ATENEO DE NAGA UNIVERSITY

College of Business and Accountancy

Intercession

FINANCIAL MANAGEMENT
Midterm Examination E.P.Cuadro, CPA
Name: Date: Section: Score:

INSTRUCTIONS: 1. Read carefully the questions.

2. Choose the best option and shade the letter of your choice in the answer sheet provided.
3. Erasures are not allowed and considered wrong.

GOOD LUCK!

1. Of the following decisions, capital budgeting techniques would least likely be used in evaluating the
a. Acquisition of new aircraft by a cargo company
b. Trade for a star quarterback by a football team
c. Design and implementation of a major advertising program
d. Adoption of a new method of allocating non-traceable costs to product lines

2. A capital investment decision is essentially a decision to:

a. exchange current assets for current liabilities.
b. exchange current cash outflows for the promise of receiving future cash inflows.
c. exchange current cash flow from operating activities for future cash inflows from investing activities.
d. exchange current cash inflows for future cash outflows

3. How are the following used in the calculation of the net present value of a proposed subject? Ignore income tax
effect.

Depreciation expense Salvage value

a. Include Include
b. Include Exclude
c. Exclude Include
d. Exclude Exclude

4. Some investment projects require that a company expand its working capital to service a greater volume of
business that will be generated. Under the net present value method, the investment in working capital should
be treated as:
a. An initial cash outflow for which no discounting is necessary.
b. A future cash inflow for which discounting is necessary.
c. Both an initial cash outflow for which no discounting is necessary and a future cash inflow for which
discounting is necessary.
d. Both an initial cash outflow for which discounting is necessary and a future cash inflow for which no
discounting is necessary.

5. How is depreciation handled by the following capital budgeting techniques?

Internal rate of return Simple rate of return Payback

a. Excluded Included Excluded
b. Included Excluded Included
c. Excluded Excluded Included
d. Included Included Excluded

6. Which of the following capital budgeting technique considers cash flow over the entire life of the project?

Internal rate of return Payback

a. Yes Yes
b. Yes No
c. No Yes
d. No No
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7. If the net present value of a project is zero based on a discount rate of 16%, then the internal rate of return:
a. is equal to 16%.
b. is less than 16%.
c. is greater than 16%.
d. cannot be determined from the information given.

8. The payback period measures:

a. How quickly investment maybe recovered.
b. The cash flow from the investment.
c. The economic life of the investment.
d. The profitability of the investment.

9. Risk can be controlled in capital budgeting situations by assuming a:

a. High accounting rate of return
b. Large net present value
c. High net income
d. Short payback period

10. All of the following are line function except:

a. Cashier in a department store
b. Accounting manager of an insurance company
c. Bus driver of a transportation company
d. Real estate agents

11. This is the most important decision when it comes to value creation.
a. Investment
b. Financing
c. Dividend
d. None of the choices.

12. Which is a function of a controller?

a. Provision of capital
b. Government reporting
c. Insurance
d. Banking and custody

13. Which of the following would decrease the net present value of a project?
a. A decrease in the income tax rate
b. A decrease in the initial investment
c. An increase in the useful life of the project
d. An increase in the discount rate

14. Which one of these statements concerning cash flow determination for capital budgeting purposes is not correct?
a. Tax depreciation must be considered because it affects cash payments for taxes.
b. Book depreciation is relevant because it affects net income.
c. Sunk costs are not incremental flows and should not be included.
d. Net working capital changes should be included in cash flow forecasts.

15. Which is a basic difference between the IRR and book rate of return (BRR) criteria for evaluating investments?
a. IRR emphasizes expenses and BRR emphasizes expenditures
b. IRR emphasizes revenues and BRR emphasizes receipts
c. IRR is used for internal investments and BRR is used for external investments
d. IRR concentrates on receipts and expenditures and BRR concentrates on revenues and expenses

16. Everything else being equal, the internal rate of return of an investment project will be lower if
a. The investment cost is lower.
b. Cash inflows are received later in the life of the project.
c. Cash inflows are larger.
d. The project has a shorter payback period.

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17. As the length of annuity increases,
a. Present value factor increases.
b. Present value factor decreases.
c. Present value factor remains constant.
d. It is impossible to tell what happens to present value factors.

18. What is the effect of changes in cash inflows, investment cost and cash outflows on profitability index (PI)?
a. PI will increase with an increase in cash flows, a decrease in investment, or a decrease in cash outflows.
b. PI will increase with an increase in cash flows, an increase in investment, or an increase in cash outflows.
c. PI will decrease with an increase in cash flows, a decrease in investment, or a decrease in cash outflows.
d. PI will decrease with an increase in cash flows, an increase in investment, or an increase in cash outflows.

19. The NPV and IRR methods give

a. the same decision (accept or reject) for any single investment.
b. the same choice from among mutually exclusive investments.
c. different rankings of projects with unequal lives.
d. the same rankings of projects with different required investments.

20. Mutually exclusive projects are those that:

a. if accepted, preclude the acceptance of competing projects.
b. if accepted, can have a negative effect on the company’s profit.
c. if accepted, can also lead to the acceptance of a competing project.
d. require all managers to consider.

21. In choosing from among mutually exclusive investments the manager should normally select the one with the
highest
a. Net present value.
b. Profitability index.
c. Internal rate return.
d. Book rate of return.

22. Why do the NPV method and the IRR method sometimes produce different rankings of mutually exclusive
investment projects?
a. The NPV method does not assume reinvestment of cash flows while the IRR method assumes the cash
flows will be reinvested at the internal rate of return.
b. The NPV method assumes a reinvestment rate equal to the discount rate while the IRR method assumes
a reinvestment rate equal to the internal rate of return.
c. The IRR method does not assume reinvestment of the cash flows while the NPV assumes the reinvestment
rate is equal to the discount rate.
d. The NPV method assumes a reinvestment rate equal to the bank loan interest rate while the IRR method
assumes a reinvestment rate equal to the discount rate.

23. The proper treatment of an investment in receivables and inventory is to

a. ignore it
b. add it to the required investment in fixed assets
c. add it to the required investment in fixed assets and subtract it from the annual cash flows
d. add it to the investment in fixed assets and add the present value of the recovery to the present value of
the annual cash flows

24. The internal rate of return on an investment

a. Usually coincides with the company’s hurdle rate.
b. Disregards discounted cash flows.
c. May produce different rankings from the net present value method on mutually exclusive projects.
d. Would tend to be reduced if a company used an accelerated method of depreciation for tax purposes
rather than the straight-line method.

25. The three frequently used methods for ranking investment proposals are payback, net present value, and internal
rate of return. One of the three is defined as the interest rate that equates the present value of expected cash
flows and the cost of the project. A second method finds the present value of expected cash flows and subtracts
the initial cost of the project. The following terms that match these respective definitions are:
a. internal rate of return and net present value
b. internal rate of return and payback
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 c. net present value and internal rate of return
d. net present value and payback

26. The capital budgeting method that assumes that funds are reinvested at the company's cost of capital is:
a. accounting rate of return
b. net present value
c. internal rate of return
d. return on investment

27. Which of the following methods of evaluating capital investment projects do not use a percentage as a
measurement unit?
a. Payback period and net present value
b. Accounting rate of return and payback period
c. Net present value and internal rate of return
d. Internal rate of return and payback period

28. An analysis of a proposal by the net present value method indicated that the present value of future cash inflows
exceeded the amount to be invested. Which of the following statements best describes the results of this
analysis?
a. The proposal is desirable and the rate of return expected from the proposal exceeds the minimum rate
used for the analysis
b. The proposal is desirable and the rate of return expected from the proposal is less than the minimum rate
used for the analysis
c. The proposal is undesirable and the rate of return expected from the proposal is less than the minimum
rate used for the analysis
d. The proposal is undesirable and the rate of return expected from the proposal exceeds the minimum rate
used for the analysis

29. If an initial investment outlay is P60,000 and the cash flows projected are P15,000, P20,000, P25,000, and P10,000
in each of the first four years, respectively, the payback period in years would be:
a. 3.3
b. 3.0
c. 2.5
d. 4.0

30. Conte Inc. invested in a machine with a useful life of six years and no salvage value. The machine is expected to
produce annual cash flows from operations, net of income tax, of P2,000. If the estimated internal rate of return
is 10%, the amount of the original investment was:
a. P9,000
b. P11,280
c. P12,000
d. P8,710

For items 31 to 34:

(Ignore income taxes in this problem). Shields Company has gathered the following data on a proposed investment project:

Investment required in equipment P400,000

Annual cash inflows 80,000
Life of the investment 10 years
Discount rate 10%

31. The payback period for the investment is closest to:

a. 0.2 years
b. 1.0 years
c. 3.0 years
d. 5.0 years

32. The simple rate of return on the investment is closest to:

a. 5%
b. 10%
c. 15%
d. 20%
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 33. The net present value on this investment is closes to:
a. P400,000
b. P80,000
c. P91,600
d. P76,750

34. The internal rate of return on the investment is closest to:

a. 11%
b. 13%
c. 15%
d. 17%

35. (Ignore income taxes in this problem). The Baker Company purchased a piece of equipment with the following
expected results:

Useful life 7 years

Yearly net cash inflow P50,000
Internal rate of return 20%
Discount rate 16%

The initial cost of the equipment was:

a. P300,100
b. P180,250
c. P190,600
d. Cannot be determined from the information given.

36. Five Company is considering to replace its old machine with a new one. The old machine had a net book value of
P100,000 and a four-year remaining useful life. The old equipment can be sold for P80,000. The new equipment
costs P160,000 and has a four-year useful life. Cash savings on operating expenses before income taxes of 40%
amounted to P50,000 per year. What is the amount of net investment for the project?
a. P160,000
b. P72,000
c. P80,000
d. P68,000

For items 37 and 38:

Fleming Inc. is planning to acquire a new machine at a total cost of P360,000. The estimated life of the machine is 6 years
with no salvage value. The straight-line method of depreciation will be used. Fleming estimates that the annual cash flows
from operations, before income taxes, from using this machine amounts to P90,000. Assume that Fleming’s cost of capital
is 8% and the income tax rate is 40%.

37. What would be the payback period for this machine?

a. 4 years
b. 4.6 years
c. 5.7 years
d. 6.7 years

38. What would be the net present value?

a. P590
b. P56,070
c. P108,000
d. P131,400

39. Jarvis Inc. purchased a new machine for P280,000 during 2021. The machine has an estimated useful life of 8 years
with no salvage value and is being depreciated using straight-line method. The accounting rate of return is
expected to be 15% based on the initial increase in required investment. On the assumption of a uniform cash
inflow, this investment is expected to provide annual cash flows from operations, net of income taxes, of
a. P35,000
b. P40,250
c. P42,000
d. P77,000
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