Question 1

Most firms choose accelerated depreciation methods because

Accepted Answer

A) reported net income is higher 
B) tax payments are made sooner, resulting in a lower deferred tax liability 
C) operating expenses are correspondingly reduced 
D) income taxes are deferred 
A) reported net income is higher 
B) tax payments are made sooner, resulting in a lower deferred tax liability 
C) operating expenses are correspondingly reduced 
D) income taxes are deferred

Question 2

Ten years ago J-Bar Company purchased a lathe for $250,000.It was being depreciated on a straight-line basis to an estimated $25,000 salvage value over a 15 year period.The firm is considering selling the old lathe and purchasing a new one.The new lathe would cost $500,000.The firm's marginal tax rate 40 percent.Determine the net investment required to purchase the new lathe, if the old lathe is sold for $100,000.

Accepted Answer

A) $380,000 
B) $397,500 
C) $400,000 
D) $418,000 
A) $380,000 
B) $397,500 
C) $400,000 
D) $418,000

Question 3

Maritech purchased a pellet mill 4 years ago for $60,000.The mill is being depreciated over 7 years using MACRS.Maritech is planning to replace the mill with a higher volume unit that will cost $110,000 installed.If the old mill can be sold for $25,000, what is the tax liability? Assume a marginal tax rate of 40%.Use the rounded MACRS schedule listed below.
(7-Year Depreciation Schedule: 14%, 25%, 18%, 12%, 9%, 9%, 9%, 4%)

Accepted Answer

A) $3,754 
B) $7,498 
C) $2,560 
D) $16,502 
A) $3,754 
B) $7,498 
C) $2,560 
D) $16,502

Question 4

Projects are often classified based on the type of capital expenditure.All of the following are project classifications EXCEPT:

Accepted Answer

A) projects generated by growth opportunities 
B) projects generated by cost reduction opportunities 
C) projects generated to meet legal requirements and health and safety standards 
D) projects generated to meet the needs of customers 
A) projects generated by growth opportunities 
B) projects generated by cost reduction opportunities 
C) projects generated to meet legal requirements and health and safety standards 
D) projects generated to meet the needs of customers

Question 5

There is neither a gain or a loss on the sale of a depreciable asset for an amount exactly equal to its .

Accepted Answer

A) acquisition cost 
B) tax book value 
C) opportunity cost 
D) historical cost 
A) acquisition cost 
B) tax book value 
C) opportunity cost 
D) historical cost

Question 6

LISP Inc.is planning to purchase a new mixer for $50,000 that will qualify as MACRS 3-year property (first year depreciation rate = 33.33%).The new mixer should increase revenues by $20,000 per year with no increase in operating cost.If LISP's marginal tax rate is 40 percent, what is the net cash flow in the first year?

Accepted Answer

A) $22,665 
B) $19,000 
C) $18,666 
D) $21,500 
A) $22,665 
B) $19,000 
C) $18,666 
D) $21,500

Question 7

Allen Company is considering an investment project that is expected to generate $100,000 in annual earnings before taxes.Annual depreciation will be $50,000.Allen's marginal tax rate is 40%.Determine the project's annual net cash flows.

Accepted Answer

A) $150,000 
B) $110,000 
C) $90,000 
D) $60,000 
A) $150,000 
B) $110,000 
C) $90,000 
D) $60,000

Question 8

If a firm sells an asset for less than its book value,

Accepted Answer

A) there are no tax consequences 
B) the loss is treated as lost depreciation 
C) the loss reduces depreciation expenses 
D) the loss may be used to offset operating income 
A) there are no tax consequences 
B) the loss is treated as lost depreciation 
C) the loss reduces depreciation expenses 
D) the loss may be used to offset operating income

Question 9

Capital expenditure projects may be classified in all the following types except:

Accepted Answer

A) growth opportunities 
B) required to meet legal requirements 
C) cost reduction opportunities 
D) capital rationing 
A) growth opportunities 
B) required to meet legal requirements 
C) cost reduction opportunities 
D) capital rationing

Question 10

The net investment calculation for an project normally includes .

Accepted Answer

A) asset expansion;pretax proceeds from the sale of the old asset 
B) asset replacement;pretax proceeds from the sale of the old asset 
C) asset expansion;after-tax proceeds from the sale of the old asset 
D) asset replacement;after-tax proceeds from the sale of the old asset 
A) asset expansion;pretax proceeds from the sale of the old asset 
B) asset replacement;pretax proceeds from the sale of the old asset 
C) asset expansion;after-tax proceeds from the sale of the old asset 
D) asset replacement;after-tax proceeds from the sale of the old asset

Question 11

Adler is replacing its old packing line with a more efficient line.The old line was being depreciated on a straight-line basis at a rate of $20,000 per year.The old machine has a current book value of $100,000.The new line, which costs $910,000, will be depreciated on a 10-year MACRS schedule.The more efficient operation is expected to increase revenues by $50,000 per year and reduce annual operating costs by $80,000.Compute the net cash flows for Adler in year 2.Assume Adler has a marginal tax rate of 40%.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) $143,520 
B) $135,520 
C) $39,520 
D) $47,520 
A) $143,520 
B) $135,520 
C) $39,520 
D) $47,520

Question 12

Of the following, an example of a component of a firm's cost of capital is:

Accepted Answer

A) Repurchase of company stock. 
B) Investment of corporate funds into a money market account. 
C) The purchase of another company's bonds. 
D) The return on common stock required by investors. 
A) Repurchase of company stock. 
B) Investment of corporate funds into a money market account. 
C) The purchase of another company's bonds. 
D) The return on common stock required by investors.

Question 13

Depreciation reported profits and it taxes paid by a firm.

Accepted Answer

A) increases, reduces 
B) reduces, reduces 
C) reduces, increases 
D) increases, increases 
A) increases, reduces 
B) reduces, reduces 
C) reduces, increases 
D) increases, increases

Question 14

When a firm sells an asset for , it realizes a capital gain and must pay income taxes on it.

Accepted Answer

A) book value 
B) less than book value 
C) more than book value but less than original cost 
D) more than its original cost 
A) book value 
B) less than book value 
C) more than book value but less than original cost 
D) more than its original cost

Question 15

Parker Chemicals purchased a hexene extractor 10 years ago for $120,000.It is being depreciated on a straight-line basis over 15 years to an estimated salvage value of zero.It can be sold today for $10,000.Parker is considering purchasing a new more efficient extractor that would cost $270,000 installed and would be depreciated as a 10-year MACRS asset.(The depreciation rate for year one is 10 percent for this asset.) The company's marginal tax rate is 40%.If the new extractor is purchased, annual revenues will increase by $10,000 and annual operating expenses will decrease by $10,000.What is the net cash flow in year 1?

Accepted Answer

A) $7,600 
B) $19,600 
C) $24,200 
D) $600 
A) $7,600 
B) $19,600 
C) $24,200 
D) $600

Question 16

A recent survey of Fortune 500 firms regarding their cash flow estimation procedures indicated that

Accepted Answer

A) few firms prepared formal cash flow estimates 
B) the majority produced detailed cash flow projections 
C) a majority estimated cash flows for a range of estimates 
D) about 50 percent made comparisons between actual and projected cash flows. 
A) few firms prepared formal cash flow estimates 
B) the majority produced detailed cash flow projections 
C) a majority estimated cash flows for a range of estimates 
D) about 50 percent made comparisons between actual and projected cash flows.

Question 17

A conventional project can also be considered:

Accepted Answer

A) a normal project 
B) a project that has both positive and negative cash flow patterns 
C) one that has a high required rate of return 
D) non-normal project 
A) a normal project 
B) a project that has both positive and negative cash flow patterns 
C) one that has a high required rate of return 
D) non-normal project

Question 18

Which of the following is not a major difficulty in implementing the basic capital budgeting model?

Accepted Answer

A) determining the schedule of available projects before a decision on any one project can be made 
B) accounting for the risk of individual projects. 
C) projecting the cost of funds over the investment decision horizon 
D) choosing an appropriate criterion for selecting among various investment alternatives 
A) determining the schedule of available projects before a decision on any one project can be made 
B) accounting for the risk of individual projects. 
C) projecting the cost of funds over the investment decision horizon 
D) choosing an appropriate criterion for selecting among various investment alternatives

Question 19

LISP Inc.is planning to purchase a new mixer/dubber for $50,000.The new equipment will replace an older mixer that has been fully depreciated but has a salvage value of $5,000.Compute the net investment required for this project.Assume a marginal tax rate of 40 percent.

Accepted Answer

A) $47,000 
B) $45,000 
C) $48,000 
D) $55,000 
A) $47,000 
B) $45,000 
C) $48,000 
D) $55,000

Question 20

Depreciation

Accepted Answer

A) does not affect cash flows. 
B) does not affect profits. 
C) is not a cash outflow. 
D) is a cash inflow. 
A) does not affect cash flows. 
B) does not affect profits. 
C) is not a cash outflow. 
D) is a cash inflow.

Exam 9: Capital Budgeting and Cash Flow Analysis

Most firms choose accelerated depreciation methods because

Projects are often classified based on the type of capital expenditure.All of the following are project classifications EXCEPT:

There is neither a gain or a loss on the sale of a depreciable asset for an amount exactly equal to its .

Allen Company is considering an investment project that is expected to generate $100,000 in annual earnings before taxes.Annual depreciation will be $50,000.Allen's marginal tax rate is 40%.Determine the project's annual net cash flows.

If a firm sells an asset for less than its book value,

Capital expenditure projects may be classified in all the following types except:

The net investment calculation for an project normally includes .

Of the following, an example of a component of a firm's cost of capital is:

Depreciation reported profits and it taxes paid by a firm.

When a firm sells an asset for , it realizes a capital gain and must pay income taxes on it.

A recent survey of Fortune 500 firms regarding their cash flow estimation procedures indicated that

A conventional project can also be considered:

Which of the following is not a major difficulty in implementing the basic capital budgeting model?

LISP Inc.is planning to purchase a new mixer/dubber for $50,000.The new equipment will replace an older mixer that has been fully depreciated but has a salvage value of $5,000.Compute the net investment required for this project.Assume a marginal tax rate of 40 percent.

Depreciation

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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