Question 1

Which of the following should be included in the initial outlay?

Accepted Answer

A) Shipping and installation costs 
B) Increased working capital requirements 
C) Cost of employee training associated specifically with the asset being evaluated 
D) All of the above 
A) Shipping and installation costs 
B) Increased working capital requirements 
C) Cost of employee training associated specifically with the asset being evaluated 
D) All of the above

Question 2

Mr.Smith included the cost of test marketing before production in the calculation of the initial outlay.Apparently,Mr.Smith does not understand the concept of

Accepted Answer

A) side-effect costs. 
B) opportunity costs. 
C) sunk costs. 
D) variable costs. 
A) side-effect costs. 
B) opportunity costs. 
C) sunk costs. 
D) variable costs.

Question 3

Holding all other variables constant,which of the following would INCREASE net working capital for given year on a project?

Accepted Answer

A) Allowing customers less time to pay for purchases 
B) Taking longer to pay suppliers 
C) Increasing inventory levels 
D) Both A and C 
A) Allowing customers less time to pay for purchases 
B) Taking longer to pay suppliers 
C) Increasing inventory levels 
D) Both A and C

Question 4

When an old asset is sold for exactly its depreciated value,the only taxable income is the difference between the initial cost of the machine and the selling price.

Accepted Answer

A) True 
 B)False

Question 5

Which of the following expenses should be included when estimating cash flows for investment projects?

Accepted Answer

A) Interest expense related to financing a project 
B) Sunk costs 
C) Required principal payments related to financing a project 
D) Opportunity costs 
A) Interest expense related to financing a project 
B) Sunk costs 
C) Required principal payments related to financing a project 
D) Opportunity costs

Question 6

The hardest step in capital budgeting analysis is estimating the cash flows of a project.

Accepted Answer

A) True 
 B)False

Question 7

By examining cash flows,we are correctly able to analyze the timing of the benefits.

Accepted Answer

A) True 
 B)False

Question 8

In year 3 of project Gamma.sales were $3,000,0000,cost of goods sold $1,500,000,other cash costs were $400,000,depreciation was $600,000 and interest expense was $250,000.The company's marginal tax rate is 35%.Compute operating cash flow for year 3 of project Gamma.

Accepted Answer

A) $925,000 
B) $675,000 
C) $500,000 
D) $325,000 
A) $925,000 
B) $675,000 
C) $500,000 
D) $325,000

Question 9

The relevant depreciation expense for a replacement investment is the difference between depreciation on the new asset(s)and the old asset(s).

Accepted Answer

A) True 
 B)False

Question 10

Wright's Warehouse has the following projections for Year 1 of a capital budgeting project.
Year 1 Incremental Projections:
Sales $200,000
Variable Costs $120,000
Fixed Costs $40,000
Depreciation Expense $20,000
Tax Rate 40%
Calculate the operating cash flow for Year 1.

Accepted Answer

A) $12,000 
B) $32,000 
C) $52,000 
D) $72,000 
A) $12,000 
B) $32,000 
C) $52,000 
D) $72,000

Question 11

Which of the following would be considered a termination cash flow?

Accepted Answer

A) The expected salvage value of the asset 
B) Any tax payments or refunds associated with the salvage value of the asset 
C) Recapture of any investment in working capital that was included as an incremental cash outlay 
D) All of the above 
A) The expected salvage value of the asset 
B) Any tax payments or refunds associated with the salvage value of the asset 
C) Recapture of any investment in working capital that was included as an incremental cash outlay 
D) All of the above

Question 12

The real discount rate includes expected inflation.

Accepted Answer

A) True 
 B)False

Question 13

ABC already spent $85,000 on a feasibility study for a machine that will produce a new product.The machine will cost $2,575,000.Required modifications will cost $375,000.ABC will need to invest $75,000 for additional inventory.The machine has an IRS approved useful life of 7 years;it is presumed to have no salvage value.It will only be operated for 3 years,after which it will be sold for $600,000.What is the depreciable cost basis of the machine?

Accepted Answer

A) $3,025,000 
B) $2,950,000 
C) $2,575,000 
D) $2,350,000 
A) $3,025,000 
B) $2,950,000 
C) $2,575,000 
D) $2,350,000

Question 14

Kahnemann Kookies is evaluating the replacement of an old oven with a new,more energy efficient model.The old oven cost $50,000,is 5 years old and is being depreciated over a life of 10 years to a value of $0.00.The new oven costs $60,000 and will be depreciated over 5 years with no salvage value.Kahnemann uses straight line depreciation,its tax rate is 40%.If the old oven is sold for $10,000,compute the net cost of the new oven.

Accepted Answer

Annual depreciation on the old oven was

Question 15

A company converts space to use as a manufacturing facility.Previously it was rented to another company as a warehouse.This is an example of a sunk cost.

Accepted Answer

A) True 
 B)False

Question 16

Clean-up and restoration costs required by government regulations are negative cash flows associated with a project's termination.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following is an example of a sunk cost?

Accepted Answer

A) Overhead costs that are associated with a project 
B) Interest expense associated with a project 
C) Market study expenses incurred in order to decide if a firm should accept a project 
D) Depreciation expenses associated with a project 
A) Overhead costs that are associated with a project 
B) Interest expense associated with a project 
C) Market study expenses incurred in order to decide if a firm should accept a project 
D) Depreciation expenses associated with a project

Question 18

The capital budgeting decision-making process involves estimating the expected incremental cash flows of a proposal and comparing the present value of these cash flows to the project's cost.

Accepted Answer

A) True 
 B)False

Question 19

Which of the following cash flows should be included as incremental costs when evaluating capital projects?

Accepted Answer

A) Investment in working capital that is directly related to a project 
B) Expenses that are incurred in order to modify a firm's production facility in order to invest in a project 
C) Opportunity costs that are directly related to a project 
D) All of the above 
A) Investment in working capital that is directly related to a project 
B) Expenses that are incurred in order to modify a firm's production facility in order to invest in a project 
C) Opportunity costs that are directly related to a project 
D) All of the above

Question 20

Which of the following cash flows should be included as incremental costs when evaluating capital projects?

Accepted Answer

A) A new security system will reduce shoplifting losses by $50,000 per year. 
B) New equipment associated with the project will increase depreciation expense by $300,000 per year. 
C) Interest on construction loans will increase interest expense by $225,000 per year. 
D) The new project will occupy about 5% of the Chief Operating Officer's time,so 5% of her salary should be included. 
A) A new security system will reduce shoplifting losses by $50,000 per year. 
B) New equipment associated with the project will increase depreciation expense by $300,000 per year. 
C) Interest on construction loans will increase interest expense by $225,000 per year. 
D) The new project will occupy about 5% of the Chief Operating Officer's time,so 5% of her salary should be included.

Which of the following should be included in the initial outlay?

Mr.Smith included the cost of test marketing before production in the calculation of the initial outlay.Apparently,Mr.Smith does not understand the concept of

Holding all other variables constant,which of the following would INCREASE net working capital for given year on a project?

When an old asset is sold for exactly its depreciated value,the only taxable income is the difference between the initial cost of the machine and the selling price.

Which of the following expenses should be included when estimating cash flows for investment projects?

The hardest step in capital budgeting analysis is estimating the cash flows of a project.

By examining cash flows,we are correctly able to analyze the timing of the benefits.

In year 3 of project Gamma.sales were $3,000,0000,cost of goods sold $1,500,000,other cash costs were $400,000,depreciation was $600,000 and interest expense was $250,000.The company's marginal tax rate is 35%.Compute operating cash flow for year 3 of project Gamma.

The relevant depreciation expense for a replacement investment is the difference between depreciation on the new asset(s)and the old asset(s).

Wright's Warehouse has the following projections for Year 1 of a capital budgeting project. Year 1 Incremental Projections: Sales $200,000 Variable Costs $120,000 Fixed Costs $40,000 Depreciation Expense $20,000 Tax Rate 40% Calculate the operating cash flow for Year 1.

Which of the following would be considered a termination cash flow?

The real discount rate includes expected inflation.

A company converts space to use as a manufacturing facility.Previously it was rented to another company as a warehouse.This is an example of a sunk cost.

Clean-up and restoration costs required by government regulations are negative cash flows associated with a project's termination.

Which of the following is an example of a sunk cost?

The capital budgeting decision-making process involves estimating the expected incremental cash flows of a proposal and comparing the present value of these cash flows to the project's cost.

Which of the following cash flows should be included as incremental costs when evaluating capital projects?

Which of the following cash flows should be included as incremental costs when evaluating capital projects?

Getting Started-Principles of Finance

Firms and the Financial Market

Understanding Financial Statements,taxes,and Cash Flows

Financial Analysis-Sizing up Firm Performance

Time Value of Money-The Basics

The Time Value of Money-Annuities and Other Topics

An Introduction to Risk and Return-History of Financial Market Returns

Risk and Return-Capital Market Theory

Debt Valuation and Interest Rates

Stock Valuation

Investment Decision Criteria

Risk Analysis and Project Evaluation

The Cost of Capital

Capital Structure Policy

Dividend Policy

Financial Forecasting and Planning

Working Capital Management

International Business Finance

Corporate Risk Management

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Exam 12: Analyzing Project Cash Flows

Which of the following should be included in the initial outlay?

Mr.Smith included the cost of test marketing before production in the calculation of the initial outlay.Apparently,Mr.Smith does not understand the concept of

Holding all other variables constant,which of the following would INCREASE net working capital for given year on a project?

When an old asset is sold for exactly its depreciated value,the only taxable income is the difference between the initial cost of the machine and the selling price.

Which of the following expenses should be included when estimating cash flows for investment projects?

The hardest step in capital budgeting analysis is estimating the cash flows of a project.

By examining cash flows,we are correctly able to analyze the timing of the benefits.

In year 3 of project Gamma.sales were $3,000,0000,cost of goods sold $1,500,000,other cash costs were $400,000,depreciation was $600,000 and interest expense was $250,000.The company's marginal tax rate is 35%.Compute operating cash flow for year 3 of project Gamma.

The relevant depreciation expense for a replacement investment is the difference between depreciation on the new asset(s)and the old asset(s).

Wright's Warehouse has the following projections for Year 1 of a capital budgeting project. Year 1 Incremental Projections: Sales $200,000 Variable Costs $120,000 Fixed Costs $40,000 Depreciation Expense $20,000 Tax Rate 40% Calculate the operating cash flow for Year 1.

Which of the following would be considered a termination cash flow?

The real discount rate includes expected inflation.

A company converts space to use as a manufacturing facility.Previously it was rented to another company as a warehouse.This is an example of a sunk cost.

Clean-up and restoration costs required by government regulations are negative cash flows associated with a project's termination.

Which of the following is an example of a sunk cost?

The capital budgeting decision-making process involves estimating the expected incremental cash flows of a proposal and comparing the present value of these cash flows to the project's cost.

Which of the following cash flows should be included as incremental costs when evaluating capital projects?

Which of the following cash flows should be included as incremental costs when evaluating capital projects?

Getting Started-Principles of Finance

Firms and the Financial Market

Understanding Financial Statements,taxes,and Cash Flows

Financial Analysis-Sizing up Firm Performance

Time Value of Money-The Basics

The Time Value of Money-Annuities and Other Topics

An Introduction to Risk and Return-History of Financial Market Returns

Risk and Return-Capital Market Theory

Debt Valuation and Interest Rates

Stock Valuation

Investment Decision Criteria

Risk Analysis and Project Evaluation

The Cost of Capital

Capital Structure Policy

Dividend Policy

Financial Forecasting and Planning

Working Capital Management

International Business Finance

Corporate Risk Management

Filters