Question 1

The equivalent annual cost method is useful in determining:

Accepted Answer

A)  the annual operating cost of a machine if the annual maintenance is performed versus when the maintenance is not performed as recommended. 
B)  the tax shield benefits of depreciation given the purchase of new assets for a project. 
C)  operating cash flows for cost-cutting projects of equal duration. 
D)  which one of two machines to acquire given equal machine lives but unequal machine costs. 
E)  which one of two machines to purchase when the machines are mutually exclusive, have different machine lives, and will be replaced once they are worn out. 
A)  the annual operating cost of a machine if the annual maintenance is performed versus when the maintenance is not performed as recommended. 
B)  the tax shield benefits of depreciation given the purchase of new assets for a project. 
C)  operating cash flows for cost-cutting projects of equal duration. 
D)  which one of two machines to acquire given equal machine lives but unequal machine costs. 
E)  which one of two machines to purchase when the machines are mutually exclusive, have different machine lives, and will be replaced once they are worn out.

Question 2

The cash flows of a new project that come at the expense of a firm's existing projects are called:

Accepted Answer

A)  salvage value expenses. 
B)  net working capital expenses. 
C)  sunk costs. 
D)  opportunity costs. 
E)  erosion costs. 
A)  salvage value expenses. 
B)  net working capital expenses. 
C)  sunk costs. 
D)  opportunity costs. 
E)  erosion costs.

Question 3

Samson's purchased a corner lot five years ago at a cost of $640,000. The lot was recently appraised at $820,000. At the time of the purchase,the company spent $50,000 to grade the lot and another $4,000 to build a small building on the lot to house a parking lot attendant who has overseen the use of the lot for daily commuter parking. The company now wants to build a new retail store on the site. The building cost is estimated at $1.5 million. What amount should be used as the initial cash flow for this building project?

Accepted Answer

A)  $694,000 
B)  $1,460,000 
C)  $1,514,000 
D)  $1,823,000 
E)  $2,320,000 
A)  $694,000 
B)  $1,460,000 
C)  $1,514,000 
D)  $1,823,000 
E)  $2,320,000

Question 4

Wilbert's,Inc. paid $90,000,in cash,for a piece of equipment three years ago. Last year,the company spent $10,000 to update the equipment with the latest technology. The company no longer uses this equipment in its current operations and has received an offer of $50,000 from a firm who would like to purchase it. Wilbert's is debating whether to sell the equipment or to expand its operations such that the equipment can be used. When evaluating the expansion option,what value,if any,should Wilbert's assign to this equipment as an initial cost of the project?

Accepted Answer

A)  $40,000 
B)  $50,000 
C)  $60,000 
D)  $80,000 
E)  $90,000 
A)  $40,000 
B)  $50,000 
C)  $60,000 
D)  $80,000 
E)  $90,000

Question 5

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 amount of the after-tax salvage value of the equipment?

Accepted Answer

A)  $134,000 
B)  $150,000 
C)  $195,400 
D)  $250,000 
E)  $300,000 
A)  $134,000 
B)  $150,000 
C)  $195,400 
D)  $250,000 
E)  $300,000

Question 6

Ronnie's Custom Cars purchased some fixed assets two years ago for $39,000. The assets are classified as 5-year property for MACRS. Ronnie is considering selling these assets now so he can buy some newer fixed assets which utilize the latest in technology. Ronnie has been offered $19,000 for his old assets. What is the net cash flow from the salvage value if the tax rate is 34%?

Accepted Answer

A)  $16,358.88 
B)  $17,909.09 
C)  $18,720.00 
D)  $18,904.80 
E)  $19,000.00 
A)  $16,358.88 
B)  $17,909.09 
C)  $18,720.00 
D)  $18,904.80 
E)  $19,000.00

Question 7

Louie's Leisure Products is considering a project which will require the purchase of $1.4 million in new equipment. The equipment will be depreciated straight-line to a zero book value over the 7-year life of the project. Louie's expects to sell the equipment at the end of the project for 20% of its original cost. Annual sales from this project are estimated at $1.2 million. Net working capital equal to 20% of sales will be required to support the project. All of the net working capital will be recouped at the end of the project. The firm desires a minimal 14% rate of return on this project. The tax rate is 34%. What is the amount of the after-tax salvage value of the equipment?

Accepted Answer

A)  $47,600 
B)  $72,000 
C)  $95,200 
D)  $144,000 
E)  $184,800 
A)  $47,600 
B)  $72,000 
C)  $95,200 
D)  $144,000 
E)  $184,800

Question 8

Ronnie's Coffee House is considering a project which will produce sales of $6,000 and increase cash expenses by $2,500. If the project is implemented,taxes will increase by $1,300. The additional depreciation expense will be $1,000. An initial cash outlay of $2,000 is required for net working capital. What is the amount of the operating cash flow using the top-down approach?

Accepted Answer

A)  $200 
B)  $1,500 
C)  $2,200 
D)  $3,500 
E)  $4,200 
A)  $200 
B)  $1,500 
C)  $2,200 
D)  $3,500 
E)  $4,200

Question 9

A project which is designed to improve the manufacturing efficiency of a firm but will generate no additional sales is referred to as a(n) _____ project.

Accepted Answer

A)  sunk cost 
B)  opportunity 
C)  cost-cutting 
D)  revenue-cutting 
E)  revenue-generating 
A)  sunk cost 
B)  opportunity 
C)  cost-cutting 
D)  revenue-cutting 
E)  revenue-generating

Question 10

Kay's Nautique is considering a project which will require additional inventory of $128,000 and will also increase accounts payable by $45,000 as suppliers are willing to finance part of these purchases. Accounts receivable are currently $80,000 and are expected to increase by 10% if this project is accepted. What is the initial project cash flow needed for net working capital?

Accepted Answer

A)  $75,000 
B)  $91,000 
C)  $99,000 
D)  $136,000 
E)  $181,000 
A)  $75,000 
B)  $91,000 
C)  $99,000 
D)  $136,000 
E)  $181,000

Question 11

Foamsoft sells customized boat shoes. Currently,it sells 10,000 pairs of shoes annually at an average price of $70 a pair. It is considering adding a lower-priced line of shoes which sell for $50 a pair. Foamsoft estimates it can sell 5,000 pairs of the lower-priced shoes but will sell 1,000 less pairs of the higher-priced shoes by doing so. What is the amount of the sales that should be used when evaluating the addition of the lower-priced shoes?

Accepted Answer

A)  $130,000 
B)  $200,000 
C)  $243,000 
D)  $252,000 
E)  $273,000 
A)  $130,000 
B)  $200,000 
C)  $243,000 
D)  $252,000 
E)  $273,000

Question 12

You own a house that you rent for $1,000 a month. The maintenance expenses on the house average $200 a month. The house cost $85,000 when you purchased it several years ago. A recent appraisal on the house valued it at $220,000. The annual property taxes are $5,000. If you sell the house you will incur $25,000 in expenses. You are deciding whether to sell the house or convert it for your own use as a professional office. What value should you place on this house when analyzing the option of using it as a professional office?

Accepted Answer

A)  $60,000 
B)  $85,000 
C)  $190,000 
D)  $195,000 
E)  $220,000 
A)  $60,000 
B)  $85,000 
C)  $190,000 
D)  $195,000 
E)  $220,000

Question 13

Big Joe's owns a manufacturing facility that is currently sitting idle. The facility is located on a piece of land that originally cost $129,000. The facility itself cost $650,000 to build. As of now,the book value of the land and the facility are $129,000 and $186,500,respectively. Big Joe's received an offer of $590,000 for the land and facility last week. The firm rejected this offer even though it was told that it is a reasonable offer in today's market. If Big Joe's were to consider using this land and facility in a new project,what cost,if any,should it include in the project analysis?

Accepted Answer

A)  $0 
B)  $315,500 
C)  $590,000 
D)  $650,000 
E)  $779,000 
A)  $0 
B)  $315,500 
C)  $590,000 
D)  $650,000 
E)  $779,000

Question 14

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 initial cost of this project?

Accepted Answer

A)  $325,000 
B)  $420,000 
C)  $425,000 
D)  $520,000 
E)  $620,000 
A)  $325,000 
B)  $420,000 
C)  $425,000 
D)  $520,000 
E)  $620,000

Question 15

Winslow,Inc. is considering the purchase of a $225,000 piece of equipment. The equipment is classified as 5-year MACRS property. The company expects to sell the equipment after four years at a price of $50,000. What is the after-tax cash flow from this sale if the tax rate is 35%?

Accepted Answer

A)  $37,036 
B)  $38,880 
C)  $46,108 
D)  $47,770 
E)  $53,892 
A)  $37,036 
B)  $38,880 
C)  $46,108 
D)  $47,770 
E)  $53,892

Question 16

Should financing costs be included as an incremental cash flow in capital budgeting analysis?

Accepted Answer

Financing costs are not an incremental c

Question 17

The depreciation method currently allowed under U.S. tax law governing the accelerated write-off of property under various lifetime classifications is called _____ depreciation.

Accepted Answer

A)  FIFO 
B)  MACRS 
C)  straight-line 
D)  sum-of-years digits 
E)  curvilinear 
A)  FIFO 
B)  MACRS 
C)  straight-line 
D)  sum-of-years digits 
E)  curvilinear

Question 18

Ben's Border Café is considering a project which will produce sales of $16,000 and increase cash expenses by $10,000. If the project is implemented,taxes will increase from $23,000 to $24,500 and depreciation will increase from $4,000 to $5,500. What is the amount of the operating cash flow using the top-down approach?

Accepted Answer

A)  $4,000 
B)  $4,500 
C)  $6,000 
D)  $7,500 
E)  $8,500 
A)  $4,000 
B)  $4,500 
C)  $6,000 
D)  $7,500 
E)  $8,500

Question 19

The cash flows of a project should:

Accepted Answer

A)  be computed on a pre-tax basis. 
B)  include all sunk costs and opportunity costs. 
C)  include all incremental costs, including opportunity costs. 
D)  be applied to the year when the related expense or income is recognized by GAAP. 
E)  include all financing costs related to new debt acquired to finance the project. 
A)  be computed on a pre-tax basis. 
B)  include all sunk costs and opportunity costs. 
C)  include all incremental costs, including opportunity costs. 
D)  be applied to the year when the related expense or income is recognized by GAAP. 
E)  include all financing costs related to new debt acquired to finance the project.

Question 20

Bet'r Bilt Toys just purchased some MACRS 5-year property at a cost of $230,000. Which of the following will correctly give you the book value of this equipment at the end of year 2?
  I. 52% of the asset cost
II) 48% of the asset cost
III) 68% of 80% of the asset cost
IV) the asset cost,minus 20% of the asset cost,minus 32% of 80% of the asset cost

Accepted Answer

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

The equivalent annual cost method is useful in determining:

The cash flows of a new project that come at the expense of a firm's existing projects are called:

A project which is designed to improve the manufacturing efficiency of a firm but will generate no additional sales is referred to as a(n) _____ project.

Winslow,Inc. is considering the purchase of a $225,000 piece of equipment. The equipment is classified as 5-year MACRS property. The company expects to sell the equipment after four years at a price of $50,000. What is the after-tax cash flow from this sale if the tax rate is 35%?

Should financing costs be included as an incremental cash flow in capital budgeting analysis?

The depreciation method currently allowed under U.S. tax law governing the accelerated write-off of property under various lifetime classifications is called _____ depreciation.

The cash flows of a project should:

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

Filters

Exam 6: Making Capital Investment Decisions

The equivalent annual cost method is useful in determining:

The cash flows of a new project that come at the expense of a firm's existing projects are called:

A project which is designed to improve the manufacturing efficiency of a firm but will generate no additional sales is referred to as a(n) _____ project.

Winslow,Inc. is considering the purchase of a $225,000 piece of equipment. The equipment is classified as 5-year MACRS property. The company expects to sell the equipment after four years at a price of $50,000. What is the after-tax cash flow from this sale if the tax rate is 35%?

Should financing costs be included as an incremental cash flow in capital budgeting analysis?

The depreciation method currently allowed under U.S. tax law governing the accelerated write-off of property under various lifetime classifications is called _____ depreciation.

The cash flows of a project should:

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

Filters