1. Incorrect The firm of Sun and Moon purchased a share of Acme.

com common
stock exactly one year ago for $45. During the past year the common
stock paid an annual dividend of $2.40. The firm sold the security today
for $85. What is the rate of return the firm has earned?
Your answer: 194.2%
The correct answer: 94.2%

Incorrect. Return is over the two-year period and includes both

dividends and capital gains. Return = [($2.40) + ($85 - $45)] / $45 =
94.2%

2. Incorrect A set of possible values that a random variable can assume and their
associated probabilities of occurrence are referred to as __________.
Your answer: the expected return
The correct answer: probability distribution

Incorrect. The expected return is the weighted average of possible

returns, with the weights being the probabilities of occurrence.

3. Correct A statistical measure of the variability of a distribution around its mean

is referred to as __________.
Your answer: the standard deviation

Correct.

4. Incorrect The ratio of the standard deviation of a distribution to the mean of that
distribution is referred to as __________.
Your answer: the expected return
The correct answer: coefficient of variation

Incorrect. The expected return is the weighted average of possible

returns, with the weights being the probabilities of occurrence.

5. Correct The weighted average of possible returns, with the weights being the
probabilities of occurrence is referred to as __________.
Your answer: the expected return

Correct.

6. Incorrect Clive Rodney Megabucks offers your friend, Melanie, an interesting

gamble involving giving her the choice of the contents in one of two
sealed, identical-looking boxes. One box has $20,000 in cash and the
second has nothing inside. There is an equal probability that the
chosen box contains cash versus nothing. Melanie states that she
would not call off the gamble if you offered her a certain $10,999
instead of her choice of box. However, she would be indifferent if
$11,000 was offered in place of the risky gamble; and she would
definitely take $11,001 to call off the gamble. We would describe
Melanie as __________ in this instance.
 Your answer: being risk averse
The correct answer: having a risk preference

Incorrect. Melanie would have had to tell us that a minimum guarantee

less than $10,000 would be necessary to call off the gamble. Thus, the
expected value > the certainty equivalent.

7. Incorrect Clive Rodney Megabucks offers your friend, Yunyoung, an interesting

gamble involving giving her the choice of the contents in one of two
sealed, identical-looking boxes. One box has $20,000 in cash and the
second has nothing inside. There is an equal probability that the
chosen box contains cash versus nothing. Yunyoung states that she
would not call off the gamble if you offered her a certain $4,999 instead
of her choice of box. However, she would be indifferent if $5,000 was
offered in place of the risky gamble; and she would definitely take
$5,001 to call off the gamble. We would describe Yunyoung as
__________ in this instance.
Your answer: having a risk preference
The correct answer: being risk averse

Incorrect. Yunyoung would have had to tell us that a minimum

guarantee exceeding $10,000 would be necessary to call off the
gamble. Thus the expected value < the certainty equivalent.

8. Incorrect Which of the following statements regarding covariance is correct?

Your answer: Covariance, because it involves a squared value, must
always be a positive number (or zero).
The correct answer: Covariances can take on positive, negative, or
zero values.

Incorrect. Covariance can take on any positive, negative, or zero value.

9. Incorrect Which of the following portfolio statistics statements is correct?

Your answer: A portfolio's standard deviation of return is a simple
weighted average of individual security return standard deviations.
The correct answer: A portfolio's expected return is a simple weighted
average of expected returns of the individual securities comprising the
portfolio.

Incorrect. A portfolio's standard deviation of return involves

covariances and nothing about it is "simple."

10. Correct Total portfolio risk is __________.

Your answer: equal to systematic risk plus diversifiable risk

Correct.

11. Correct __________ is the variability of return on stocks or portfolios not

explained by general market movements. It is avoidable through
diversification.
 Your answer: Unsystematic risk

Correct.

12. Incorrect __________ is the variability of return on stocks or portfolios

associated with changes in return on the market as a whole.
Your answer: Standard deviation.
The correct answer: Systematic risk

Incorrect. Systematic risk is the nondiversifiable portion of total risk and

is associated with changes in return on the market as a whole.

13. Correct Which of the following indexes would be most the appropriate proxy to
measure the return of the market portfolio in the CAPM?
Your answer: Standard & Poor's 500

Correct.

14. Incorrect The __________ describes the linear relationship between expected
rates of return for individual securities (or portfolios) and __________.
Your answer: security market line; standard deviation
The correct answer: security market line; beta

Incorrect. Change standard deviation to beta and you've got it.

15. Correct The __________ describes the relationship between an individual

security's returns and returns on the market portfolio. The slope of this
line is __________.
Your answer: characteristic line; beta

Correct.

16. Incorrect Which of the following items describes an index measure of systematic
risk?
Your answer: Coefficent of variation
The correct answer: Beta

Incorrect. The coefficient of variation is a measure of relative risk.

17. Incorrect Which of the following items is a model that describes the relationship
between risk and expected return (in this model the expected return is
equal to the risk-free return plus a premium based on the systematic
risk of the security)?
Your answer: Characteristic line
The correct answer: Capital asset pricing model

Incorrect. The characteristic line describes the relationship between an

individual security's returns and returns on the market portfolio.
18. Correct What is the beta for an average risk security? What is the beta for a
Treasury bill? Hint Refer to the "Capital-Asset Pricing Model" section.
Your answer: 1; 0.

Correct.

19. Correct Assume that a firm's common stock can be valued using the constant
dividend growth model. As an analyst you expect that the return on the
market will be 15% and the risk-free rate is 7%. You have estimated
that the dividend next period will be $1.50, the firm will grow at a
constant 6%, and the firm beta is 0.50. The common stock is currently
selling for $30.00 in the market place. Which of the following
statements is correct?
Your answer: The firm's stock is fairly priced.

Correct.

20. Incorrect Which form of market efficiency states that current security prices fully
reflect all information, both public and private?
Your answer: Semi-strong
The correct answer: Strong

Incorrect. This form states that current prices fully reflect all publicly
available information.

21. Incorrect Which form of market efficiency states that current prices fully reflect
the historical sequence of prices?
Your answer: Semi-strong
The correct answer: Weak

Incorrect. This form states that current prices fully reflect all publicly
available information.

22. Correct Which form of market efficiency states that current prices fully reflect all
publicly available information?
Your answer: Semi-strong

Correct.
1. Correct The return on common stocks is a combination of income paid to the
stockholder plus any appreciation in stock price.
Your answer: TRUE
Correct.

2. Incorrect As long as the correlation coefficient between two securities is less than 1.0,
the standard deviation of a portfolio made up of these two securities will be
less than the weighted average of the two individual standard deviations.
Your answer: FALSE
The correct answer: TRUE

Incorrect. Combining two securities will always reduce risk with the
 exception of when two securities that are perfectly positively correlated.

3. Incorrect Investors can expect to be compensated with higher returns for bearing
avoidable or unsystematic risk.
Your answer: TRUE
The correct answer: FALSE

Incorrect. Since investors can eliminate this risk by diversifying among a

number of different firms, there is no additional compensation. It is the
bearing of systematic risk that brings additional expected return.

4. Incorrect The "risk-free rate" is usually represented by the yield on short-term U.S.
Treasury securities.
Your answer: FALSE
The correct answer: TRUE

Incorrect. A short-term U.S. Treasury security is considered risk-free.

5. Incorrect The CAPM is a multifactor model.

Your answer: TRUE
The correct answer: FALSE

Incorrect. The CAPM is a single-factor model.

You have invested in a ski resort that has the following distribution of returns
1. under different snow conditions:

PROBABILITY
POSSIBLE RATE OF RETURN
OF
SNOW UNDER THIS
THIS
CONDITIONS CONDITION
CONDITION
Poor .10 .03
Fair .30 .07
Good .40 .10
Excellent .20 .18
What is the expected value of return on your investment?
You have an investment with an expected value of return of 30% or .30 and a
2. standard deviation of .20. (Assume a normal distribution.) What is the probability
that the actual future return will be less than zero? What is the probability of a
return below 30%?
Assuming that the capital-asset pricing model approach is appropriate, compute
3. the required rate of return for each of the following stocks. Assume a risk-free rate
of .08 and an expected return for the market portfolio of .13.

STOCK A B C D
 BETA 2.0 1.5 1 .7

CHAPTR 2

1. Incorrect To financial analysts, "working capital" means the same thing as __________.
Your answer: fixed assets
The correct answer: current assets

Incorrect. Financial analysts use the term "working capital" when referring to
current assets not fixed assets.

2. Incorrect Which of the following would be consistent with an aggressive approach to

financing working capital?
Your answer: Financing permanent inventory buildup with long-term debt.
The correct answer: Financing some long-term needs with short-term funds.

Incorrect. This is a maturity matching approach and is neither aggressive nor

conservative in nature (Table 8-1). Rather, it is a moderate approach.

3. Incorrect Which of the following would be consistent with a conservative approach to

financing working capital?
Your answer: Financing seasonal needs with short-term funds.
The correct answer: Financing short-term needs with long-term debt.

Incorrect. This is a moderate (maturity matching) approach as the seasonal short-

term demand for funds can be repaid with the eventual short-term cash flows.

4. Correct Which of the following would be consistent with a hedging (maturity matching)
approach to financing working capital?
Your answer: Financing short-term needs with short-term funds.

Correct.

5. Correct Which of the following is a basic principle of finance as it relates to the

management of working capital?
Your answer: Profitability moves together with risk.

Correct.

6. Incorrect Which of the following illustrates the use of a hedging approach to financing
assets?
Your answer: Short-term assets financed with equity
The correct answer: Permanent working capital financed with long-term liabilities.
 Incorrect. The hedging approach attempts to match the maturities of both assets
and liabilities. In this case the assets are short-term while the liabilities are long-
term.

7. Incorrect In deciding the optimal level of current assets for the firm, management is
confronted with __________.
Your answer: a trade-off between liquidity and risk
The correct answer: a trade-off between profitability and risk

Incorrect. Actually, greater liquidity results in lower profitability and risk.

8. Incorrect Which of the following statements is most correct?

Your answer: Strict adherence to the maturity matching approach to financing
would call for all current assets to be financed solely with current liabilities.
The correct answer: Current assets of the typical manufacturing firm account for
over half of its total assets.

Incorrect. Only the "temporary" component of current assets would be financed

with current liabilities under the maturity matching approach.

9. Incorrect The amount of current assets required to meet a firm's long-term minimum needs
is referred to as __________ working capital.
Your answer: net
The correct answer: permanent

Incorrect. This is the amount of current assets less current liabilities.

10. Incorrect The amount of current assets that varies with seasonal requirements is referred to
as __________ working capital.
Your answer: permanent
The correct answer: temporary

Incorrect. This is the amount of current assets required to meet a firm's long-term
minimum needs.

11. Incorrect Having defined working capital as current assets, it can be further classified
according to __________.
Your answer: rate of return and financing method
The correct answer: components and time

Incorrect. Components (e.g. cash, marketable securities, receivables) and time

(permanent or temporary)

12. Incorrect Your firm has a philosophy that is analogous to the hedging (maturity matching)
 approach. Which of the following is the most appropriate form for financing a new
capital investment in plant and equipment?
Your answer: 6-month bank notes
The correct answer: Common stock equity

Incorrect. These bank notes are very short-term and would not match closely to the
long-term life of the plant and equipment.

13. Correct Your firm has a philosophy that is analogous to the hedging (maturity matching)
approach. Which of the following is the most appropriate non-spontaneous form for
financing the excess seasonal current asset needs?
Your answer: 6-month bank notes

Correct.

14. Correct Under a conservative financing policy a firm would use long-term financing to
finance some of the temporary current assets. What should the firm do when a
"dip" in temporary current assets causes total assets to fall below the total long-
term financing?
Your answer: Invest the excess long-term financing in marketable securities.

Correct.

15. Incorrect Which of the following statements is correct for a conservative financing policy for a
firm relative to a former aggressive policy?
Your answer: The firm will see an increase in its risk profile.
The correct answer: The firm uses long-term financing to finance all fixed and
current assets.

Incorrect. The firm will actually find a decrease in its risk profile, as there is less
interest rate and refinancing risks.

16. Correct Which of the following statements is correct for an aggressive financing policy for a
firm relative to a former conservative policy?
Your answer: The firm will see an increase in its expected profits.

Correct.

17. Incorrect How can a firm provide a margin of safety if it cannot borrow on short notice to
meet its needs?
Your answer: Shorten the maturity schedule of financing
The correct answer: Lengthening the maturity schedule of financing

Incorrect. However, lengthening the maturity schedule of financing would help

provide a margin of safety.
18. Incorrect Risk, as it relates to working capital, means that there is jeopardy to the firm for not
maintaining sufficient current assets to __________.
Your answer: support the proper level of sales and take prompt payment
discounts
The correct answer: meet its cash obligations as they occur and support the
proper level of sales

Incorrect. The first part of the answer is correct, but not the second.

19. Incorrect If a company moves from a "conservative" working capital policy to an "aggressive"
policy, it should expect __________.
Your answer: expected profitability to increase, whereas risk would decrease
The correct answer: liquidity to decrease, whereas expected profitability would
increase

Incorrect. Expected profitability would increase, but so would risk.

20. Incorrect To financial analysts, "net working capital" means the same thing as __________.
Your answer: fixed assets
The correct answer: current assets minus current liabilities.

Incorrect. Financial analysts use the term "working capital" when referring to the
dollar difference between current assets and current liabilities.
1. Correct From a financial analyst's viewpoint, "gross working capital" simply refers to current
assets.
Your answer: TRUE
Correct

2. Incorrect The optimal level of working capital is that which provides a 2:1 ratio of current assets
to current liabilities.
Your answer: TRUE
The correct answer: FALSE

Incorrect. Based on our stated objective for the firm, the optimal level of working
capital (holding everything else equal) is that which ultimately maximizes shareholder
wealth, not a fixed ratio.

3. Incorrect The level of current assets to maintain and how to finance current assets are
interdependent.
Your answer: FALSE
The correct answer: TRUE

These two items are considered jointly. A firm that follows a conservative policy (high
levels of current assets) should be in a better position to utilize short-term borrowing
than a firm that maintains aggressively low levels of current assets.
4. Correct The hedging approach to financing involves matching maturities of financing with
specific assets.
Your answer: TRUE

Correct.

5. Correct In general, long-term debt costs less than short-term debt.

Your answer: FALSE

Correct.
Hoskins Hiking Boot Company is trying to devise an appropriate working
1.   capital policy. Their most recent balance sheet is as follows:

BALANCE SHEET, DECEMBER 31, 2001 (in thousands)

ASSETS LIABILIIES AND OWNER'S EQUITY

Cash $30 Accounts payable $35

Accounts receivable 50 Notes payable 10
Inventories 30 Accruals 5
Current Assets 110 Current liabilities 50
Mortgage loan (at
Net fixed assets 150 80
13%)
Common equity 130
Total liabilities &
Total assets $260 Owner's equity $260
You know that net profits in 2001 were $28,000.

a. What is Hoskin's current level of working capital?

b. What percentage of total assets is invested in working capital?
c. Calculate Hoskins' return on investment.
d. Suppose the firm reduces cash, accounts receivable, and inventory by
10% and uses the proceeds to pay off some of its accounts payable.
Now, assuming all other items remain the same, answer a, b, and c
above using these new figures

Devise a financing plan, assuming that your objective is to use a maturity

2. matching policy for Hoskins Hiking Boot Company. The firm has had the following
quantity of fixed and current assets over the past five years:
 Ending Fixed Assets Current Assets
Date (millions) (millions)
6/1999 $100 $ 80
12/1999 100 100
6/2000 110 90

CHAPTR 3

1. Correct In proper capital budgeting analysis we evaluate incremental

__________ cash flows.
Your answer: operating

Correct.

2. Correct The estimated benefits from a capital budgeting project are expected
as cash flows rather than income flows because __________.
Your answer: it is cash, not accounting income, that is central to the
firm's capital budgeting decision

Correct.

3. Incorrect What is the depreciable basis?

Your answer: It is the cost of capital (both debt and equity) that can be
depreciated and the cost spread over multiple years of the project.
The correct answer: It is the fully installed cost of an asset that taxing
authorities allow to be written off for tax purposes.

Incorrect. It is the fully installed cost of an asset that taxing authorities

allow to be written off for tax purposes.

4. Incorrect In estimating "after-tax incremental operating cash flows" for a project,

you should include all of the following except __________.
Your answer: changes in working capital resulting from the project, net
of spontaneous changes in current liabilities
The correct answer: costs that have previously been incurred that are
unrecoverable

Incorrect. We want to consider changes in working capital when

evaluating a project.

5. Incorrect All of the following influence capital budgeting cash flows except
__________.
Your answer: economic length of the project
The correct answer: sunk costs of the project

Incorrect. The economic life of the project impacts the quantity and
timing of cash flows in a project.
6. Correct The basic capital budgeting principles involved in determining relevant
after-tax incremental operating cash flows require us to __________.
Your answer: include opportunity costs, but ignore sunk costs

Correct.

7. Incorrect Place the following items in the proper order of completion regarding
the capital budgeting process. I. Perform a postaudit for completed
projects; II. Generate project proposals; III. Estimate appropriate cash
flows; IV. Select value-maximizing projects; V. Evaluate projects.
Your answer: II, III, IV, V, and I.
The correct answer: II, III, V, IV, and I.

Incorrect. There correct order is II, III, V, IV, and I.

8. Incorrect The basic capital budgeting principles involved in determining relevant

after-tax incremental operating cash flows require us to __________.
Your answer: ignore both the effects of inflation and project-driven
changes in working capital net of spontaneous changes in current
liabilities
The correct answer: include effects of inflation, and include project-
driven changes in working capital net of spontaneous changes in
current liabilities

Incorrect. We would include effects of inflation, and include project-

driven changes in working capital net of spontaneous changes in
current liabilities.

9. Incorrect Interest payments, principal payments, and cash dividends are

__________ the typical budgeting cash-flow analysis because they are
________ flows.
Your answer: included in; financing
The correct answer: excluded from; financing

Incorrect. These items are excluded because they are financing flows.

10. Correct What is an example of a capitalized expenditure?

Your answer: Installation costs necessary to use a machine that was
just purchased.

Correct.

11. Correct In regards to the sale or disposal of a depreciable asset, "recapture of

depreciation" is __________.
Your answer: any amount realized in excess of its depreciated (tax)
book value, but less than its original depreciable basis

Correct.

12. Incorrect For a corporation, what is the maximum federal tax that applies to any
 gains on the sale of a depreciable asset above its depreciable basis?
Your answer: 39%.
The correct answer: 35%.

Incorrect. The maximum rate is 35%.

13. Correct Under the MACRS system, and employing the half-year convention, a
piece of machinery falling in the 10-year property class would generally
be depreciated over __________.
Your answer: 11 recovery years

Correct.

14. Correct Which of the following is least likely to be part of the calculation of the
terminal-year incremental net cash flow for a energy-related expansion
project?
Your answer: Capitalized expenditures.

Correct.

15. Incorrect HeinShmidt [Link] is considering the purchase of a new project

with a four-year life. The depreciable basis is $100,000 and requires
$20,000 of additional working capital. The project will generate $87,000
of additional revenue with $50,000 of additional operating expenses for
each year of the four-year project. For tax purposes, the equipment
falls into the three-year property class using MACRS percentages. The
company is subject to a marginal tax rate of 40%. The salvage value at
the end of the fourth year is expected to be $5,000. The incremental
net cash flow for the first year of the project is closest to which of the
four suggested answers below?
Your answer: $35,862
The correct answer: $35,532

Incorrect. ($87,000 - $50,000 - $33,330) × (1-.40) + $33,330 =

$35,532. Note that the depreciation charge is 33.33% of $100,000.

16. Incorrect HeinShmidt [Link] is considering the purchase of a new project

with a four-year life. The depreciable basis is $100,000 and requires
$20,000 of additional working capital. The project will generate $87,000
of additional revenue with $50,000 of additional operating expenses for
each year of the four-year project. For tax purposes, the equipment
falls into the three-year property class using MACRS percentages. The
company is subject to a marginal tax rate of 40%. The salvage value at
the end of the fourth year is expected to be $5,000. When we
determine the project's terminal year incremental net cash flow, i.e., the
flow for year 4, we apply the same step-by-step procedure for this
period's cash flow as we do to those in all the interim periods. In
addition, we give special recognition to a few cash flows that are
connected with project termination. The adjustment (i.e., the sum of
just those flows connected with project termination) that needs to be
made to the incremental net cash flow for the fourth year of the project
 is closest to which of the four suggested answers below?
Your answer: $25,000
The correct answer: $23,000

Incorrect. ($5,000 - $2,000 + $20,000) = $23,000. Note that the

salvage value is considered as recapturing previous depreciation and
will increase taxes by 40% of the salvage value.

17. Incorrect HeinShmidt [Link] is considering the purchase of a new project

with a four-year life. The depreciable basis is $100,000 and requires
$20,000 of additional working capital. The project will generate $87,000
of additional revenue with $50,000 of additional operating expenses for
each year of the four-year project. For tax purposes, the equipment
falls into the three-year property class using MACRS percentages. The
company is subject to a marginal tax rate of 40%. The salvage value at
the end of the fourth year is expected to be $5,000. The initial cash
outflow for the project is closest to which of the four suggested answers
below?
Your answer: $100,000
The correct answer: $120,000

Incorrect. ($100,000 + $20,000) = $120,000.

18. Incorrect HeinShmidt [Link] is considering the purchase of a new project

with a four-year life. The depreciable basis is $100,000 and requires
$20,000 of additional working capital. The project will generate $87,000
of additional revenue with $50,000 of additional operating expenses for
each year of the four-year project. For tax purposes, the equipment
falls into the three-year property class using MACRS percentages. The
company is subject to a marginal tax rate of 40%. The salvage value at
the end of the fourth year is expected to be $5,000. The incremental
net cash flow for the second year of the project is closest to which of
the four suggested answers below?
Your answer: $27,000
The correct answer: $39,980

Incorrect. ($87,000 - $50,000 - $44,450) × (1 - .40) + $44,450 =

$39,980. Note that the depreciation charge is 44.45% of $100,000 and
we assume that the "tax loss" shields other income in the firm.

19. Incorrect Bruggerstein [Link] is considering replacing a machine with a new

machine that has a four-year life. The depreciable basis of the "new"
machine is $100,000 ($80,000 cost plus $20,000 shipping and
installation) and requires no additional working capital. The "old"
machine can be salvaged for $20,000 (at its current {tax} book value)
today. The "new" project will not generate additional revenues, but will
decrease operating expenses by $35,000 for each year of the four-year
project. For tax purposes, the equipment falls into the three-year
property class using MACRS percentages. The "old" machine has four
years of useful life remaining, only one year of tax depreciation of
$5,000 remaining to be taken, and an estimated final salvage value,
 four years from now, of zero. The company is subject to a marginal tax
rate of 40%. The salvage value at the end of the fourth year for the
"new" project is expected to be $5,000. The incremental net cash flow
for the first year of the project is closest to which of the four suggested
answers below?
Your answer: $28,330
The correct answer: $32,332

Incorrect. [ $35,000 - ($33,330 - $5,000) ] × [ 1- .40 ] + $28,330 =

$32,332.

20. Incorrect Bruggerstein [Link] is considering replacing a machine with a new

machine that has a four-year life. The depreciable basis of the "new"
machine is $100,000 ($80,000 cost plus $20,000 shipping and
installation) and requires no additional working capital. The "old"
machine can be salvaged for $20,000 (at its current {tax} book value)
today. The "new" project will not generate additional revenues, but will
decrease operating expenses by $35,000 for each year of the four-year
project. For tax purposes, the equipment falls into the three-year
property class using MACRS percentages. The "old" machine has four
years of useful life remaining, only one year of tax depreciation of
$5,000 remaining to be taken, and an estimated final salvage value,
four years from now, of zero. The company is subject to a marginal tax
rate of 40%. The salvage value at the end of the fourth year for the
"new" project is expected to be $5,000. The initial cash outflow for the
project is closest to which of the four suggested answers below?
Your answer: $120,000
The correct answer: $80,000

Incorrect. [ $80,000 + $20,000 - $20,000 + $0 ] = $80,000

1. Incorrect The stream of cash flows produced by the project directly influences
the value of a capital expansion project.
Your answer: FALSE
The correct answer: TRUE
Incorrect. Cash flows are critical to the valuation of any project or
asset.

2. Correct Capital budgeting is the process of identifying, analyzing, and selecting

investment projects whose cash flows will all be received beyond one year.
Your answer: TRUE

Correct.

3. Incorrect In the initial years of a project the use of an accelerated form of

depreciation, like Modified Cost Recovery System, increases taxable income
relative to the use of the straight-line method.
Your answer: TRUE
The correct answer: FALSE

Incorrect. An accelerated form of depreciation increases the depreciation

expense in the initial years that results in lower taxable income and higher
 cash flows.

4. Incorrect Cash flow calculations require adding back depreciation to net income since
it is a non-cash expense.
Your answer: FALSE
The correct answer: TRUE

Incorrect. Depreciation is a non-cash expense. Thus we add it back in

calculating cash flows since the firm expended no cash at that time.

5. Incorrect A capital investment involves making a future cash outlay in the expectation
of current benefits.
Your answer: TRUE
The correct answer: FALSE

Incorrect. A capital investment involves making a current cash outlay in the

expectation of future benefits