Question 1

Relevant incremental cash flows include

Accepted Answer

A)  sales captured from the firm's competitors. 
B)  retained sales that would have been lost to new competing products. 
C)  incremental sales brought to the firm as a whole. 
D)  all of the above.

Question 2

Depreciation expenses affect tax-related cash flows by

Accepted Answer

A)  increasing taxable income, thus increasing taxes. 
B)  decreasing taxable income, thus reducing taxes. 
C)  decreasing taxable income, but not altering cash flows since depreciation is not a cash expense. 
D)  all of the above.

Question 3

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

Question 4

The machine's NPV is

Accepted Answer

A)  $1,556.56. 
B)  $2,556.56. 
C)  $1,123.99. 
D)  $2,123.99.

Question 5

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 6

J&P Accounting purchased new tax software two years ago. The software is still useable, but faster, more comprehensive software is available. If J&P purchases the new software, the cost of the old software is

Accepted Answer

A)  a sunk cost. 
B)  an opportunity cost. 
C)  a terminal expense. 
D)  an overhead expense.

Question 7

Jain's Pharmaceuticals is installing new lab equipment at a cost of $5 million with an economic life of 5 years. Jain's marginal tax rate is 35%. What is the difference in depreciation between straight line depreciation and MACRS depreciation in the second year.

Accepted Answer

A)  $0.6 million 
B)  $1 million 
C)  $1.6 million 
D)  $1.75 million

Question 8

Diamond Inc. has estimated that a new building will cost $2,500,000 to construct. Land was purchased a year ago for $500,000 and could be sold today for $550,000. An environmental impact study required by the state was performed at a cost of $48,000. For capital budgeting purposes, what is the relevant cost of the new building?

Accepted Answer

A)  $2,500,000 
B)  $3,048,000 
C)  $3,050,000 
D)  $3,098,000

Question 9

The depreciation method used in capital budgeting is irrelevant because any depreciation not taken during the life of the project will add to the book value when assets are sold.

Accepted Answer

A) True 
 B)False

Question 10

If the new machine is purchased, operating cash flow for years 1 through 5 will increase or decrease by

Accepted Answer

A)  Increase $15,000. 
B)  Decrease $9,900. 
C)  Increase $12,246. 
D)  Increase $5,346.

Question 11

SpaceTech is considering a new project with the following projections for Year 2. Year 2 Projections
EBIT $400,000
Interest Expense $20,000
Depreciation Expense $40,000
Tax Rate 40%
Incremental Net Working
Capital Needs $200,000
Compute the operating cash flow for year 2.

Accepted Answer

A)  $80,000 
B)  $180,000 
C)  $240,000 
D)  $280,000

Question 12

Incremental cash flows include all of the following EXCEPT:

Accepted Answer

A)  research and development costs. 
B)  increased labor costs from the project. 
C)  advertising costs . 
D)  both B and C.

Question 13

Al's Fabrication Shop is purchasing a new rivet machine to replace an existing one. The new machine costs $8,000 and will require an additional cost of $1,000 for modification and training. It will be depreciated using simplified straight line depreciation over five years. The new machine operates much faster than the old machine and with better quality. Consequently, sales are expected to increase by $2,100 per year for the next five years. While it is faster, it is fully automated and will result in increased electricity costs for the firm by $700 per year. It will, however, save about $850 per year in labor costs. The old machine is 20 years old and has already been fully depreciated. If the firm's marginal tax rate is 28%, compute the after tax incremental cash flows for the new machine for years 1 through 5.

Accepted Answer

A)  $2,698 
B)  $450 
C)  $2,124 
D)  $1,620

Question 14

Which of the following overhead expenses is a relevant, incremental cash flow?

Accepted Answer

A)  The project will represent 10% of the firm's revenues, so 10% of the CEO's compensation is allocated to the project. 
B)  The project will occupy 10% of the firm's available space, so 10% of the firm's property insurance is allocated to the project. 
C)  The project will increase the number of employees by 10%, so an additional human resources assistant must be hired to handle personnel issues directly related to the project. 
D)  None of the expenses above should be allocated to the project.

Question 15

In 2013, Sunny Electronics expects to sell 100,000 3-D television sets for an average price of $1,000. Expected production costs are $600 per unit. In 2014, volume is expected to increase by 10%, Inflation will increase the cost per unit by 3%, but to attract more buyers, Sunny will reduce the price to $950. In nominal dollars, expected gross profit for 2014 is

Accepted Answer

A)  $45.32 million. 
B)  $40 million. 
C)  $38 million. 
D)  $36.52 million.

Question 16

Terminal cash flows can include expenses as well as revenues.

Accepted Answer

A) True 
 B)False

Question 17

When computing the NPV of a project, if cash flows are discounted at the real cost of capital, then the cash flows should not be adjusted for inflation.

Accepted Answer

A) True 
 B)False

Question 18

Greenspan Inc. discounts cash flows at a nominal rate of 10%. Inflation over the next few years is expected to average 3%. Which of the following would be a correct adjustment for inflation when computing net present value?

Accepted Answer

A)  Discount cash flows at 10%; increase revenues and expenses by 3% each year. 
B)  Discount cash flows at 13%; increase revenues and expenses by 3% each year. 
C)  Discount cash flows at 7%; ignore inflation when forecasting revenues and expenses. 
D)  Either A or C would be acceptable.

Question 19

When determining how much overhead cost to include in incremental cash flows for a capital budgeting decision, the allocation of overhead by the accounting department based on percentage of space used by a project should always be used.

Accepted Answer

A) True 
 B)False

Question 20

Schiller Construction Inc. has estimated the following revenues and expenses related to phase I of a proposed new housing development. Incremental sales= $5,000,000, total cash operating expenses $3,500,000, depreciation $500,000, taxes 35%, interest expense, $200,000. Operating cash flow equals

Accepted Answer

A)  $650,000. 
B)  $1,000,000. 
C)  $1,150,000. 
D)  $975,000.

Exam 12: Analyzing Project Cash Flows

Relevant incremental cash flows include

Depreciation expenses affect tax-related cash flows by

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 machine's NPV is

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.

J&P Accounting purchased new tax software two years ago. The software is still useable, but faster, more comprehensive software is available. If J&P purchases the new software, the cost of the old software is

Jain's Pharmaceuticals is installing new lab equipment at a cost of $5 million with an economic life of 5 years. Jain's marginal tax rate is 35%. What is the difference in depreciation between straight line depreciation and MACRS depreciation in the second year.

The depreciation method used in capital budgeting is irrelevant because any depreciation not taken during the life of the project will add to the book value when assets are sold.

If the new machine is purchased, operating cash flow for years 1 through 5 will increase or decrease by

SpaceTech is considering a new project with the following projections for Year 2. Year 2 Projections EBIT $400,000 Interest Expense $20,000 Depreciation Expense $40,000 Tax Rate 40% Incremental Net Working Capital Needs $200,000 Compute the operating cash flow for year 2.

Incremental cash flows include all of the following EXCEPT:

Which of the following overhead expenses is a relevant, incremental cash flow?

Terminal cash flows can include expenses as well as revenues.

When computing the NPV of a project, if cash flows are discounted at the real cost of capital, then the cash flows should not be adjusted for inflation.

Greenspan Inc. discounts cash flows at a nominal rate of 10%. Inflation over the next few years is expected to average 3%. Which of the following would be a correct adjustment for inflation when computing net present value?

When determining how much overhead cost to include in incremental cash flows for a capital budgeting decision, the allocation of overhead by the accounting department based on percentage of space used by a project should always be used.

Schiller Construction Inc. has estimated the following revenues and expenses related to phase I of a proposed new housing development. Incremental sales= $5,000,000, total cash operating expenses $3,500,000, depreciation $500,000, taxes 35%, interest expense, $200,000. Operating cash flow equals