FINMGMT4

Multiple Choice Questions
1. _________ is the process of evaluating and selecting longterm investments consistent with the
firm’s goal of owner wealth maximization.
(a) Recapitalizing assets
(b) Capital budgeting
(c) Ratio analysis
(d) Restructuring debt
2. Fixed assets that provide the basis for the firm’s profit and value are often called
(a) tangible assets.
(b) noncurrent assets.
(c) earning assets.
(d) book assets.
3. The most common motive for adding fixed assets to the firm is
(a) expansion.
(b) replacement.
(c) renewal.
(d) transformation.
4. The final step in the capital budgeting process is
(a) implementation.
(b) followup monitoring.
(c) reevaluation.
(d) education.
5. The first step in the capital budgeting process is
(a) review and analysis.
(b) implementation.
(c) decisionmaking.
(d) proposal generation.
6. A $60,000 outlay for a new machine with a usable life of 15 years is called
(a) capital expenditure.
(b) operating expenditure.
(c) replacement expenditure.
(d) none of the above.
7. A capital expenditure is all of the following except
(a) an outlay made for the earning assets of the firm.
(b) expected to produce benefits over a period of time greater than one year.
(c) an outlay for current asset expansion.
(d) commonly used to expand the level of operations.
8. Which pattern of cash flow stream is the most difficult to use when evaluating projects?
(a) Mixed stream.
(b) Conventional flow.
(c) Nonconventional flow.
(d) Annuity.
Table 8.1
Operating Cash Inflows
$1,000 $1,000 $1,000 $1,000 $1,000
$2,500
Initial Outlay
9. The cash flow pattern depicted is associated with a capital investment and may be characterized as
(See Table 8.1.)
(a) an annuity and conventional cash flow.
(b) a mixed stream and nonconventional cash flow.
(c) an annuity and nonconventional cash flow.
(d) a mixed stream and conventional cash flow.
Table 8.2
Operating Cash Inflows
$25,000 $10,000 $50,000 $10,000 $10,000 $60,000
–$100,000
Initial Outlay
10. The cash flow pattern depicted is associated with a capital investment and may be characterized as
(See Table 8.2.)
(a) an annuity and conventional cash flow.
(b) a mixed stream and nonconventional cash flow.
(c) an annuity and nonconventional cash flow.
(d) a mixed stream and conventional cash flow.
11. _________ projects do not compete with each other; the acceptance of one _________ the others
from consideration.
(a) Capital; eliminates
(b) Independent; does not eliminate
(c) Mutually exclusive; eliminates
(d) Replacement; does not eliminate
12. _________ projects have the same function; the acceptance of one _________ the others from
consideration.
(a) Capital; eliminates
(b) Independent; does not eliminate
(c) Mutually exclusive; eliminates
(d) Replacement; does not eliminate
13. A firm with limited dollars available for capital expenditures is subject to
(a) capital dependency.
(b) mutually exclusive projects.
(c) working capital constraints.
(d) capital rationing.
14. A conventional cash flow pattern associated with capital investment projects consists of an initial
(a) outflow followed by a broken cash series.
(b) inflow followed by a broken series.
(c) outflow followed by a series of inflows.
(d) inflow followed by a series of outflows.
15. A nonconventional cash flow pattern associated with capital investment projects consists of an
initial
(a) outflow followed by a series of cash inflows and outflows.
(b) inflow followed by a series of cash inflows and outflows.
(c) outflow followed by a series of inflows.
(d) inflow followed by a series of outflows.
16. _________ is a series of equal annual cash flows.
(a) A mixed stream
(b) A conventional
(c) A nonconventional
(d) An annuity
17. The cash flows of any project having a conventional pattern include all of the basic components
except
(a) initial investment.
(b) operating cash outflows.
(c) operating cash inflows.
(d) terminal cash flow.
18. Projects that compete with one another, so that the acceptance of one eliminates the others from
further consideration are called
(a) independent projects.
(b) mutually exclusive projects.
(c) replacement projects.
(d) None of the above.
19. A firm with unlimited funds must evaluate five projects. Projects 1 and 2 are independent and
Projects 3, 4, and 5 are mutually exclusive. The projects are listed with their returns.
Project Status Return(%)

1 Independent 14
2 Independent 12
3 Mutually 10
exclusive
4 Mutually 15
exclusive
5 Mutually 12
exclusive
A ranking of the projects on the basis of their returns from the best to the worst according to their
acceptability to the firm would be
(a) 4, 1, 2 or 5, and 3.
(b) 4, 1, and 2.
(c) 3, 2 or 5, 1, and 4.
(d) 4, 1, 5, and 3.
20. Initial cash flows and subsequent operating cash flows for a project are sometimes referred to as
(a) necessary cash flows.
(b) relevant cash flows.
(c) consistent cash flows.
(d) ordinary cash flows.

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Multiple Choice Questions

Project Status Return(%)

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