Question 1

With regard to depreciation,the time value of money concept tells us that:

Accepted Answer

A)  delaying the depreciation expense is always better. 
B)  taking the depreciation expense sooner is always better. 
C)  delaying the depreciation expense is sometimes better. 
D)  taking the depreciation expense sooner is sometimes better. 
A)  delaying the depreciation expense is always better. 
B)  taking the depreciation expense sooner is always better. 
C)  delaying the depreciation expense is sometimes better. 
D)  taking the depreciation expense sooner is sometimes better.

Question 2

Which of the following statements is correct with respect to Section 179 deductions?

Accepted Answer

A)  It was designed to help small businesses. 
B)  It allows the firm to expense the asset immediately in the year of purchase. 
C)  Most businesses can expense up to $108,000 of property placed in service during each year. 
D)  All of the options are correct statements. 
A)  It was designed to help small businesses. 
B)  It allows the firm to expense the asset immediately in the year of purchase. 
C)  Most businesses can expense up to $108,000 of property placed in service during each year. 
D)  All of the options are correct statements.

Question 3

You are evaluating a project for your company.You estimate the sales price to be $40 per unit and sales volume to be 2,000 units in year 1; 8,000 units in year 2; and 4,000 units in year 3.The project has a three-year life.Variable costs amount to $25 per unit and fixed costs are $20,000 per year.The project requires an initial investment of $16,000 in assets that will be depreciated straight-line to zero over the three-year project life.The actual market value of these assets at the end of year 3 is expected to be $1,000.NWC requirements at the beginning of each year will be approximately 25 percent of the projected sales during the coming year.The tax rate is 35 percent and the required return on the project is 10 percent.What change in NWC occurs at the end of year 1?

Accepted Answer

A)  $16,000 
B)  $44,000 
C)  $60,000 
D)  $90,000 
A)  $16,000 
B)  $44,000 
C)  $60,000 
D)  $90,000

Question 4

Your firm needs a machine which costs $125,000,and requires $5,000 in maintenance for each year of its three-year life.After three years,this machine will be replaced.The machine falls into the MACRS three-year class life category.Assume a tax rate of 35 percent and a discount rate of 10 percent.If this machine can be sold for $15,000 at the end of year 3,what is the after-tax salvage value?

Accepted Answer

A)  $9,262.50 
B)  $9,750.00 
C)  $11,692.69 
D)  $12,991.88 
A)  $9,262.50 
B)  $9,750.00 
C)  $11,692.69 
D)  $12,991.88

Question 5

Equipment was purchased for $45,000 plus $2,000 in freight charges.Installation costs were $1,500 and sales tax totaled $1,000.Hiring a special consultant to provide advice during the selection of the equipment cost $3,000.What is this asset's depreciable basis?

Accepted Answer

A)  $51,500 
B)  $49,500 
C)  $48,500 
D)  $52,500 
A)  $51,500 
B)  $49,500 
C)  $48,500 
D)  $52,500

Question 6

You are trying to pick the least-expensive machine for your company.You have two choices: machine A,which will cost $100,000 to purchase and which will have OCF of −$7,000 annually throughout the machine's expected life of three years; and machine B,which will cost $125,000 to purchase and which will have OCF of −$2,600 annually throughout that machine's four-year life.Both machines will be worthless at the end of their life.If you intend to replace whichever type of machine you choose with the same thing when its life runs out,again and again out into the foreseeable future,and if your business has a cost of capital of 15 percent,which one should you choose?

Accepted Answer

A)  Machine A 
B)  Machine B 
C)  Both machines A and B 
D)  Neither machine A nor B 
A)  Machine A 
B)  Machine B 
C)  Both machines A and B 
D)  Neither machine A nor B

Question 7

You are evaluating a project for your company.You estimate the sales price to be $25 per unit and sales volume to be 4,000 units in year 1; 7,000 units in year 2; and 1,000 units in year 3.The project has a three-year life.Variable costs amount to $10 per unit and fixed costs are $50,000 per year.The project requires an initial investment of $10,000 in assets that will be depreciated straight-line to zero over the three-year project life.The actual market value of these assets at the end of year 3 is expected to be $1,000.NWC requirements at the beginning of each year will be approximately 10 percent of the projected sales during the coming year.The tax rate is 34 percent and the required return on the project is 10 percent.What is the operating cash flow for the project in year 2?

Accepted Answer

A)  $34,100 
B)  $37,093 
C)  $37,433 
D)  $39,700 
A)  $34,100 
B)  $37,093 
C)  $37,433 
D)  $39,700

Question 8

Suppose you sell a fixed asset for $75,000 when its book value is $80,000.If your company's marginal tax rate is 35 percent,what will be the effect on cash flows of this sale (i.e.,what will be the after-tax cash flow of this sale)?

Accepted Answer

A)  $5,000 
B)  $48,750 
C)  $76,750 
D)  $80,000 
A)  $5,000 
B)  $48,750 
C)  $76,750 
D)  $80,000

Question 9

You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck for $250,000.The truck falls into the MACRS three-year class,and it will be sold after three years for $50,000.Use of the truck will require an increase in NWC (spare parts inventory)of $5,000.The truck will have no effect on revenues,but it is expected to save the firm $80,000 per year in before-tax operating costs,mainly labor.The firm's marginal tax rate is 40 percent.What will the operating cash flow for this project be during year 3?

Accepted Answer

A)  $25,785 
B)  $62,810 
C)  $81,333 
D)  $85,025 
A)  $25,785 
B)  $62,810 
C)  $81,333 
D)  $85,025

Question 10

You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck for $70,000.The truck falls into the MACRS three-year class,and it will be sold after three years for $5,000.Use of the truck will require an increase in NWC (spare parts inventory)of $10,000.The truck will have no effect on revenues,but it is expected to save the firm $32,000 per year in before-tax operating costs,mainly labor.The firm's marginal tax rate is 40 percent.What will the operating cash flow for this project be during year 2?

Accepted Answer

A)  $531 
B)  $885 
C)  $31,646 
D)  $50,315 
A)  $531 
B)  $885 
C)  $31,646 
D)  $50,315

Question 11

Due to rapid growth,a computer superstore is contemplating expanding by adding another location.Which of the following items should the financial officer NOT include in estimating the cash flow associated with this expansion?

Accepted Answer

A)  The company owns the land of the future site of the new location. 
B)  The new location is expected to take sales away from the existing location. 
C)  The company spent $100,000 six months ago in a major advertising campaign that will help the new store become profitable sooner. 
D)  All of the items should be included in the analysis. 
A)  The company owns the land of the future site of the new location. 
B)  The new location is expected to take sales away from the existing location. 
C)  The company spent $100,000 six months ago in a major advertising campaign that will help the new store become profitable sooner. 
D)  All of the items should be included in the analysis.

Question 12

Your firm needs a machine which costs $50,000,and requires $2,000 in maintenance for each year of its five-year life.After five years,this machine will be replaced.The machine falls into the MACRS five-year class life category.Assume a tax rate of 35 percent and a discount rate of 10 percent.If this machine can be sold for $3,000 at the end of year 5,what is the after-tax salvage value?

Accepted Answer

A)  $1,050.00 
B)  $1,872.00 
C)  $2,922.00 
D)  $2,958.00 
A)  $1,050.00 
B)  $1,872.00 
C)  $2,922.00 
D)  $2,958.00

Question 13

Your company is considering a new project that will require $2,000,000 of new equipment at the start of the project.The equipment will have a depreciable life of 10 years and will be depreciated to a book value of $250,000 using straight-line depreciation.The cost of capital is 12 percent,and the firm's tax rate is 39 percent.Estimate the present value of the tax benefits from depreciation.

Accepted Answer

A)  $68,250 
B)  $106,750 
C)  $175,000 
D)  $385,628 
A)  $68,250 
B)  $106,750 
C)  $175,000 
D)  $385,628

Question 14

The best approach to convert an infinite series of asset purchases into a perpetuity is known as the:

Accepted Answer

A)  net working capital approach 
B)  net present value approach 
C)  equivalent annual cost approach 
D)  equivalent annual cash flow approach 
A)  net working capital approach 
B)  net present value approach 
C)  equivalent annual cost approach 
D)  equivalent annual cash flow approach

Question 15

Which statement is true regarding cost-cutting proposals?

Accepted Answer

A)  The main benefits are from changes in sales and changes in costs. 
B)  The main benefits come only from changes in sales. 
C)  The main benefits come only from changes in costs. 
D)  The main benefits come from the change in sales due to the response from the cost-cutting proposal. 
A)  The main benefits are from changes in sales and changes in costs. 
B)  The main benefits come only from changes in sales. 
C)  The main benefits come only from changes in costs. 
D)  The main benefits come from the change in sales due to the response from the cost-cutting proposal.

Question 16

Your firm needs a machine which costs $500,000,and requires $15,000 in maintenance for each year of its three-year life.After three years,this machine will be replaced.The machine falls into the MACRS three-year class life category.Assume a tax rate of 35 percent and a discount rate of 10 percent.If this machine can be sold for $50,000 at the end of year 3,what is the after-tax salvage value?

Accepted Answer

A)  $12,250.00 
B)  $17,500.00 
C)  $32,500.00 
D)  $45,467.50 
A)  $12,250.00 
B)  $17,500.00 
C)  $32,500.00 
D)  $45,467.50

Question 17

ABC Engineering just bought a new machine.All of the following are examples of incremental cash flows EXCEPT:

Accepted Answer

A)  interest expense on the loan used to purchase the machine. 
B)  installation costs on the new machine. 
C)  increase in costs as a result of the new machine. 
D)  increases in depreciation expenses as a result of the new machine. 
A)  interest expense on the loan used to purchase the machine. 
B)  installation costs on the new machine. 
C)  increase in costs as a result of the new machine. 
D)  increases in depreciation expenses as a result of the new machine.

Question 18

You are evaluating a product for your company.You estimate the sales price of the product to be $50 per unit and sales volume to be 50,000 units in year 1; 75,000 units in year 2; and 10,000 units in year 3.The project has a three-year life.Variable costs amount to $15 per unit and fixed costs are $100,000 per year.The project requires an initial investment of $275,000 in assets that will be depreciated straight-line to zero over the three-year project life.The actual market value of these assets at the end of year 3 is expected to be $25,000.NWC requirements at the beginning of each year will be approximately 10 percent of the projected sales during the coming year.The tax rate is 34 percent and the required return on the project is 9 percent.What will the year 2 free cash flow for this project be?

Accepted Answer

A)  $1,556,332 
B)  $1,572,667 
C)  $1,697,667 
D)  $2,022,667 
A)  $1,556,332 
B)  $1,572,667 
C)  $1,697,667 
D)  $2,022,667

Question 19

One way to account for flotation costs of raising capital is to:

Accepted Answer

A)  adjust all the project's cash flows so that each year it will reflect the flotation costs. 
B)  adjust the project's initial cash flow so that it will reflect the flotation costs. 
C)  adjust only the project's operating cash flows to account for paying back the shareholders. 
D)  adjust the project's tax burden to account for the tax implications of raising capital. 
A)  adjust all the project's cash flows so that each year it will reflect the flotation costs. 
B)  adjust the project's initial cash flow so that it will reflect the flotation costs. 
C)  adjust only the project's operating cash flows to account for paying back the shareholders. 
D)  adjust the project's tax burden to account for the tax implications of raising capital.

Question 20

Equipment was purchased for $250,000 plus $500 in freight charges.Installation costs were $750 and sales tax totaled $18,750.Hiring a special consultant to provide advice during the selection of the equipment cost $500.What is this asset's depreciable basis?

Accepted Answer

A)  $270,500 
B)  $270,000 
C)  $269,250 
D)  $268,750 
A)  $270,500 
B)  $270,000 
C)  $269,250 
D)  $268,750

With regard to depreciation,the time value of money concept tells us that:

Which of the following statements is correct with respect to Section 179 deductions?

Equipment was purchased for $45,000 plus $2,000 in freight charges.Installation costs were $1,500 and sales tax totaled $1,000.Hiring a special consultant to provide advice during the selection of the equipment cost $3,000.What is this asset's depreciable basis?

Suppose you sell a fixed asset for $75,000 when its book value is $80,000.If your company's marginal tax rate is 35 percent,what will be the effect on cash flows of this sale (i.e.,what will be the after-tax cash flow of this sale)?

Due to rapid growth,a computer superstore is contemplating expanding by adding another location.Which of the following items should the financial officer NOT include in estimating the cash flow associated with this expansion?

The best approach to convert an infinite series of asset purchases into a perpetuity is known as the:

Which statement is true regarding cost-cutting proposals?

ABC Engineering just bought a new machine.All of the following are examples of incremental cash flows EXCEPT:

One way to account for flotation costs of raising capital is to:

Equipment was purchased for $250,000 plus $500 in freight charges.Installation costs were $750 and sales tax totaled $18,750.Hiring a special consultant to provide advice during the selection of the equipment cost $500.What is this asset's depreciable basis?

Introduction to Financial Management

Reviewing Financial Statements

Analyzing Financial Statements

Time Value of Money 1: Analyzing Single Cash Flows

Time Value of Money 2: Analyzing Annuity Cash Flows

Understanding Financial Markets and Institutions

Valuing Bonds

Valuing Stocks

Characterizing Risk and Return

Estimating Risk and Return

Calculating the Cost of Capital

Weighing Net Present Value and Other Capital Budgeting Criteria

Working Capital Management and Policies

Filters

Exam 12: Estimating Cash Flows on Capital Budgeting Projects

With regard to depreciation,the time value of money concept tells us that:

Which of the following statements is correct with respect to Section 179 deductions?

Equipment was purchased for $45,000 plus $2,000 in freight charges.Installation costs were $1,500 and sales tax totaled $1,000.Hiring a special consultant to provide advice during the selection of the equipment cost $3,000.What is this asset's depreciable basis?

Suppose you sell a fixed asset for $75,000 when its book value is $80,000.If your company's marginal tax rate is 35 percent,what will be the effect on cash flows of this sale (i.e.,what will be the after-tax cash flow of this sale)?

Due to rapid growth,a computer superstore is contemplating expanding by adding another location.Which of the following items should the financial officer NOT include in estimating the cash flow associated with this expansion?

The best approach to convert an infinite series of asset purchases into a perpetuity is known as the:

Which statement is true regarding cost-cutting proposals?

ABC Engineering just bought a new machine.All of the following are examples of incremental cash flows EXCEPT:

One way to account for flotation costs of raising capital is to:

Equipment was purchased for $250,000 plus $500 in freight charges.Installation costs were $750 and sales tax totaled $18,750.Hiring a special consultant to provide advice during the selection of the equipment cost $500.What is this asset's depreciable basis?

Introduction to Financial Management

Reviewing Financial Statements

Analyzing Financial Statements

Time Value of Money 1: Analyzing Single Cash Flows

Time Value of Money 2: Analyzing Annuity Cash Flows

Understanding Financial Markets and Institutions

Valuing Bonds

Valuing Stocks

Characterizing Risk and Return

Estimating Risk and Return

Calculating the Cost of Capital

Weighing Net Present Value and Other Capital Budgeting Criteria

Working Capital Management and Policies

Filters