Question 1

The dollar amount of interest charges is:

Accepted Answer

A) always considered in the net cash flow calculation 
B) normally not considered in the net cash flow calculation 
C) always considered as a part of the net investment 
D) never a consideration 
A) always considered in the net cash flow calculation 
B) normally not considered in the net cash flow calculation 
C) always considered as a part of the net investment 
D) never a consideration

Question 2

Capital Foods purchased an oven 5 years ago for $45,000.The oven is being depreciated over its estimated 10-year life using the straight line method to a salvage value of $5,000.Capital is planning to replace the oven with a more automated one that will cost $150,000 installed.If the old oven can be sold for $30,000, what is the tax liability? Assume a marginal tax rate of 40 percent.

Accepted Answer

A) $900 
B) $2,000 
C) $127,000 
D) $25,000 
A) $900 
B) $2,000 
C) $127,000 
D) $25,000

Question 3

Jim Bo's currently has annual cash revenues of $240,000 and annual operating expenses of $185,000 including $35,000 in depreciation.The firm's marginal tax rate is 40 percent.A new cutting machine can be purchased for $120,000 will increase revenues by $50,000 per year while operating expenses would increase to $205,000, including $42,000 in depreciation.Compute Jim Bo's annual incremental after-tax net cash flows.

Accepted Answer

A) $25,000 
B) $20,800 
C) $93,000 
D) $19,000 
A) $25,000 
B) $20,800 
C) $93,000 
D) $19,000

Question 4

A firm's cost of capital is:

Accepted Answer

A) an important financial ratio 
B) equal to 10 percent 
C) rarely used in practice 
D) an important input in the capital budgeting process 
A) an important financial ratio 
B) equal to 10 percent 
C) rarely used in practice 
D) an important input in the capital budgeting process

Question 5

A drill press costs $30,000 and is expected to have a 10 year life.The drill press will be depreciated on a straight-line basis over 10 years to a zero estimated salvage value.This machine is expected to reduce the firm's cash operating costs by $4,500 per year.If the firm is in the 40 percent marginal tax bracket, determine the annual net cash flows generated by the drill press.

Accepted Answer

A) $4,500 
B) $900 
C) $5,700 
D) $3,900 
A) $4,500 
B) $900 
C) $5,700 
D) $3,900

Question 6

What are the principles that should be applied when estimating cash flows for capital budgeting purposes?

Accepted Answer

1.Cash flows should be measured on an in

Question 7

The net investment calculation for an asset replacement decision normally includes any .

Accepted Answer

A) after-tax salvage value of the old asset 
B) increase in net working capital 
C) after-tax salvage value of the old asset and increase in net working capital 
D) cannot be computed 
A) after-tax salvage value of the old asset 
B) increase in net working capital 
C) after-tax salvage value of the old asset and increase in net working capital 
D) cannot be computed

Question 8

There are four ways tax consequences may affect the after-tax net proceeds received from the sale of an asset.Describe the four ways and the tax impact.

Accepted Answer

1.Sale of an asset for its book value:Th

Question 9

In estimating the net investment, an outlay that has already been made is known as a (n) .

Accepted Answer

A) sunk cost 
B) cash outflow 
C) opportunity cost 
D) expansion cost 
A) sunk cost 
B) cash outflow 
C) opportunity cost 
D) expansion cost

Question 10

Seduck has just replaced a set of hydraulic screens that had been in operation for 6 years with a newer screening system that cost $180,000 installed.The old system cost $140,000 and had been depreciated as a 10-year MACRS asset.Its salvage value is $10,000.What is the NINV for the new equipment? Assume a 40% tax rate.Use the rounded MACRS schedule listed below:
(10-Year Depreciation Schedule: 10%, 18%, 14%, 12%, 9%, 7%, 7%, 7%, 7%, 6%, 3%)

Accepted Answer

A) $170,000 
B) $157,200 
C) $202,514 
D) $151,228 
A) $170,000 
B) $157,200 
C) $202,514 
D) $151,228

Question 11

The determination of net cash flows (NCF) should never include

Accepted Answer

A) changes in depreciation 
B) changes in operating costs 
C) interest charges 
D) indirect effects 
A) changes in depreciation 
B) changes in operating costs 
C) interest charges 
D) indirect effects

Question 12

What type of tax consequence is associated with the recovery of net working capital?

Accepted Answer

A) A firm must pay tax and a penalty. 
B) There is no tax consequence 
C) The firm must pay capital gains tax 
D) The firm must pay ordinary income tax 
A) A firm must pay tax and a penalty. 
B) There is no tax consequence 
C) The firm must pay capital gains tax 
D) The firm must pay ordinary income tax

Question 13

All of the following are reasons that capital investment analysis must be performed correctly EXCEPT:

Accepted Answer

A) Determine synergy of the venture. 
B) Establish global markets. 
C) Determine potential risks. 
D) Chart the future course of a company. 
A) Determine synergy of the venture. 
B) Establish global markets. 
C) Determine potential risks. 
D) Chart the future course of a company.

Question 14

Which of the following is not a major step in the capital budgeting process?

Accepted Answer

A) generating investment project proposals 
B) estimating cash flows 
C) analyzing the effect of a project on the firm's financial ratios 
D) performing a project post-audit and review 
A) generating investment project proposals 
B) estimating cash flows 
C) analyzing the effect of a project on the firm's financial ratios 
D) performing a project post-audit and review

Question 15

The capital budgeting process is very important to the firm because it:

Accepted Answer

A) highlights the impacts of a project on net income 
B) essentially plots the company's future direction 
C) is used in working capital analysis 
D) indicates the net cash flows available for employee education 
A) highlights the impacts of a project on net income 
B) essentially plots the company's future direction 
C) is used in working capital analysis 
D) indicates the net cash flows available for employee education

Question 16

The net cash flows for any year during the life of capital expenditure project are equal to the change in plus the change in .

Accepted Answer

A) earnings before interest and taxes;depreciation 
B) earnings before taxes;depreciation 
C) earnings after taxes;depreciation 
D) revenues;costs 
A) earnings before interest and taxes;depreciation 
B) earnings before taxes;depreciation 
C) earnings after taxes;depreciation 
D) revenues;costs

Question 17

Pixaire purchased a new mixer to replace an older system.The older system which cost $100,000 is 5 years old now and was being depreciated over a MACRS life at 7 years.The new mixer, which will cost $270,000, will also be depreciated as a 7 year asset for MACRS purposes.The new mixer is expected to increase revenues by $64,000 with no additional operating expenses.Determine the net operating cash flows in year 2 for the new mixer.Assume a 40% tax rate.Use the rounded MACRS schedule listed below:
(7-Year Depreciation Schedule: 14%, 25%, 18%, 12%, 9%, 9%, 9%, 4%)

Accepted Answer

A) $66,974 
B) $66,124 
C) $61,277 
D) $64,229 
A) $66,974 
B) $66,124 
C) $61,277 
D) $64,229

Question 18

Martin Tartans, Inc.is considering the purchase of a new argyle sock knitting machine to replace a less automated one.The new machine will cost $220,000 plus $30,000 for shipping and installation.The machine being replaced was purchased five years ago for $140,000 and depreciated as a 7-year MACRS property.It can be sold for $24,000.Boll Mills has a marginal tax rate of 35%.Compute the NINV for the project.Use the rounded MACRS schedule listed below:
(7-Year Depreciation Schedule: 14%, 25%, 18%, 12%, 9%, 9%, 9%, 4%)

Accepted Answer

A) $250,000 
B) $226,000 
C) $221,298 
D) $223,620 
A) $250,000 
B) $226,000 
C) $221,298 
D) $223,620

Question 19

Projects that begin with an initial investment and then is expected to generate a stream of cash inflows is considered:

Accepted Answer

A) a contingent project 
B) a nonconventional project 
C) a normal project 
D) a non-normal project 
A) a contingent project 
B) a nonconventional project 
C) a normal project 
D) a non-normal project

Question 20

The difference between a capital expenditure and an operating expenditure is that a capital expenditure:

Accepted Answer

A) is expected to generate returns greater than 10% 
B) involves replacement of a money market account with three-month treasury bills. 
C) is expected to generate future cash benefits lasting longer than one year. 
D) involves a combined effort of the accounting department and the marketing department. 
A) is expected to generate returns greater than 10% 
B) involves replacement of a money market account with three-month treasury bills. 
C) is expected to generate future cash benefits lasting longer than one year. 
D) involves a combined effort of the accounting department and the marketing department.

Exam 9: Capital Budgeting and Cash Flow Analysis

The dollar amount of interest charges is:

A firm's cost of capital is:

What are the principles that should be applied when estimating cash flows for capital budgeting purposes?

The net investment calculation for an asset replacement decision normally includes any .

There are four ways tax consequences may affect the after-tax net proceeds received from the sale of an asset.Describe the four ways and the tax impact.

In estimating the net investment, an outlay that has already been made is known as a (n) .

The determination of net cash flows (NCF) should never include

What type of tax consequence is associated with the recovery of net working capital?

All of the following are reasons that capital investment analysis must be performed correctly EXCEPT:

Which of the following is not a major step in the capital budgeting process?

The capital budgeting process is very important to the firm because it:

The net cash flows for any year during the life of capital expenditure project are equal to the change in plus the change in .

Projects that begin with an initial investment and then is expected to generate a stream of cash inflows is considered:

The difference between a capital expenditure and an operating expenditure is that a capital expenditure:

The Role and Objective of Financial Management

The Domestic and International Financial Marketplace

Evaluation of Financial Performance

Financial Planning and Forecasting

The Time Value of Money

A: The Time Value of Money

Fixed-Income Securities: Characteristics and Valuation

Common Stock: Characteristics, Valuation, and Issuance

Analysis of Risk and Return

Capital Budgeting: Decision Criteria and Real Option Considerations

A: Capital Budgeting: Decision Criteria and Real Option Considerations

Capital Budgeting and Risk

The Cost of Capital, Capital Structure, and Dividend Policy

Capital Structure Concepts

Capital Structure Management in Practice

A: Capital Structure Management in Practice

Dividend Policy

Working Capital Management

The Management of Cash and Marketable Securities

The Management of Accounts Receivable and Inventories

Lease and Intermediate-Term Financing

Financing with Derivatives

A: Financing with Derivatives

Risk Management

International Financial Management

Corporate Restructuring

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