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Homework answers / question archive / MULTIPLE CHOICE 1)Which of the following capital budgeting techniques ignores the time value of money? a
MULTIPLE CHOICE
1)Which of the following capital budgeting techniques ignores the time value of money?
a. 
payback period 
b. 
net present value 
c. 
internal rate of return 
d. 
profitability index 
2. Which of the following capital budgeting techniques may potentially ignore part of a project's relevant cash flows?
a. 
net present value 
b. 
internal rate of return 
c. 
payback period 
d. 
profitability index 
3. In comparing two projects, the ___________ is often used to evaluate the relative riskiness of the projects.
a. 
payback period 
b. 
net present value 
c. 
internal rate of return 
d. 
discount rate 
4. Which of the following capital budgeting techniques does not routinely rely on the assumption that all cash flows occur at the end of the period?
a. 
internal rate of return 
b. 
net present value 
c. 
profitability index 
d. 
payback period 
5. Assume that a project consists of an initial cash outlay of $100,000 followed by equal annual cash inflows of $40,000 for 4 years. In the formula X = $100,000/$40,000, X represents the
a. 
payback period for the project. 
b. 
profitability index of the project. 
c. 
internal rate of return for the project. 
d. 
project's discount rate. 
6. All other factors equal, a large number is preferred to a smaller number for all capital project evaluation measures except
a. 
net present value. 
b. 
payback period. 
c. 
internal rate of return. 
d. 
profitability index. 
7. The payback method assumes that all cash inflows are reinvested to yield a return equal to
a. 
the discount rate. 
b. 
the hurdle rate. 
c. 
the internal rate of return. 
d. 
zero. 
8. The payback method measures
a. 
how quickly investment dollars may be recovered. 
b. 
the cash flow from an investment. 
c. 
the economic life of an investment. 
d. 
the profitability of an investment. 
9. If investment A has a payback period of three years and investment B has a payback period of four years, then
a. 
A is more profitable than B. 
b. 
A is less profitable than B. 
c. 
A and B are equally profitable. 
d. 
the relative profitability of A and B cannot be determined from the information given. 
10. The payback period is the
a. 
length of time over which the investment will provide cash inflows. 
b. 
length of time over which the initial investment is recovered. 
c. 
shortest length of time over which an investment may be depreciated. 
d. 
shortest length of time over which the net present value will be positive. 
11. Which of the following capital budgeting techniques has been criticized because it fails to consider investment profitability?
a. 
payback method 
b. 
accounting rate of return 
c. 
net present value method 
d. 
internal rate of return 
12. The time value of money is explicitly recognized through the process of
a. 
interpolating. 
b. 
discounting. 
c. 
annuitizing. 
d. 
budgeting. 
13. The time value of money is considered in longrange investment decisions by
a. 
assuming equal annual cash flow patterns. 
b. 
investing only in shortterm projects. 
c. 
assigning greater value to more immediate cash flows. 
d. 
ignoring depreciation and tax implications of the investment. 
14. When using one of the discounted cash flow methods to evaluate the desirability of a capital budgeting project, which of the following factors is generally not important?
a. 
method of financing the project under consideration 
b. 
timing of cash flows relating to the project 
c. 
impact of the project on income taxes to be paid 
d. 
amounts of cash flows relating to the project 
15. As to a capital investment, net cash inflow is equal to the
a. 
cost savings resulting from the investment. 
b. 
sum of all future revenues from the investment. 
c. 
net increase in cash receipts over cash payments. 
d. 
net increase in cash payments over cash receipts. 
16. In a discounted cash flow analysis, which of the following would not be consistent with adjusting a project's cash flows to account for higherthannormal risk?
a. 
increasing the expected amount for cash outflows 
b. 
increasing the discounting period for expected cash inflows 
c. 
increasing the discount rate for cash outflows 
d. 
decreasing the amount for expected cash inflows 
17. When a project has uneven projected cash inflows over its life, an analyst may be forced to use ___________________ to find the project's internal rate of return.
a. 
a screening decision 
b. 
a trialanderror approach 
c. 
a post investment audit 
d. 
a time line 
18. The interest rate used to find the present value of a future cash flow is the
a. 
prime rate. 
b. 
discount rate. 
c. 
cutoff rate. 
d. 
internal rate of return. 
19. A firm's discount rate is typically based on
a. 
the interest rates related to the firm's bonds. 
b. 
a project's internal rate of return. 
c. 
its cost of capital. 
d. 
the corporate Aa bond yield. 
20. In capital budgeting, a firm's cost of capital is frequently used as the
a. 
internal rate of return. 
b. 
accounting rate of return. 
c. 
discount rate. 
d. 
profitability index. 
21. The net present value method assumes that all cash inflows can be immediately reinvested at the
a. 
cost of capital. 
b. 
discount rate. 
c. 
internal rate of return. 
d. 
rate on the corporation's shortterm debt. 
22. Which of the following changes would not decrease the present value of the future depreciation deductions on a specific depreciable asset?
a. 
a decrease in the marginal tax rate 
b. 
a decrease in the discount rate 
c. 
a decrease in the rate of depreciation 
d. 
an increase in the life expectancy of the depreciable asset 
23. To reflect greater uncertainty (greater risk) about a future cash inflow, an analyst could
a. 
increase the discount rate for the cash flow. 
b. 
decrease the discounting period for the cash flow. 
c. 
increase the expected value of the future cash flow before it is discounted. 
d. 
extend the acceptable length for the payback period. 
24. A change in the discount rate used to evaluate a specific project will affect the project's
a. 
life. 
b. 
payback period. 
c. 
net present value. 
d. 
total cash flows. 
25. For a project such as plant investment, the return that should leave the market price of the firm's stock unchanged is known as the
a. 
cost of capital. 
b. 
net present value. 
c. 
payback rate. 
d. 
internal rate of return. 
26. The pretax cost of capital is higher than the aftertax cost of capital because
a. 
interest expense is deductible for tax purposes. 
b. 
principal payments on debt are deductible for tax purposes. 
c. 
the cost of capital is a deductible expense for tax purposes. 
d. 
dividend payments to stockholders are deductible for tax purposes. 
27. The basis for measuring the cost of capital derived from bonds and preferred stock, respectively, is the
a. 
pretax rate of interest for bonds and stated annual dividend rate less the expected earnings per share for preferred stock. 
b. 
pretax rate of interest for bonds and stated annual dividend rate for preferred stock. 
c. 
aftertax rate of interest for bonds and stated annual dividend rate less the expected earnings per share for preferred stock. 
d. 
aftertax rate of interest for bonds and stated annual dividend rate for preferred stock. 
28. The combined weighted average interest rate that a firm incurs on its longterm debt, preferred stock, and common stock is the
a. 
cost of capital. 
b. 
discount rate. 
c. 
cutoff rate. 
d. 
internal rate of return. 
29. The weighted average cost of capital that is used to evaluate a specific project should be based on the
a. 
mix of capital components that was used to finance a project from last year. 
b. 
overall capital structure of the corporation. 
c. 
cost of capital for other corporations with similar investments. 
d. 
mix of capital components for all capital acquired in the most recent fiscal year. 
30. Debt in the capital structure could be treated as if it were common equity in computing the weighted average cost of capital if the debt were
a. 
callable. 
b. 
participating. 
c. 
cumulative. 
d. 
convertible. 
31. The weighted average cost of capital approach to decision making is not directly affected by the
a. 
value of the common stock. 
b. 
current budget for capital expansion. 
c. 
cost of debt outstanding. 
d. 
proposed mix of debt, equity, and existing funds used to implement the project. 
32. The ___________________ is the highest rate of return that can be earned from the most attractive, alternative capital project available to the firm.
a. 
accounting rate of return 
b. 
internal rate of return 
c. 
hurdle rate 
d. 
opportunity cost of capital 
33. If an analyst desires a conservative net present value estimate, he/she will assume that all cash inflows occur at
a. 
mid year. 
b. 
the beginning of the year. 
c. 
year end. 
d. 
irregular intervals. 
34. The salvage value of an old lathe is zero. If instead, the salvage value of the old lathe was $20,000, what would be the impact on the net present value of the proposal to purchase a new lathe?
a. 
It would increase the net present value of the proposal. 
b. 
It would decrease the net present value of the proposal. 
c. 
It would not affect the net present value of the proposal. 
d. 
Potentially it could increase or decrease the net present value of the new lathe. 
35. The net present value method of evaluating proposed investments
a. 
measures a project's internal rate of return. 
b. 
ignores cash flows beyond the payback period. 
c. 
applies only to mutually exclusive investment proposals. 
d. 
discounts cash flows at a minimum desired rate of return. 
36. Which of the following statements is true regarding capital budgeting methods?
a. 
The Fisher rate can never exceed a company's cost of capital. 
b. 
The internal rate of return measure used for capital project evaluation has more conservative assumptions than the net present value method, especially for projects that generate a positive net present value. 
c. 
The net present value method of project evaluation will always provide the same ranking of projects as the profitability index method. 
d. 
The net present value method assumes that all cash inflows can be reinvested at the project's cost of capital. 
37. A company is evaluating three possible investments. Information relating to the company and the investments follow:
Fisher rate for the three projects 
7% 
Cost of capital 
8% 
Based on this information, we know that
a. 
all three projects are acceptable. 
b. 
none of the projects are acceptable. 
c. 
the capital budgeting evaluation techniques profitability index, net present value, and internal rate of return will provide a consistent ranking of the projects. 
d. 
the net present value method will provide a ranking of the projects that is superior to the ranking obtained using the internal rate of return method. 
38. If a project generates a net present value of zero, the profitability index for the project will
a. 
equal zero. 
b. 
equal 1. 
c. 
equal 1. 
d. 
be undefined. 
39. If the profitability index for a project exceeds 1, then the project's
a. 
net present value is positive. 
b. 
internal rate of return is less than the project's discount rate. 
c. 
payback period is less than 5 years. 
d. 
accounting rate of return is greater than the project's internal rate of return. 
40. If a project's profitability index is less than 1, the project's
a. 
discount rate is above its cost of capital. 
b. 
internal rate of return is less than zero. 
c. 
payback period is infinite. 
d. 
net present value is negative. 
41. The profitability index is
a. 
the ratio of net cash flows to the original investment. 
b. 
the ratio of the present value of cash flows to the original investment. 
c. 
a capital budgeting evaluation technique that doesn't use discounted values. 
d. 
a mandatory technique when capital rationing is used. 
42. Which method of evaluating capital projects assumes that cash inflows can be reinvested at the discount rate?
a. 
internal rate of return 
b. 
payback period 
c. 
profitability index 
d. 
accounting rate of return 
43. If the total cash inflows associated with a project exceed the total cash outflows associated with the project, the project's
a. 
net present value is greater than zero. 
b. 
internal rate of return is greater than zero. 
c. 
profitability index is greater than 1. 
d. 
payback period is acceptable. 
44. The net present value and internal rate of return methods of decision making in capital budgeting are superior to the payback method in that they
a. 
are easier to implement. 
b. 
consider the time value of money. 
c. 
require less input. 
d. 
reflect the effects of sensitivity analysis. 
45. If an investment has a positive net present value, the
a. 
internal rate of return is higher than the discount rate. 
b. 
discount rate is higher than the hurdle rate of return. 
c. 
internal rate of return is lower than the discount rate of return. 
d. 
hurdle rate of return is higher than the discount rate. 
46. The rate of interest that produces a zero net present value when a project's discounted cash operating advantage is netted against its discounted net investment is the
a. 
cost of capital. 
b. 
discount rate. 
c. 
cutoff rate. 
d. 
internal rate of return. 
47. For a profitable company, an increase in the rate of depreciation on a specific project could
a. 
increase the project's profitability index. 
b. 
increase the project's payback period. 
c. 
decrease the project's net present value. 
d. 
increase the project's internal rate of return. 
48. Which of the following capital expenditure planning and control techniques has been criticized because it might mistakenly imply that earnings are reinvested at the rate of return earned by the investment?
a. 
payback method 
b. 
accounting rate of return 
c. 
net present value method 
d. 
internal rate of return 
49. If the discount rate that is used to evaluate a project is equal to the project's internal rate of return, the project's _____________ is zero.
a. 
profitability index 
b. 
internal rate of return 
c. 
present value of the investment 
d. 
net present value 
50. As the marginal tax rate goes up, the benefit from the depreciation tax shield
a. 
decreases. 
b. 
increases. 
c. 
stays the same. 
d. 
can move up or down depending on whether the firm's cost of capital is high or low. 
51. When a profitable corporation sells an asset at a loss, the aftertax cash flow on the sale will
a. 
exceed the pretax cash flow on the sale. 
b. 
be less than the pretax cash flow on the sale. 
c. 
be the same as the pretax cash flow on the sale. 
d. 
increase the corporation's overall tax liability. 
52. In a typical (conservative assumptions) aftertax discounted cash flow analysis, depreciation expense is assumed to accrue at
a. 
the beginning of the period. 
b. 
the middle of the period. 
c. 
the end of the period. 
d. 
irregular intervals over the life of the investment. 
53. The pretax and aftertax cash flows would be the same for all of the following items except
a. 
the liquidation of working capital at the end of a project's life. 
b. 
the initial (outlay) cost of an investment. 
c. 
the sale of an asset at its book value. 
d. 
a cash payment for salaries and wages. 
54. The aftertax net present value of a project is affected by
a. 
taxdeductible cash flows. 
b. 
nontaxdeductible cash flows. 
c. 
accounting accruals. 
d. 
all of the above. 
55. A project's aftertax net present value is increased by all of the following except
a. 
revenue accruals. 
b. 
cash inflows. 
c. 
depreciation deductions. 
d. 
expense accruals. 
56. Multiplying the depreciation deduction by the tax rate yields a measure of the depreciation tax
a. 
shield. 
b. 
benefit. 
c. 
payable. 
d. 
loss. 
57. Annual aftertax corporate net income can be converted to annual aftertax cash flow by
a. 
adding back the depreciation amount. 
b. 
deducting the depreciation amount. 
c. 
adding back the quantity (t ´ depreciation deduction), where t is the corporate tax rate. 
d. 
deducting the quantity [(1 t) ´ depreciation deduction], where t is the corporate tax rate. 
58. Income taxes are levied on
a. 
net cash flow. 
b. 
income as measured by accounting rules. 
c. 
net cash flow plus depreciation. 
d. 
income as measured by tax rules. 
59. Which of the following best represents a screening decision?
a. 
determining which project has the highest net present value 
b. 
determining if a project's internal rate of return exceeds the firm's cost of capital 
c. 
determining which projects are mutually exclusive 
d. 
determining which are the best projects 
60. Below are pairs of projects. Which pair best represents independent projects?
a. 
buy computer; buy software package 
b. 
buy computer #1; buy computer #2 
c. 
buy computer; buy computer security system 
d. 
buy computer; repave parking lot 
61. Which of the following are tax deductible under U.S. tax law?
a. 
interest payments to bondholders 
b. 
preferred stock dividends 
c. 
common stock dividends 
d. 
all of the above 
62. Sensitivity analysis is
a. 
an appropriate response to uncertainty in cash flow projections. 
b. 
useful in measuring the variance of the Fisher rate. 
c. 
typically conducted in the post investment audit. 
d. 
useful to compare projects requiring vastly different levels of initial investment. 
63. If management judges one project in a mutually inclusive set to be acceptable for investment,
a. 
all the other projects in the set are rejected. 
b. 
only one other project in the set can be accepted. 
c. 
all other projects in the set are also accepted. 
d. 
only one project in the set will be rejected. 
64. All other factors equal, which of the following would affect a project's internal rate of return, net present value, and payback period?
a. 
an increase in the discount rate 
b. 
a decrease in the life of the project 
c. 
an increase in the initial cost of the project 
d. 
all of the above 
65. (Present value tables needed to answer this question.) Tiger Inc. bought a piece of machinery with the following data:
Useful life 
6 years 
Yearly net cash inflow 
$45,000 
Salvage value 
 0  
Internal rate of return 
18% 
Cost of capital 
14% 
The initial cost of the machinery was
a. 
$157,392. 
b. 
$174,992. 
c. 
$165,812. 
d. 
impossible to determine from the information given. 
66. Microsoft Co. is considering the purchase of a $100,000 machine that is expected to result in a decrease of $15,000 per year in cash expenses. This machine, which has no residual value, has an estimated useful life of 10 years and will be depreciated on a straightline basis. For this machine, the accounting rate of return would be
a. 
10 percent. 
b. 
15 percent. 
c. 
30 percent. 
d. 
35 percent. 
67. An investment project is expected to yield $10,000 in annual revenues, has $2,000 in fixed costs per year, and requires an initial investment of $5,000. Given a cost of goods sold of 60 percent of sales, what is the payback period in years?
a. 
2.50 
b. 
5.00 
c. 
2.00 
d. 
1.25 
68. A project has an initial cost of $100,000 and generates a present value of net cash inflows of $120,000. What is the project's profitability index?
a. 
.20 
b. 
1.20 
c. 
.80 
d. 
5.00 
69. (Present value tables needed to answer this question.) C Corp. faces a marginal tax rate of 35 percent. One project that is currently under evaluation has a cash flow in the fourth year of its life that has a present value of $10,000 (aftertax). C Corp. assumes that all cash flows occur at the end of the year and the company uses 11 percent as its discount rate. What is the pretax amount of the cash flow in year 4? (Round to the nearest dollar.)
a. 
$15,181 
b. 
$23,356 
c. 
$9,868 
d. 
$43,375 
70. (Present value tables needed to answer this question.) The Salvage Co. is considering the purchase of a new oceangoing vessel that could potentially reduce labor costs of its operation by a considerable margin. The new ship would cost $500,000 and would be fully depreciated by the straightline method over 10 years. At the end of 10 years, the ship will have no value and will be sunk in some already polluted harbor. The Salvage Co.'s cost of capital is 12 percent, and its marginal tax rate is 40 percent. What is the present value of the depreciation tax benefit of the new ship? (Round to the nearest dollar.)
a. 
$113,004 
b. 
$282,510 
c. 
$169,506 
d. 
$200,000 
71. (Present value tables needed to answer this question.) Salvage Co. is considering the purchase of a new oceangoing vessel that could potentially reduce labor costs of its operation by a considerable margin. The new ship would cost $500,000 and would be fully depreciated by the straightline method over 10 years. At the end of 10 years, the ship will have no value and will be sunk in some already polluted harbor. The Salvage Co.'s cost of capital is 12 percent, and its marginal tax rate is 40 percent. If the ship produces equal annual labor cost savings over its 10year life, how much do the annual savings in labor costs need to be to generate a net present value of $0 on the project? (Round to the nearest dollar.)
a. 
$68,492 
b. 
$114,154 
c. 
$88,492 
d. 
$147,487 
72. Pebble Co. recently sold a used machine for $40,000. The machine had a book value of $60,000 at the time of the sale. What is the aftertax cash flow from the sale, assuming the company's marginal tax rate is 20 percent?
a. 
$40,000 
b. 
$60,000 
c. 
$44,000 
d. 
$32,000 
73. (Present value tables needed to answer this question.) A project under consideration by the White Corp. would require a working capital investment of $200,000. The working capital would be liquidated at the end of the project's 10year life. If White Corp. has an aftertax cost of capital of 10 percent and a marginal tax rate of 30 percent, what is the present value of the working capital cash flow expected to be received in year 10?
a. 
$36,868 
b. 
$77,100 
c. 
$53,970 
d. 
$23,130 
74. (Present value tables needed to answer this question.) B Company is considering two alternative ways to depreciate a proposed investment. The investment has an initial cost of $100,000 and an expected fiveyear life. The two alternative depreciation schedules follow:

Method 1 
Method 2 
Year 1 depreciation 
$20,000 
$40,000 
Year 2 depreciation 
$20,000 
$30,000 
Year 3 depreciation 
$20,000 
$20,000 
Year 4 depreciation 
$20,000 
$10,000 
Year 5 depreciation 
$20,000 
$0 
Assuming that the company faces a marginal tax rate of 40 percent and has a cost of capital of 10 percent, what is the difference between the two methods in the present value of the depreciation tax benefit?
a. 
$7,196 
b. 
$0 
c. 
$2,878 
d. 
$6,342 
75. (Present value tables needed to answer this question.) Ann recently invested in a project that promised an internal rate of return of 15 percent. If the project has an expected annual cash inflow of $12,000 for six years, with no salvage value, how much did Ann pay for the project?
a. 
$35,000 
b. 
$45,414 
c. 
$72,000 
d. 
$31,708 
76. Louis recently invested in a project that has an expected annual cash inflow of $7,000 for 10 years, and an expected payback period of 3.6 years. How much did Louis invest in the project?
a. 
$19,444 
b. 
$36,000 
c. 
$25,200 
d. 
$40,000 
77. The McNally Co. is considering an investment in a project that generates a profitability index of 1.3. The present value of the cash inflows on the project is $44,000. What is the net present value of this project?
a. 
$10,154 
b. 
$13,200 
c. 
$57,200 
d. 
$33,846 
78. If r is the discount rate, the formula [1/(1 + r)] refers to the
a. 
future value interest factor associated with r for one period. 
b. 
present value of some future cash flow. 
c. 
present value interest factor associated with r for one period. 
d. 
future value interest factor for an annuity with a duration of r periods. 
79. Future value is the
a. 
sum of dollarsin discounted to time zero. 
b. 
sum of dollarsout discounted to time zero. 
c. 
difference of dollarsin and dollarsout. 
d. 
value of dollarsin minus dollarsout for future periods adjusted for any interestcompounding factor. 
80. All other things being equal, as the time period for receiving an annuity lengthens,
a. 
the related present value factors increase. 
b. 
the related present value factors decrease. 
c. 
the related present value factors remain constant. 
d. 
it is impossible to tell what happens to present value factors from the information given. 
81. Which of the following indicates that the first cash flow is at the end of a period?
Ordinary annuity 
Annuity due 
a. 
yes no 
b. 
yes yes 
c. 
no yes 
d. 
no no 
82. Assume that X represents a sum of money that Bill has available to invest in a project that will yield a return of r. In the formula Y = X(1 + r), Y represents the
a. 
future value of X in one period. 
b. 
future value interest factor associated with r. 
c. 
present value of X. 
d. 
present value interest factor associated with r. 
83. The capital budgeting technique known as accounting rate of return uses
salvage value 
time value of money 
a. 
no no 
b. 
no yes 
c. 
yes yes 
d. 
yes no 
84. In computing the accounting rate of return, the __________ level of investment should be used as the denominator.
a. 
average 
b. 
initial 
c. 
residual 
d. 
cumulative 
85. (Present value tables needed to answer this question.) Debb borrows $50,000 from her bank on January 1, 2001. She is to repay the loan in equal annual installments over 30 years. How much is her annual repayment if the bank charges 10 percent interest?
a. 
$1,667 
b. 
$4,200 
c. 
$2,865 
d. 
$5,304 
86. (Present value tables needed to answer this question.) Bill Hawkins has just turned 65. He has $100,000 to invest in a retirement annuity. One investment company has offered to pay Bill $10,000 per year for 15 years (payments to begin in one year) in exchange for an immediate $100,000 payment. If Bill accepts the offer from the investment company, what is his expected return on the $100,000 investment (assume a return that is compounded annually)?
a. 
between 5 and 6 percent 
b. 
between 6 and 7 percent 
c. 
between 7 and 8 percent 
d. 
between 8 and 9 percent 
87. (Present value tables needed to answer this question.) Cramden Armored Car Co. is considering the acquisition of a new armored truck. The truck is expected to cost $300,000. The company's discount rate is 12 percent. The firm has determined that the truck generates a positive net present value of $17,022. However, the firm is uncertain as to whether its has determined a reasonable estimate of the salvage value of the truck. In computing the net present value, the company assumed that the truck would be salvaged at the end of the fifth year for $60,000. What expected salvage value for the truck would cause the investment to generate a net present value of $0? Ignore taxes.
a. 
$30,000 
b. 
$0 
c. 
$55,278 
d. 
$42,978 
88. (Present value tables needed to answer this question.) Booker Steel Inc. is considering an investment that would require an initial cash outlay of $400,000 and would have no salvage value. The project would generate annual cash inflows of $75,000. The firm's discount rate is 8 percent. How many years must the annual cash flows be generated for the project to generate a net present value of $0?
a. 
between 5 and 6 years 
b. 
between 6 and 7 years 
c. 
between 7 and 8 years 
d. 
between 8 and 9 years 
89. A capital budget is used by management to determine
in what to invest 
how much to invest 
a. 
no no 
b. 
no yes 
c. 
yes no 
d. 
yes yes 
90. The weighted average cost of capital represents the
a. 
cost of bonds, preferred stock, and common stock divided by the three sources. 
b. 
equivalent units of capital used by the organization. 
c. 
overall cost of capital from all organization financing sources. 
d. 
overall cost of dividends plus interest paid by the organization. 
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