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CFA CFA I Exam
CFA Level I Chartered Financial Analyst (Page 67 )

Updated On: 26-Jan-2026
Page 67 of 793
PDF with 3960 Questions

You have been asked by the president of your company to evaluate the proposed acquisition of a new special- purpose truck. The truck's basic price is $50,000, and it will cost another $10,000 to modify it for special use by your firm. The truck falls into the MACRS three-year class, and it will be sold after three years for $20,000. Use of the truck will require an increase in net working capital (spare parts inventory) of $2,000. The truck will have no effect on revenues, but it is expected to save the firm $20,000 per year in before-tax operating costs, mainly labor. The firm's marginal tax rate is 40 percent. What is the net investment in the truck?

  1. -$65,000
  2. -$50,000
  3. -$52,600
  4. -$55,800
  5. -$62,000

Answer(s): E

Explanation:

Initial investment:
Cost($50,000)
Modification(10,000)
Change in NWC(2,000)
Total net investment =($62,000)



Which of the following characteristics is not necessary for the NPV and MIRR calculations to consistently produce similar results?

  1. Projects must have cash flows
  2. Projects must have equal lifespans
  3. Project must be of equal scale
  4. Projects must be of equal size
  5. Projects must be independent

Answer(s): E

Explanation:

When examining mutually-exclusive projects with normal cash flows, the MIRR and NPV methods will ALWAYS produce similar results as long as the projects being examined are equal in size and have the same life. It is not necessary for projects to be independent in order for the NPV and MIRR methods to produce similar results.



Which of the following events is likely to encourage a corporation to increase its debt ratio?

  1. An increase in the personal tax rate.
  2. An increase in the expected cost of bankruptcy.
  3. Increased uncertainty about the level of sales and output prices.
  4. An increase in the corporate tax rate.
  5. An increase in the company's degree of operating leverage.

Answer(s): D

Explanation:

A major reason for using debt is that interest is deductible, which lowers the effective cost of debt. An increase in the corporate tax rate will increase the tax savings from using debt. An interest increase in the personal tax rate will make interest income less attractive. An increase in operating leverage, bankruptcy costs, and uncertainty about sales and output prices will encourage the firm to decrease financial leverage.



Of the commonly-employed methods for evaluating capital projects, which of the following offers the most useful, reliable, and germane results for the financial analyst?

  1. Internal Rate of Return
  2. Discounted Payback Period
  3. Net Present Value
  4. Payback Period

Answer(s): C

Explanation:

In analyzing capital projects, particular weight should be given to Net Present Value (NPV) calculations, as this method is viewed as the most reliable and realistic of the four major capital budgeting analysis methods. Net Present Value calculations are superior to Internal Rate of Return calculations in that NPV works regardless of the size or timing of cash flows, and has a more flexible incorporation of the appropriate discount rate. Payback period should be viewed as the most inferior of the four methods, asit does not incorporate the "time-value of money" principle into its calculation. The Discounted Payback Period is only a slightly improved version of the basic Payback Period.



Which of the following statements is most correct?

  1. Corporations should fully account for sunk costs when making investment decisions.
  2. All of the answers are correct.
  3. The rate of depreciation will not affect operating cash flows, because depreciation is not a cash expense.
  4. Corporations should fully account for opportunity costs when making investment decisions.
  5. None of the answers are correct.

Answer(s): D

Explanation:

Cash flow = Net income + depreciation; therefore, depreciation affects operating cash flows. Sunk costs should be disregarded when making investment decisions, while opportunity costs should be considered when making investment decisions, as they represent the best alternative use of an asset.



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