Question 1

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) can only affect the initial and the final cash flows of a project. 
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) can only affect the initial and the final cash flows of a project.

Question 2

Three years ago,you purchased some 5-year MACRS equipment at a cost of $135,000.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.You sold the equipment today for $82,500.Which of these statements is correct if your tax rate is 23 percent and you ignore bonus depreciation?

Accepted Answer

A) The tax due on the sale is $10,032.60. 
B) The book value today is $40,478. 
C) The book value today is $37,320. 
D) The taxable amount on the sale is $47,380. 
E) The tax refund from the sale is $13,219.40. 
A) The tax due on the sale is $10,032.60. 
B) The book value today is $40,478. 
C) The book value today is $37,320. 
D) The taxable amount on the sale is $47,380. 
E) The tax refund from the sale is $13,219.40.

Question 3

The most valuable investment given up if an alternative investment is chosen is referred to as 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 4

Matty's Place is considering the installation of a new computer system that will cut annual operating costs by $12,000.The system will cost $42,000 to purchase and install.This system is expected to have a life of 5 years and will be depreciated to zero using straight-line depreciation.Ignore bonus depreciation.What is the amount of the earnings before interest and taxes for each year of this project if the tax rate is 21 percent?

Accepted Answer

A) −$20,400 
B) $5,400 
C) $3,600 
D) $12,000 
E) $8,400 
A) −$20,400 
B) $5,400 
C) $3,600 
D) $12,000 
E) $8,400

Question 5

Pete's Garage just purchased some equipment at a cost of $650,000.What is the proper methodology for computing the depreciation expense for Year 3 if the equipment is classified as 5-year property for MACRS? 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.Ignore bonus depreciation.

Accepted Answer

A) $650,000(1 − .20)(1 − .32)(1 − .192) 
B) $650,000(1 − .20)(1 − .32) 
C) $650,000(1 − .20)(1 − .32)(.192) 
D) $650,000(1 − .192) 
E) $650,000(.192) 
A) $650,000(1 − .20)(1 − .32)(1 − .192) 
B) $650,000(1 − .20)(1 − .32) 
C) $650,000(1 − .20)(1 − .32)(.192) 
D) $650,000(1 − .192) 
E) $650,000(.192)

Question 6

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

Accepted Answer

Financing costs are not an incremental c

Question 7

Samson's purchased a lot four years ago at a cost of $398,000.At that time,the firm spent $289,000 to build a small retail outlet on the site.The most recent appraisal on the property placed a value of $629,000 on the property and building.Samson's now wants to tear down the original structure and build a new strip mall on the site at an estimated cost of $2.3 million.What amount should be used as the initial cash outflow for the new project?

Accepted Answer

A) $2,987,000 
B) $2,242,000 
C) $2,058,000 
D) $2,300,000 
E) $2,929,000 
A) $2,987,000 
B) $2,242,000 
C) $2,058,000 
D) $2,300,000 
E) $2,929,000

Question 8

For next year,By-Way has projected sales of $435,000,costs of $254,000,depreciation of $35,000,interest expense of $22,000,and taxes of $28,500.What is the amount of the projected operating cash flow?

Accepted Answer

A) $130,500 
B) $157,900 
C) $152,500 
D) $161,500 
E) $181,000 
A) $130,500 
B) $157,900 
C) $152,500 
D) $161,500 
E) $181,000

Question 9

Walks Softly currently sells 14,800 pairs of shoes annually at an average price of $59 a pair.It is considering adding a lower-priced line of shoes that will be priced at $39 a pair.The company estimates it can sell 6,000 pairs of the lower-priced shoes annually but will sell 3,500 less pairs of the higher-priced shoes each year by doing so.What annual sales revenue should be used when evaluating the addition of the lower-priced shoes?

Accepted Answer

A) $27,500 
B) $24,000 
C) $31,300 
D) $789,100 
E) $900,700 
A) $27,500 
B) $24,000 
C) $31,300 
D) $789,100 
E) $900,700

Question 10

For the current year,Peter's Boats has sales of $760,000 and a profit margin of 5 percent.The annual depreciation expense is $80,000.What is the amount of the annual operating cash flow if the company has no long-term debt?

Accepted Answer

A) $34,000 
B) $86,400 
C) $118,000 
D) $120,400 
E) $123,900 
A) $34,000 
B) $86,400 
C) $118,000 
D) $120,400 
E) $123,900

Question 11

Champion Toys just purchased some MACRS 5-year property at a cost of $230,000.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.Assuming the firm foregoes all bonus depreciation,the book value of the asset as of the end of Year 2 can be calculated as:

Accepted Answer

A) $230,000(1 − .20 − .32). 
B) $230,000([1 − (.20)(.32)]. 
C) $230,000(1 − .20)(1 − .32). 
D) $230,000/(1 − .20 − .32). 
E) $230,000(.20)(.32). 
A) $230,000(1 − .20 − .32). 
B) $230,000([1 − (.20)(.32)]. 
C) $230,000(1 − .20)(1 − .32). 
D) $230,000/(1 − .20 − .32). 
E) $230,000(.20)(.32).

Question 12

A project will increase annual sales by $60,000 and annual cash expenses by $51,000.The project will cost $40,000 and will be depreciated using straight-line depreciation to a zero book value over the 4-year life of the project.Ignore bonus depreciation.The company has a marginal tax rate of 23 percent.What is the annual operating cash flow using the tax shield approach?

Accepted Answer

A) $5,850 
B) $8,650 
C) $9,230 
D) $9,770 
E) $10,350 
A) $5,850 
B) $8,650 
C) $9,230 
D) $9,770 
E) $10,350

Question 13

Tech Enterprises is considering a new project that will require $325,000 for fixed assets,$160,000 for inventory,and $35,000 for accounts receivable.Short-term debt is expected to increase by $100,000.The project has a life of 5 years.The fixed assets will be depreciated straight-line to a zero book value over the life of the project.Ignore bonus depreciation.At the end of the project,the fixed assets can be sold for 25 percent of their original cost and the net working capital will return to its original level.The project is expected to generate annual sales of $554,000 with costs of $430,000.The tax rate is 21 percent and the required rate of return is 15 percent.What is the net present value of this project?

Accepted Answer

A) $32,026.45 
B) $33,278.35 
C) $34,138.25 
D) $32,318.29 
E) $36,202.48 
A) $32,026.45 
B) $33,278.35 
C) $34,138.25 
D) $32,318.29 
E) $36,202.48

Question 14

Camille's Café is considering a project that will not produce any sales but will decrease annual cash expenses by $12,000.If the project is implemented,annual taxes will increase from $23,000 to $25,205,and depreciation will increase from $4,000 to $5,500 per year.What is the amount of the annual operating cash flow using the top-down approach?

Accepted Answer

A) $5,025 
B) $9,795 
C) $5,500 
D) $12,000 
E) $14,205 
A) $5,025 
B) $9,795 
C) $5,500 
D) $12,000 
E) $14,205

Question 15

Schroeder Electronics is considering a project which will require the purchase of $5.68 million in new equipment that will be depreciated straight-line to a zero book value over the 5-year life of the project.Ignore bonus depreciation.The firm requires a rate of return of 12 percent and the tax rate is 21 percent.What is the value of the depreciation tax shield in Year 5 of the project?

Accepted Answer

A) $225,608 
B) $228,406 
C) $334,800 
D) $238,560 
E) $0 
A) $225,608 
B) $228,406 
C) $334,800 
D) $238,560 
E) $0

Question 16

Which one of these is an example of erosion that should be included in project analysis?

Accepted Answer

A) The anticipated loss of current sales when a new product is launched. 
B) The expected decline in sales as the market for a product becomes saturated. 
C) The reduction in sales that occurs when a competitor introduces a new product. 
D) The sudden loss of sales due to a major employer in your community implementing massive layoffs. 
E) The reduction in sales price that will most likely be required to sell inventory that has aged. 
A) The anticipated loss of current sales when a new product is launched. 
B) The expected decline in sales as the market for a product becomes saturated. 
C) The reduction in sales that occurs when a competitor introduces a new product. 
D) The sudden loss of sales due to a major employer in your community implementing massive layoffs. 
E) The reduction in sales price that will most likely be required to sell inventory that has aged.

Question 17

A cost that has already been paid,or a liability to pay that has already been incurred,is classified as 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

The initial cost of one customized machine is $675,000 with an annual operating cost of $14,800,and a life of 4 years.The machine will be worthless and replaced at the end of its life.What is the equivalent annual cost of this machine if the required rate of return is 14.5 percent and we ignore taxes?

Accepted Answer

A) $249,797.41 
B) $240,008.02 
C) $248,841.99 
D) $247,647.78 
E) $251,610.29 
A) $249,797.41 
B) $240,008.02 
C) $248,841.99 
D) $247,647.78 
E) $251,610.29

Changes in the net working capital:

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

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

For next year,By-Way has projected sales of $435,000,costs of $254,000,depreciation of $35,000,interest expense of $22,000,and taxes of $28,500.What is the amount of the projected operating cash flow?

For the current year,Peter's Boats has sales of $760,000 and a profit margin of 5 percent.The annual depreciation expense is $80,000.What is the amount of the annual operating cash flow if the company has no long-term debt?

Which one of these is an example of erosion that should be included in project analysis?

A cost that has already been paid,or a liability to pay that has already been incurred,is classified as a(n):

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

Filters

Exam 6: Making Capital Investment Decisions

Changes in the net working capital:

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

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

For next year,By-Way has projected sales of $435,000,costs of $254,000,depreciation of $35,000,interest expense of $22,000,and taxes of $28,500.What is the amount of the projected operating cash flow?

For the current year,Peter's Boats has sales of $760,000 and a profit margin of 5 percent.The annual depreciation expense is $80,000.What is the amount of the annual operating cash flow if the company has no long-term debt?

Which one of these is an example of erosion that should be included in project analysis?

A cost that has already been paid,or a liability to pay that has already been incurred,is classified as a(n):

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

Filters