1. The appropriate cash flows for evaluating a corporate investment decision are
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Question
1. The appropriate cash flows for evaluating a corporate investment decision are: (Points : 1) incremental additional cash flows.marginal after-tax cash flows.
incremental after-tax cash flows.
investment after-tax cash flows. Question 2.2. The payback period has several weaknesses. From the list below, identify the item that is NOT necessarily a weakness of the payback period method. (Points : 1) There is no theoretically correct way to tie an acceptance criterion to shareholder wealth creation.
It is simple to compute.
It ignores all cash flows after the payback period.
It ignores the time value of money.
d. have cash flows that increase over time with product market penetration. Question 3.3. According to the NPV acceptance criterion, projects: (Points : 1) with a positive NPV should be accepted, since they are value increasing.
with the highest NPV should be accepted.
with an NPV over $10,000 should be accepted, since value increases less than that are trivial.
are acceptable only if the ratio of benefits to costs is greater than zero. Question 4.4. The most obvious leakage or capital market imperfection affecting the debt and equity choice is: (Points : 1) bankruptcy risk.
differential taxation of cash flows between debt and equity.
the obligatory payment of interest and discretionary payment of dividends.
the inability of bond rating agencies to perfectly foresee risk. Question 5.5. When making investment decisions, we focus on incremental cash flows because: (Points : 1) we want to avoid double counting.
sometimes a new product erodes sales of existing products.
we want to compare the additional cash flows to the cost of the investment.
we want to make sure that the cash flows are positive. Question 6.6. If depreciation expense is a noncash charge, why do we consider it when determining cash flows? (Points : 1) because depreciation expense reduces taxable income, so reduces the amount of taxes paid
because depreciation expense offsets part of the initial cash outlay for depreciable assets
because depreciation expense reduces net income
because depreciation expense is a method for allocating costs Question 7.7. Capital structure refers to a company 1. The appropriate cash flows for evaluating a corporate investment decision are: (Points : 1) incremental additional cash flows.
marginal after-tax cash flows.
incremental after-tax cash flows.
investment after-tax cash flows.
Explanation / Answer
1. interest paid on debt is tax-deductible.
2. It is simple to compute
3. with the highest NPV should be accepted
4. the obligatory payment of interest and discretionary payment of dividends
5. we want to compare the additional cash flows to the cost of the investment
6. because depreciation expense reduces taxable income, so reduces the amount of taxes paid
7. mix of debt and equity used to fund the firm
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