Question 1

When terminating a project for capital budgeting purposes,the working capital outlay required at the initiation of the project will

Accepted Answer

A)  not affect the cash flow. 
B)  decrease the cash flow because it is a historical cost. 
C)  increase the cash flow because it is recaptured. 
D)  decrease the cash flow because it is an outlay.

Question 2

A six-year project for East Nile,Inc.results in additional accounts receivable of $150,000,additional inventory of $50,000,and additional accounts payable of $80,000 today.What is the change in the NPV of a project solely due to the additional net working capital (NWC)needs? Assume a 14% discount rate,and the recovery of net working capital at the end of the project.

Accepted Answer

A)  a decrease of $34,606 
B)  a decrease of $42,670 
C)  a decrease of $120,000 
D)  a decrease of $58,689

Question 3

Which of the following cash flows are not considered in the calculation of the initial outlay for a capital investment proposal?

Accepted Answer

A)  increase in accounts receivable 
B)  cost of issuing new bonds if the project is financed by a new bond issue 
C)  installation costs 
D)  none of the above - all are considered

Question 4

A project for Jevon and Aaron,Inc.results in additional accounts receivable of $400,000,additional inventory of $180,000,and additional accounts payable of $70,000.What is the additional investment in net working capital?

Accepted Answer

A)  $580,000 
B)  $510,000 
C)  $270,000 
D)  $150,000

Question 5

Terminal cash flows are always positive because they result from the shutting down of a project with the sale of any assets with remaining value.

Accepted Answer

A) True 
 B)False

Question 6

If bankruptcy costs and/or shareholder underdiversification are an issue,what measure of risk is relevant when evaluating project risk in capital budgeting?

Accepted Answer

A)  Total project risk 
B)  Contribution-to-firm risk 
C)  Systematic risk 
D)  Capital rationing risk

Question 7

Your company is considering the replacement of an old delivery van with a new one that is more efficient.The old van cost $40,000 when it was purchased 5 years ago.The old van is being depreciated using the simplified straight-line method over a useful life of 8 years.The old van could be sold today for $7,000.The new van has an invoice price of $80,000,and it will cost $6,000 to modify the van to carry the company's products.Cost savings from use of the new van are expected to be $28,000 per year for 5 years,at which time the van will be sold for its estimated salvage value of $18,000.The new van will be depreciated using the simplified straight-line method over its 5-year useful life.The company's tax rate is 35%.Working capital is expected to increase by $5,000 at the inception of the project,but this amount will be recaptured at the end of year five.What is the initial outlay required to fund this replacement project?

Accepted Answer

A)  $81,200 
B)  $78,600 
C)  $74,500 
D)  $73,580

Question 8

An asset with an original cost of $100,000 and a current book value of $20,000 is sold for $50,000 as part of a capital budgeting project.The company has a tax rate of 30%.This transaction will have what impact on the project's initial outlay?

Accepted Answer

A)  reduce it by $20,000 
B)  reduce it by $50,000 
C)  reduce it by $6,000 
D)  reduce it by $15,000

Question 9

A new machine can be purchased for $1,800,000.It will cost $35,000 to ship and $15,000 to fine-tune the machine.The new machine will replace an older version that is fully depreciated and will be sold for $200,000.The firm's income tax rate is 35%.What is the initial outlay for capital budgeting purposes?

Accepted Answer

A)  $1,580,000 
B)  $1,630,000 
C)  $1,650,000 
D)  $1,720,000

Question 10

Margo Inc.wants to replace a 9-year-old machine with a new machine that is more efficient.The old machine cost $70,000 when new and has a current book value of $15,000.Margo can sell the machine to a foreign buyer for $14,000.Margo's tax rate is 35%.The effect of the sale of the old machine on the initial outlay for the new machine is

Accepted Answer

A)  ($14,350). 
B)  ($13,650). 
C)  ($9,100). 
D)  $1,000

Question 11

The less-risky investment is always the more desirable choice.

Accepted Answer

A) True 
 B)False

Question 12

A small,family-owned corporation would be more likely to use the contribution-to-firm risk criteria rather than the systematic risk to evaluate capital budgeting projects.

Accepted Answer

A) True 
 B)False

Question 13

The initial outlay includes the immediate cash outflow necessary to purchase the asset and put it in operating order.

Accepted Answer

A) True 
 B)False

Question 14

Creighton Industries is considering the purchase of a new strapping machine,which will cost $150,000,plus an additional $10,500 to ship and install.The new machine will have a 5-year useful life and will be depreciated to zero using the straight-line method.The machine is expected to generate new sales of $45,000 per year and is expected to save $16,000 in labor and electrical expenses over the next 5-years.The machine is expected to have a salvage value of $20,000.Creighton's income tax rate is 35%.What is the machine's IRR?

Accepted Answer

A)  15.75% 
B)  18.86% 
C)  19.15% 
D)  20.03%

Question 15

Bill and Mary own a small chain of high fashion boutiques that represent almost 100% of their net worth.When considering capital budgeting projects for their boutiques,the appropriate measure of risk is

Accepted Answer

A)  Project standing alone risk. 
B)  Systematic risk. 
C)  Contribution-to-firm risk. 
D)  Beta risk.

Question 16

The recapture of net working capital at the end of a project will

Accepted Answer

A)  increase terminal year free cash flow. 
B)  decrease terminal year free cash flow by the change in net working capital times the corporate tax rate. 
C)  increase terminal year free cash flow by the change in net working capital times the corporate tax rate. 
D)  have no effect on the terminal year free cash flow because the net working capital change has already been included in a prior year.

Question 17

A typical decision rule used in simulation is to accept the project if the probability is sufficiently high that the net present value is positive.

Accepted Answer

A) True 
 B)False

Question 18

J.B.Corporation is considering the purchase of equipment that has an invoice price of $450,000.The equipment was recommended by a consulting firm that did an analysis for J.B.Corporation.J.B.paid the consulting firm $12,000 for its report.The cost of shipping and installation is $50,000.The equipment will be depreciated on a straight-line basis over its useful life of 10 years,assuming no salvage value.The equipment will replace existing assets that have a current book value of $100,000 and which could be sold for $150,000.Additional net working capital of $15,000 will be required to maintain the equipment and to support higher sales.J.B.'s marginal tax rate is 40%.Calculate the initial outlay required to fund this project.

Accepted Answer

The answer of J.B.Corporation is considering the purchase of equipment...

Question 19

Synergistic benefits from an investment project include cannibalism.

Accepted Answer

A) True 
 B)False

Question 20

Blue Jay Industries is considering the purchase of a new machine.It will replace an existing but obsolete machine that will be sold for $50,000.The existing machine is 8 years old,cost $200,000,had a 10-year useful life,and is being depreciated to zero using the straight-line method.Blue Jay's income tax rate is 35%.What is the after-tax salvage value of the old machine?

Accepted Answer

A)  $42,000 
B)  $46,500 
C)  $50,000 
D)  $53,500

Exam 11: Cash Flows and Other Topics in Capital Budgeting

When terminating a project for capital budgeting purposes,the working capital outlay required at the initiation of the project will

Which of the following cash flows are not considered in the calculation of the initial outlay for a capital investment proposal?

A project for Jevon and Aaron,Inc.results in additional accounts receivable of $400,000,additional inventory of $180,000,and additional accounts payable of $70,000.What is the additional investment in net working capital?

Terminal cash flows are always positive because they result from the shutting down of a project with the sale of any assets with remaining value.

If bankruptcy costs and/or shareholder underdiversification are an issue,what measure of risk is relevant when evaluating project risk in capital budgeting?

An asset with an original cost of $100,000 and a current book value of $20,000 is sold for $50,000 as part of a capital budgeting project.The company has a tax rate of 30%.This transaction will have what impact on the project's initial outlay?

The less-risky investment is always the more desirable choice.

A small,family-owned corporation would be more likely to use the contribution-to-firm risk criteria rather than the systematic risk to evaluate capital budgeting projects.

The initial outlay includes the immediate cash outflow necessary to purchase the asset and put it in operating order.

Bill and Mary own a small chain of high fashion boutiques that represent almost 100% of their net worth.When considering capital budgeting projects for their boutiques,the appropriate measure of risk is

The recapture of net working capital at the end of a project will

A typical decision rule used in simulation is to accept the project if the probability is sufficiently high that the net present value is positive.

Synergistic benefits from an investment project include cannibalism.