital budgeting course of consists of

a. determining potential investments and estimating the incremental cash inflows and outflows of cash associated to each funding

b. analyzing and prioritizing the investments utilizing quite a few willpower requirements

c. implementing and monitoring the chosen funding duties

d. estimating a very good worth of return on each funding given its hazard

e. the complete above

ANS: E PTS: 1 DIF: E

REF: 8.1 Introduction to Capital Budgeting NAT: Reflective contemplating

LOC: buy info of capital budgeting and the worth of capital

2. The favored methodology for evaluating most capital investments is

a. payback interval

b. low price payback interval

c. inside worth of return

d. web present value

ANS: D PTS: 1 DIF: E

REF: 8.1 Introduction to Capital Budgeting NAT: Reflective contemplating

LOC: buy info of capital budgeting and the worth of capital

NARRBEGIN: Gamma Electronics

Gamma Electronics

Gamma Electronics is considering the acquisition of testing gear that may worth $500,000 to substitute outdated gear. Assume the model new machine will generate after-tax monetary financial savings of $250,000 per 12 months over the next 4 years.

NARREND

3. Refer to Gamma Electronics. What’s the payback interval for the funding?

a. 1.8 years

b. 2.0 years

c. 2.5 years

d. 2.8 years

ANS: B

The funding requires $500,000. In its first two years, this funding generates $500,000.

PTS: 1 DIF: E REF: 8.2 Payback Methods

NAT: Analytic experience

LOC: buy info of capital budgeting and the worth of capital

4. Refer to Gamma Electronics. If the company has a 15% worth of capital, what’s the low price payback interval of the funding?

a. 1.5 years

b. 2.0 years

c. 2.4 years

d. 2.6 years

ANS: D

Present value

PV of 12 months 1 = 250,000/1.15 = 217,391

PV of 12 months 2 = 250,000/1.152 = 189,036

PV of 12 months 3 = 250,000/1.153 = 164,379

By the highest of 12 months 3, the problem produces a cumulative cash motion that’s greater than $500,000. Thus the problem earns once more the preliminary $500,000 in some unspecified time sooner or later by way of the third 12 months.

(500,000 – 217,391 – 189,036)/164,379 = 93,573/164,379 = 0.569

The low price payback interval is 2.6 years.

PTS: 1 DIF: M REF: 8.2 Payback Methods

NAT: Analytic experience

LOC: buy info of capital budgeting and the worth of capital

5. If Gamma Electronics has a 15% worth of capital, what’s the NPV of the funding?

a. $213,745

b. $185,865

c. $713,745

d. $500,000

ANS: A

NPV = -500,000 + 250,000/1.15 + 250,000/1.152 + 250,000/1.153 + 250,000/1.154 = 213,745

PTS: 1 DIF: E REF: 8.4 Web Present Value

NAT: Analytic experience

LOC: buy info of capital budgeting and the worth of capital

6. If Gamma Electronics has a 15% worth of capital, what’s the IRR of the funding?

a. 23.4%

b. 15.0%

c. 34.9%

d. 100.0%

ANS: C

Let r characterize the IRR of the funding.

-500,000 + 250,000/(1+r) + 250,000/(1+r)2 + 250,000/(1+r)3 + 250,000/(1+r)4 = 0

r = 34.9%

PTS: 1 DIF: E REF: 8.5 Inside Cost of Return

NAT: Analytic experience

LOC: buy info of capital budgeting and the worth of capital

7. If Gamma Electronics has a 15% worth of capital, what’s the profitability index of the funding?

a. 1.4

b. 0.4

c. 2.0

d. 1.0

ANS: A

(250,000/1.15 + 250,000/1.152 + 250,000/1.153 + 250,000/1.154 )/500,000 = 713,745/500,000 = 1.4

PTS: 1 DIF: E REF: 8.6 Profitability Index

NAT: Analytic experience

LOC: buy info of capital budgeting and the worth of capital

NARRBEGIN: Exhibit 8-1 Invst Csh Prj

Exhibit 8-1

The cash flows associated to an funding problem are as follows:

Cash Flows

Preliminary Outflow -$70,000

12 months 1 $20,000

12 months 2 $30,000

12 months 3 $30,000

12 months 4 $30,000

NARREND

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