Question 1

Explain the use of real and nominal discount rates in discounting cash flows.Which is used more often and why?

Accepted Answer

The most important thing to remember is

Question 2

For a tax-paying firm,the net present value of a project will increase when:

Accepted Answer

A) the initial net working capital requirement increases. 
B) depreciation is decreased during the early years of a project's life. 
C) the life of the fixed assets used by that project is increased. 
D) the operating cash flows increase. 
E) the tax rate increases. 
A) the initial net working capital requirement increases. 
B) depreciation is decreased during the early years of a project's life. 
C) the life of the fixed assets used by that project is increased. 
D) the operating cash flows increase. 
E) the tax rate increases.

Question 3

Western Tech is considering a new project that will require $118,000 of fixed assets and net working capital of $16,000.The fixed assets will be depreciated on a straight-line basis to a zero salvage value over three years.Ignore bonus depreciation.This project is expected to produce an operating cash flow of $45,000 the first year with that amount decreasing by 5 percent annually for two years before the project is shut down.The fixed assets can be sold for $55,000 at the end of the project and all net working capital will be recovered.What is the net present value of this project at a discount rate of 11.5 percent and a tax rate of 23 percent?

Accepted Answer

A) $3,209.17 
B) $15,311.09 
C) $12,136.54 
D) −$3,770.30 
E) −$5,456.32 
A) $3,209.17 
B) $15,311.09 
C) $12,136.54 
D) −$3,770.30 
E) −$5,456.32

Question 4

Jackson & Sons uses packing machines to prepare its products for shipping.One machine costs $397,500 and lasts 5 years before it needs replaced.The machine will be worthless after the 5 years.The annual aftertax operating cost per machine is $38,400.What is the equivalent annual cost of one machine if the required rate of return is 16 percent?

Accepted Answer

A) $148,556.67 
B) $159,800.23 
C) $156,004.12 
D) $143,006.15 
E) $154,224.08 
A) $148,556.67 
B) $159,800.23 
C) $156,004.12 
D) $143,006.15 
E) $154,224.08

Question 5

Stu is working on a bid for a contract.Thus far,he has determined that he will need $218,000 for fixed assets and another $41,000 for net working capital at Time 0.He has also determined that he can recover $79,900 aftertax for the combined fixed assets and net working capital at the end of the 3-year project.What operating cash flow will be required each year for the project to return 14 percent in nominal terms?

Accepted Answer

A) $116,079.42 
B) $97,487.79 
C) $110,220.48 
D) $88,330.01 
E) $113,360.69 
A) $116,079.42 
B) $97,487.79 
C) $110,220.48 
D) $88,330.01 
E) $113,360.69

Question 6

Sue purchased a house for $89,000,spent $56,000 upgrading it,and currently had it appraised at $212,900.The house is being rented to a family for $1,200 a month,the maintenance expenses average $200 a month,and the property taxes are $4,800 a year.If she sells the house she will incur $20,000 in expenses.She is considering converting the house into professional office space.What opportunity cost,if any,should she assign to this property if she has been renting it for the past two years?

Accepted Answer

A) $178,500 
B) $120,000 
C) $185,000 
D) $192,900 
E) $232,900 
A) $178,500 
B) $120,000 
C) $185,000 
D) $192,900 
E) $232,900

Question 7

A project is expected to create operating cash flows of $26,500 a year for four years.The fixed assets required for the project cost $62,000 and will be worthless at the end of the project.An additional $3,000 of net working capital will be required throughout the life of the project.What is the project's net present value if the required rate of return is 12 percent?

Accepted Answer

A) $19,208.11 
B) $14,028.18 
C) $15,306.09 
D) $17,396.31 
E) $21,954.17 
A) $19,208.11 
B) $14,028.18 
C) $15,306.09 
D) $17,396.31 
E) $21,954.17

Question 8

A project will produce an operating cash flow of $7,300 a year for three years.The initial investment for fixed assets will be $11,600,which will be depreciated straight-line to zero over the asset's 4-year life.Ignore bonus depreciation.The project will require an initial $500 in net working capital plus an additional $500 every year with all net working capital levels restored to their original levels when the project ends.The fixed assets can be sold for an estimated $2,500 at the end of the project,the combined tax rate is 23 percent,and the required rate of return is 12 percent.What is the net present value of the project?

Accepted Answer

A) $7,500.95 
B) $9,896.87 
C) $7,072.72 
D) $6,353.41 
E) $8,398.29 
A) $7,500.95 
B) $9,896.87 
C) $7,072.72 
D) $6,353.41 
E) $8,398.29

Question 9

Bruno's is analyzing two machines to determine which one it should purchase.The company requires a rate of return of 14.6 percent and uses straight-line depreciation to a zero book value over a machine's life.Ignore bonus depreciation and taxes.Machine A has a cost of $318,000,annual operating costs of $8,700,and a life of 3 years.Machine B costs $247,000,has annual operating costs of $9,300,and a life of 2 years.Whichever machine is purchased will be replaced at the end of its useful life.Which machine should Bruno's purchase and why?

Accepted Answer

A) Machine A; because it will save the company about $13,406 a year 
B) Machine A; because it will save the company about $18,100 a year 
C) Machine B; because it will save the company about $16,510 a year 
D) Machine B; because it will save the company about $11,609 a year 
E) $154,224.08 
A) Machine A; because it will save the company about $13,406 a year 
B) Machine A; because it will save the company about $18,100 a year 
C) Machine B; because it will save the company about $16,510 a year 
D) Machine B; because it will save the company about $11,609 a year 
E) $154,224.08

Question 10

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

Question 11

Lew just purchased $67,600 of equipment that is classified as 5-year MACRS property.The MACRS rates are 20 percent,32 percent,19.2 percent,11.52 percent,11.52 percent,and 5.76 percent for Years 1 to 6,respectively.What will be the book value of this equipment at the end of four years if he ignores bonus depreciation?

Accepted Answer

A) $11,681.28 
B) $18,280.20 
C) $17,040.00 
D) $19,468.80 
E) $22,672.00 
A) $11,681.28 
B) $18,280.20 
C) $17,040.00 
D) $19,468.80 
E) $22,672.00

Question 12

One purpose of identifying all 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 13

Interest rates or rates of return on investments that have been adjusted for the effects of inflation are called ________ rates.

Accepted Answer

A) real 
B) nominal 
C) effective 
D) stripped 
E) coupon 
A) real 
B) nominal 
C) effective 
D) stripped 
E) coupon

Question 14

The salvage value of an asset creates an aftertax cash flow in an amount equal to the sales price:

Accepted Answer

A) of the asset. 
B) minus the remaining book value. 
C) minus [Tax rate × (Sales price − Book value)]. 
D) minus [Tax rate × (Book value − Sales price)]. 
E) plus the remaining book value. 
A) of the asset. 
B) minus the remaining book value. 
C) minus [Tax rate × (Sales price − Book value)]. 
D) minus [Tax rate × (Book value − Sales price)]. 
E) plus the remaining book value.

Question 15

The top-down approach to computing the operating cash flow:

Accepted Answer

A) ignores all noncash items. 
B) applies only if a project produces sales. 
C) can only be used if the entire cash flows of a firm are included. 
D) is equal to: Sales − Costs − Taxes + Depreciation. 
E) includes the interest expense related to a project. 
A) ignores all noncash items. 
B) applies only if a project produces sales. 
C) can only be used if the entire cash flows of a firm are included. 
D) is equal to: Sales − Costs − Taxes + Depreciation. 
E) includes the interest expense related to a project.

Question 16

The Boat Works currently produces boat sails and is considering expanding its operations to include awnings.The expansion would require the use of land the firm purchased three years ago at a cost of $197,000 that is currently valued at $209,500.The expansion could use some equipment that is currently sitting idle if $7,500 of modifications were made to it.The equipment originally cost $387,500 five years ago,has a current book value of $132,700,and a current market value of $139,000.Other capital purchases costing $520,000 will also be required.What is the value of the opportunity costs that should be included in the initial cash outflow for the expansion project?

Accepted Answer

A) $425,000 
B) $485,000 
C) $329,700 
D) $348,500 
E) $537,200 
A) $425,000 
B) $485,000 
C) $329,700 
D) $348,500 
E) $537,200

Question 17

The pretax 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 18

Jamestown Ltd.currently produces boat sails and is considering expanding its operations to include awnings.The expansion would require the use of land the firm purchased three years ago at a cost of $142,000 that is currently valued at $137,500.The expansion could use some equipment that is currently sitting idle if $6,700 of modifications were made to it.The equipment originally cost $139,500 six years ago,has a current book value of $24,700,and a current market value of $39,000.Other capital purchases costing $780,000 will also be required.What is the amount of the initial cash outflow for this expansion project?

Accepted Answer

A) $953,400 
B) $962,300 
C) $948,900 
D) $927,800 
E) $963,200 
A) $953,400 
B) $962,300 
C) $948,900 
D) $927,800 
E) $963,200

Question 19

The bottom-up approach to computing the operating cash flow applies only when:

Accepted Answer

A) both the depreciation expense and the interest expense are equal to zero. 
B) the interest expense is equal to zero. 
C) the project is a cost-cutting project. 
D) no fixed assets are required for the project. 
E) taxes are ignored and the interest expense is equal to zero. 
A) both the depreciation expense and the interest expense are equal to zero. 
B) the interest expense is equal to zero. 
C) the project is a cost-cutting project. 
D) no fixed assets are required for the project. 
E) taxes are ignored and the interest expense is equal to zero.

Question 20

The net working capital of a firm will decrease if there is:

Accepted Answer

A) a decrease in accounts payable. 
B) an increase in inventory. 
C) a decrease in accounts receivable. 
D) an increase in the checking account balance. 
E) a decrease in fixed assets. 
A) a decrease in accounts payable. 
B) an increase in inventory. 
C) a decrease in accounts receivable. 
D) an increase in the checking account balance. 
E) a decrease in fixed assets.

Exam 6: Making Capital Investment Decisions

Explain the use of real and nominal discount rates in discounting cash flows.Which is used more often and why?

For a tax-paying firm,the net present value of a project will increase when:

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.

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

Interest rates or rates of return on investments that have been adjusted for the effects of inflation are called ________ rates.

The salvage value of an asset creates an aftertax cash flow in an amount equal to the sales price:

The top-down approach to computing the operating cash flow:

The pretax salvage value of an asset is equal to the:

The bottom-up approach to computing the operating cash flow applies only when:

The net working capital of a firm will decrease if there is:

Introduction to Corporate Finance

Financial Statements and Cash Flow

Financial Statements and Cash Flow

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

Lessons From Market History

Return, risk, and 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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