Question 1

Tax shield refers to a reduction in taxes created by:

Accepted Answer

A)  a reduction in sales. 
B)  an increase in interest expense. 
C)  noncash expenses. 
D)  a project's incremental expenses. 
E)  opportunity costs. 
A)  a reduction in sales. 
B)  an increase in interest expense. 
C)  noncash expenses. 
D)  a project's incremental expenses. 
E)  opportunity costs. C

Question 2

You spent $500 last week fixing the transmission in your car. Now,the brakes are acting up and you are trying to decide whether to fix them or trade the car in for a newer model. In analyzing the brake situation,the $500 you spent fixing the transmission is a(n) _____ cost.

Accepted Answer

A)  opportunity 
B)  fixed 
C)  incremental 
D)  sunk 
E)  relevant 
A)  opportunity 
B)  fixed 
C)  incremental 
D)  sunk 
E)  relevant D

Question 3

Toni's Tools is comparing machines to determine which one to purchase. The machines sell for differing prices,have differing operating costs,differing machine lives,and will be replaced when worn out. These machines should be compared using:

Accepted Answer

A)  net present value only. 
B)  both net present value and the internal rate of return. 
C)  their equivalent annual costs. 
D)  the depreciation tax shield approach. 
E)  the replacement parts approach. 
A)  net present value only. 
B)  both net present value and the internal rate of return. 
C)  their equivalent annual costs. 
D)  the depreciation tax shield approach. 
E)  the replacement parts approach. C

Question 4

Jackson & Sons uses packing machines to prepare its products for shipping. One machine costs $136,000 and lasts about 4 years before it needs replaced. The operating cost per machine is $6,000 a year. What is the equivalent annual cost of one packing machine if the required rate of return is 12%? (Round your answer to whole dollars.)

Accepted Answer

A)  $38,556 
B)  $50,776 
C)  $79,012 
D)  $101,006 
E)  $154,224 
A)  $38,556 
B)  $50,776 
C)  $79,012 
D)  $101,006 
E)  $154,224

Question 5

This chapter introduced three new methods for calculating project operating cash flow (OCF). Under what circumstances is each method appropriate?

Accepted Answer

Three additional formulations of OCF pro

Question 6

The cash flow from projects for a company is computed as the:

Accepted Answer

A)  net operating cash flow generated by the project, less any sunk costs and erosion costs. 
B)  sum of the incremental operating cash flow and after-tax salvage value of the project. 
C)  net income generated by the project, plus the annual depreciation expense. 
D)  sum of the incremental operating cash flow, capital spending, and net working capital expenses incurred by the project. 
E)  sum of the sunk costs, opportunity costs, and erosion costs of the project. 
A)  net operating cash flow generated by the project, less any sunk costs and erosion costs. 
B)  sum of the incremental operating cash flow and after-tax salvage value of the project. 
C)  net income generated by the project, plus the annual depreciation expense. 
D)  sum of the incremental operating cash flow, capital spending, and net working capital expenses incurred by the project. 
E)  sum of the sunk costs, opportunity costs, and erosion costs of the project.

Question 7

Ernie's Electrical is evaluating a project which will increase sales by $50,000 and costs by $30,000. The project will cost $150,000 and will be depreciated straight-line to a zero book value over the 10 year life of the project. The applicable tax rate is 34%. What is the operating cash flow for this project?

Accepted Answer

A)  $3,300 
B)  $5,000 
C)  $8,300 
D)  $13,300 
E)  $18,300 
A)  $3,300 
B)  $5,000 
C)  $8,300 
D)  $13,300 
E)  $18,300

Question 8

The Wolf's Den Outdoor Gear is considering replacing the equipment it uses to produce tents. The equipment would cost $1.4 million and lower manufacturing costs by an estimated $215,000 a year. The equipment will be depreciated using straight-line depreciation to a book value of zero. The life of the equipment is 8 years. The required rate of return is 13% and the tax rate is 34%. What is the net income from this proposed project?

Accepted Answer

A)  $13,600 
B)  $26,400 
C)  $32,400 
D)  $40,000 
E)  $53,600 
A)  $13,600 
B)  $26,400 
C)  $32,400 
D)  $40,000 
E)  $53,600

Question 9

You just purchased some equipment that is classified as 5-year property for MACRS. The equipment cost $67,600. What will the book value of this equipment be at the end of three years should you decide to resell the equipment at that point in time?

Accepted Answer

A)  $19,468.80 
B)  $20,280.20 
C)  $27,040.00 
D)  $48,131.20 
E)  $48,672.00 
A)  $19,468.80 
B)  $20,280.20 
C)  $27,040.00 
D)  $48,131.20 
E)  $48,672.00

Question 10

Jeff's Stereo Sound is expanding its product offerings to reach a wider range of customers. The expansion project includes increasing the floor inventory by $150,000 and increasing its debt to suppliers by 50% of that amount. The company will also spend $200,000 for a building contractor to expand the size of the showroom. As part of the expansion plan,the company will be offering credit to its customers and thus expects accounts receivable to rise by $25,000. For the project analysis,what amount should be used as the initial cash flow for net working capital?

Accepted Answer

A)  $75,000 
B)  $100,000 
C)  $125,000 
D)  $150,000 
E)  $175,000 
A)  $75,000 
B)  $100,000 
C)  $125,000 
D)  $150,000 
E)  $175,000

Question 11

The salvage value of an asset creates an after-tax cash inflow to the firm in an amount equal to the:

Accepted Answer

A)  sales price of the asset. 
B)  sales price minus the book value. 
C)  sales price minus the tax due based on the sales price minus the book value. 
D)  sales price plus the tax due based on the sales price minus the book value. 
E)  sales price plus the tax due based on the book value minus the sales pricE. 
A)  sales price of the asset. 
B)  sales price minus the book value. 
C)  sales price minus the tax due based on the sales price minus the book value. 
D)  sales price plus the tax due based on the sales price minus the book value. 
E)  sales price plus the tax due based on the book value minus the sales pricE.

Question 12

Schroeder Electronics is considering a project which will require the purchase of $5 million in new equipment. The equipment will be depreciated straight-line to a zero book value over the 5-year life of the project. Schroeder's expects to sell the equipment at the end of the project for 10% of its original cost. Annual sales from this project are estimated at $2.3 million. Net working capital equal to 10% of sales will be required to support the project. All of the net working capital will be recouped at the end of the project. Schroeder desires a 12% rate of return on this project. The tax rate is 40%. What is the value of the depreciation tax shield in year 2 of the project?

Accepted Answer

A)  $134,000 
B)  $240,000 
C)  $334,000 
D)  $400,000 
E)  $1,000,000 
A)  $134,000 
B)  $240,000 
C)  $334,000 
D)  $400,000 
E)  $1,000,000

Question 13

Jamestown Ltd. currently produces boat sails and is considering expanding its operations to include awnings for homes and travel trailers. The company owns land beside its current manufacturing facility that could be used for the expansion. The company bought this land ten years ago at a cost of $250,000. Today,the land is valued at $425,000. The grading and excavation work necessary to build on the land will cost $15,000. The company currently owns some unused equipment valued at $60,000. This equipment could be used for producing awnings if $5,000 is spent for equipment modifications. Other equipment costing $780,000 will also be required. What is the amount of the initial cash flow for this expansion project?

Accepted Answer

A)  $800,000 
B)  $1,050,000 
C)  $1,110,000 
D)  $1,225,000 
E)  $1,285,000 
A)  $800,000 
B)  $1,050,000 
C)  $1,110,000 
D)  $1,225,000 
E)  $1,285,000

Question 14

Which of the following are examples of an incremental cash flow?
I. An increase in accounts receivable
II. A decrease in net working capital
III. An increase in taxes
IV. A decrease in the cost of goods sold

Accepted Answer

A)  I and III only 
B)  III and IV only 
C)  I and IV only 
D)  I, III, and IV only 
E)  I, II, III, and IV 
A)  I and III only 
B)  III and IV only 
C)  I and IV only 
D)  I, III, and IV only 
E)  I, II, III, and IV

Question 15

The pre-tax salvage value of an asset is equal to the:

Accepted Answer

A)  book value if straight-line depreciation is used. 
B)  book value if MACRS depreciation is used. 
C)  market value minus the book value. 
D)  book value minus the market value. 
E)  market valuE. 
A)  book value if straight-line depreciation is used. 
B)  book value if MACRS depreciation is used. 
C)  market value minus the book value. 
D)  book value minus the market value. 
E)  market valuE.

Question 16

One purpose of identifying all of the incremental cash flows related to a proposed project is to:

Accepted Answer

A)  isolate the total sunk costs so they can be evaluated to determine if the project will add value to the firm. 
B)  eliminate any cost which has previously been incurred so that it can be omitted from the analysis of the project. 
C)  make each project appear as profitable as possible for the firm. 
D)  include both the proposed and the current operations of a firm in the analysis of the project. 
E)  identify any and all changes in the cash flows of the firm for the past year so they can be included in the analysis. 
A)  isolate the total sunk costs so they can be evaluated to determine if the project will add value to the firm. 
B)  eliminate any cost which has previously been incurred so that it can be omitted from the analysis of the project. 
C)  make each project appear as profitable as possible for the firm. 
D)  include both the proposed and the current operations of a firm in the analysis of the project. 
E)  identify any and all changes in the cash flows of the firm for the past year so they can be included in the analysis.

Question 17

The most valuable investment given up if an alternative investment is chosen is a(n):

Accepted Answer

A)  salvage value expense. 
B)  net working capital expense. 
C)  sunk cost. 
D)  opportunity cost. 
E)  erosion cost. 
A)  salvage value expense. 
B)  net working capital expense. 
C)  sunk cost. 
D)  opportunity cost. 
E)  erosion cost.

Question 18

LiCheng's Enterprises just purchased some fixed assets that are classified as 3-year property for MACRS. The assets cost $1,900. What is the amount of the depreciation expense for year 2?

Accepted Answer

A)  $562.93 
B)  $633.27 
C)  $719.67 
D)  $844.36 
E)  $1,477.63 
A)  $562.93 
B)  $633.27 
C)  $719.67 
D)  $844.36 
E)  $1,477.63

Question 19

Margarite's Enterprises is considering a new project. The project will require $325,000 for new fixed assets,$160,000 for additional inventory and $35,000 for additional accounts receivable. Short-term debt is expected to increase by $100,000 and long-term debt is expected to increase by $300,000. The project has a 5-year life. The fixed assets will be depreciated straight-line to a zero book value over the life of the project. At the end of the project,the fixed assets can be sold for 25% of their original cost. The net working capital returns to its original level at the end of the project. The project is expected to generate annual sales of $554,000 and costs of $430,000. The tax rate is 35% and the required rate of return is 15%. What is the amount of the after-tax cash flow from the sale of the fixed assets at the end of this project?
(Round your answer to whole dollars.)

Accepted Answer

A)  $28,438 
B)  $37,918 
C)  $52,813 
D)  $60,009 
E)  $81,250 
A)  $28,438 
B)  $37,918 
C)  $52,813 
D)  $60,009 
E)  $81,250

Question 20

Changes in the net working capital:

Accepted Answer

A)  can affect the cash flows of a project every year of the project's life. 
B)  only affect the initial cash flows of a project. 
C)  are included in project analysis only if they represent cash outflows. 
D)  are generally excluded from project analysis due to their irrelevance to the total project. 
E)  affect the initial and the final cash flows of a project but not the cash flows of the middle years. 
A)  can affect the cash flows of a project every year of the project's life. 
B)  only affect the initial cash flows of a project. 
C)  are included in project analysis only if they represent cash outflows. 
D)  are generally excluded from project analysis due to their irrelevance to the total project. 
E)  affect the initial and the final cash flows of a project but not the cash flows of the middle years.

Exam 6: Making Capital Investment Decisions

Tax shield refers to a reduction in taxes created by:

You spent $500 last week fixing the transmission in your car. Now,the brakes are acting up and you are trying to decide whether to fix them or trade the car in for a newer model. In analyzing the brake situation,the $500 you spent fixing the transmission is a(n) _____ cost.

Toni's Tools is comparing machines to determine which one to purchase. The machines sell for differing prices,have differing operating costs,differing machine lives,and will be replaced when worn out. These machines should be compared using:

This chapter introduced three new methods for calculating project operating cash flow (OCF). Under what circumstances is each method appropriate?

The cash flow from projects for a company is computed as the:

You just purchased some equipment that is classified as 5-year property for MACRS. The equipment cost $67,600. What will the book value of this equipment be at the end of three years should you decide to resell the equipment at that point in time?

The salvage value of an asset creates an after-tax cash inflow to the firm in an amount equal to the:

Which of the following are examples of an incremental cash flow? I. An increase in accounts receivable II. A decrease in net working capital III. An increase in taxes IV. A decrease in the cost of goods sold

The pre-tax salvage value of an asset is equal to the:

One purpose of identifying all of the incremental cash flows related to a proposed project is to:

The most valuable investment given up if an alternative investment is chosen is a(n):

LiCheng's Enterprises just purchased some fixed assets that are classified as 3-year property for MACRS. The assets cost $1,900. What is the amount of the depreciation expense for year 2?

Changes in the net working capital:

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements Analysis and Financial Models

Discounted Cash Flow Valuation

Net Present Value and Other Investment Rules

Risk Analysis, Real Options, and Capital Budgeting

Interest Rates and Bond Valuation

Stock Valuation

Risk and Return: Lessons From Market History

Return and Risk: the Capital Asset Pricing Model Capm

An Alternative View of Risk and Return: The Arbitrage Pricing Theory

Risk, Cost of Capital, and Valuation

Efficient Capital Markets and Behavioral Challenges

Long-Term Financing

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Valuation and Capital Budgeting for the Levered Firm

Dividends and Other Payouts

Raising Capital

Leasing

Options and Corporate Finance

Options and Corporate Finance: Extensions and Applications

Warrants and Convertibles

Derivatives and Hedging Risk

Short-Term Finance and Planning

Cash Management

Credit and Inventory Management

Mergers, Acquisitions, and Divestitures

Financial Distress

International Corporate Finance

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