Question 1

Assume your firm has an unused machine that originally cost $75,000,has a book value of $20,000,and a market value of $25,000.Ignoring taxes,what is the opportunity cost of using this machine?

Accepted Answer

A)   $75,000
B)   $25,000
C)   $20,000
D)   $5,000 B

Question 2

Your forecast shows $500,000 annually in sales for each of the next 3 years.If your second and third year predictions have failed to incorporate the 3% expected annual inflation,how far off in total dollar sales is your 3-year forecast?

Accepted Answer

A)   $45,450
B)   $60,900
C)   $52,550
D)   $76,250 A

Question 3

Allocations of overheads should not affect a project's incremental cash flows unless the:

Accepted Answer

A)   project actually changes the total amount of overhead expenses.
B)   overhead will not be recovered at the end of the project.
C)   overhead is not currently fully allocated to existing projects.
D)   accountant is required to allocate costs to this project. A

Question 4

Why is accelerated depreciation often favored for the corporation's set of tax books?

Accepted Answer

A)   It increases the total depreciation tax shield over the project's life.
B)   It reduces the total amount of taxes paid over the project's life.
C)   It increases net accounting profits over the project's life.
D)   It allows the depreciation tax savings to be realized earlier.

Question 5

Discounting real cash flows with real interest rates provides an overly optimistic idea of a project's value.

Accepted Answer

A) True 
 B)False

Question 6

What is the NPV of a 6-year project that costs $100,000,has annual revenues of $50,000 and costs of $15,000? Assume the investment can be depreciated for tax purposes straight-line over 6 years,the corporate tax rate is 35%,and the discount rate is 14%.

Accepted Answer

A)   −$15,560.04
B)   $11,151.08
C)   $3,411.14
D)   $14,782.09

Question 7

If inflation is forecast to increase,which of the company's following cash flows is most likely to change?

Accepted Answer

A)   The depreciation tax shield.
B)   Labor costs.
C)   Costs of raw materials purchased on a fixed price contract.
D)   Interest payments on its long-term debt.

Question 8

You are considering the introduction of a new product that will require an investment in new machinery.Which one of these will lower the net present value of that project?

Accepted Answer

A)   A reduction in the firm's total variable costs due to the purchase of the new machine
B)   A loss of sales of existing products due to the introduction of the new product
C)   The increase in annual depreciation resulting from the asset purchase
D)   The sale of the machine after it is fully depreciated

Question 9

An investment today of $25,000 promises to return $10,000 annually for the next 3 years.What is the real rate of return on this investment if inflation averages 6% annually during the period?

Accepted Answer

A)   3.49%
B)   9.78%
C)   4.84%
D)   6.38%

Question 10

What is the operating cash flow for a firm with $500,000 profit before tax,$100,000 depreciation expense,and a 35% marginal tax rate?

Accepted Answer

A)   $260,000
B)   $325,000
C)   $360,000
D)   $425,000

Question 11

Which one of the following would be more apt to make an unacceptable project appear acceptable?

Accepted Answer

A)   Discounting real cash flows with real rates
B)   Discounting nominal cash flows with real rates
C)   Discounting real cash flows with nominal rates
D)   Discounting nominal cash flows with nominal rates

Question 12

The present value of the total depreciation tax shield will be higher when an asset uses MACRS than when depreciated straight-line.

Accepted Answer

A) True 
 B)False

Question 13

Which one of these represents a cash outflow for a project?

Accepted Answer

A)   A sunk cost
B)   Increase in accounts receivable
C)   Depreciation
D)   Accrued expenses

Question 14

When is it appropriate to include sunk costs in the evaluation of a project?

Accepted Answer

A)   Whenever they are relatively large
B)   If they improve the project's NPV
C)   If they are considered to be overhead costs
D)   Never

Question 15

Investments in working capital:

Accepted Answer

A)   are simply accounting entries and do not affect NPV.
B)   do not matter because the cash is generally recovered when the project ends.
C)   increase NPV because they make the project more valuable.
D)   reduce project NPV.

Question 16

Which one of these statements is incorrect?

Accepted Answer

A)   Real cash flows must be discounted at a real discount rate.
B)   (1 + real rate of interest)  = (1 + nominal rate of interest)  / (1 + inflation rate) 
C)   The actual real rate of interest almost equals "nominal rate of interest − inflation rate."
D)   Inflation rate = nominal rate / real rate − 1

Question 17

Which of the following correctly adjusts for depreciation when calculating a project's operating cash flow?

Accepted Answer

A)   (revenues − cash expenses)  × (1 − tax rate)  + (tax rate × depreciation) .
B)   pretax profit + depreciation tax shield.
C)   after-tax profit − depreciation.
D)   ignore depreciation since it is not a cash flow.

Question 18

When you evaluate a proposed project you should:

Accepted Answer

A)   allocate a percentage of current overhead costs to the project.
B)   include all indirect effects.
C)   include sunk costs.
D)   ignore opportunity costs.

Question 19

Lew's Metals has a machine sitting idle in its warehouse.The machine originally cost $213,000,has a current book value of $32,300,has a scrap metal value of $13,000,and a market value of $46,900.The machine is totally paid for.What value should be placed on this machine if it is used for a new project?

Accepted Answer

A)   $0
B)   $13,000
C)   $32,300
D)   $46,900

Question 20

Which one of the following changes in working capital is least likely if sales increase?

Accepted Answer

A)   An increase in inventories
B)   An increase in accounts payable
C)   A decrease in accounts receivable
D)   An increase in notes payable

Exam 9: Using Discounted Cash-Flow Analysis to Make Investment Decisions