Multiple Choice Answers


1. The amount of time required for an investment to generate cash flows sufficient to recover its initial cost is called the
A. net present value.
B. average accounting return.
C. internal rate of return.
D. payback period.

2. To calculate a firm’s break-even point, you need to
A. divide fixed costs by variable costs.
B. add fixed costs to variable costs, and divide the total
by the unit contribution margin.
C. divide fixed costs by the unit contribution margin.
D. divide the unit contribution margin by variable costs.

3. The present value of an investment’s future cash flows divided by its initial cost is called the
A. profitability index.
B. average accounting return.
C. net present value.
D. discounted payback

4. Assume that a firm has an average net income of $125,000 and an average book value of $500,000. What is the firm’s average accounting return?
A. 25 percent
B. 65 percent
C. 40 percent
D. 12.5 percent

5. A cost that has already been incurred and that should therefore not be considered in an investment decision is called a(n)
A. pro forma.
B. sunk cost.
C. erosion.
D. opportunity cost.

6. A situation in which a company can’t raise financing for a project under any circumstances is called
A. simulation analysis.
B. hard rationing.
C. operating leverage.
D. forecasting risk.

7. A project requires an initial investment of $75,000 today. The present value of the cash inflows likely to result from this initial investment is $98,293. What is the net present value of this investment?
A. –$23,293
B. $75,000
C. $51,707
D. $23,293

8. The discount rate that makes the net present value of an investment zero is called the
A. average accounting return.
B. internal rate of return.
C. project cash flow.
D. crossover rate.

9. Assume that an item costs $4 per unit to manufacture, and sells for $19 per unit. What is the unit contribution margin?
A. $23
B. 21 percent
C. $15
D. 4.75 percent

10. The difference between an investment’s market value and its cost is called the
A. discounted cash flow.
B. average accounting return.
C. net present value.
D. probability index.

11. When making capital budgeting decisions for a firm, the average net income divided by the average book value equals the
A. average accounting return.
B. internal rate of return.
C. net present value.
D. project cash flow

12. A situation in which the taking of one investment will prevent the taking of another is called a(n)
A. stand-alone investment.
B. opportunity cost.
C. marginal revenue investment.
D. mutually exclusive investment decision.

13. When you’re discussing operating cash flow, the tax saving that results from the depreciation deduction, calculated as the depreciation multiplied by the corporate tax rate is called the
A. discounted cash flow.
B. accelerated cost recovery system.
C. depreciation tax shield.
D. net working capital.

14. Under U.S. tax law, the depreciation method that allows for the accelerated write-off of property under certain classifications is called the
A. modified depreciation allowance.
B. accelerated cost recovery system.
C. bottom-up approach.
D. depreciation tax shield.

15. A type of financial statement that provides projections for future years is called a
A. pro forma statement.
B. modified depreciation statement.
C. discounted cash flow analysis.
D. project cash flow statement.

16. A company manufactures an item that has a unit contribution margin of $9. The firm has fixed costs of $3,600 per year. What is the break-even point, in units?
A. 27 units
B. 400 units
C. 32,400 units
D. 200 units

17. The sales level that results in zero project net income is called the
A. operating cash flow.
B. accounting break-even point.
C. opportunity cost.
D. internal rate of return.

18. Which of the following statements about operating leverage is not correct?
A. Operating leverage is a measure of risk.
B. Operating leverage increases as fixed costs increase.
C. Operating leverage decreases as variable costs decrease.
D. Operating leverage is a combination of scenario and sensitivity analysis.

19. The degree to which a firm or project is committed to fixed production costs is called
A. operating leverage
B. accelerated cost recovery.
C. capital rationing.
D. sunk cost.

20. When a firm introduces a new product, it can have a negative effect on the cash flows from existing products. This negative effect is known as
A. opportunity cost.
B. incremental cash flow.
C. erosion.
D. MACRS depreciation.