Question 1

Changes in the net working capital:

Accepted Answer

A)  can affect the cash flows of a project every year of the project's life. 
B)  only affect the initial cash flows of a project. 
C)  are included in project analysis only if they represent cash outflows. 
D)  are generally excluded from project analysis due to their irrelevance to the total project. 
E)  affect the initial and the final cash flows of a project but not the cash flows of the middle years. 
A)  can affect the cash flows of a project every year of the project's life. 
B)  only affect the initial cash flows of a project. 
C)  are included in project analysis only if they represent cash outflows. 
D)  are generally excluded from project analysis due to their irrelevance to the total project. 
E)  affect the initial and the final cash flows of a project but not the cash flows of the middle years. A

Question 2

A machine lasts 3 years and has a purchase price of $100. It costs $40 per year to operate and can be sold as junk for $15 at the end of its life. What is the EAC of the costs of operating a series of such machines into perpetuity if the discount rate is 15%?
A.15,3 -15/(1.15)3 = $181.47
The machine's equivalent annual cost is: $181.47/2.283 = $79.48

Accepted Answer

The present value of the cost of the machine is: $100 + $40 * A._15,3 -15/(1.15)³ = $181.47 The machine's equivalent annual cost is: $181.47/2.283 = $79.48

Question 3

You spent $500 last week fixing the transmission in your car. Now, the brakes are acting up and you are trying to decide whether to fix them or trade the car in for a newer model. In analyzing the brake situation, the $500 you spent fixing the transmission is a(n) _____ cost.

Accepted Answer

A)  opportunity 
B)  fixed 
C)  incremental 
D)  sunk 
A)  opportunity 
B)  fixed 
C)  incremental 
D)  sunk D

Question 4

Sales for year 2 of the new project are expected to increase by 10%. Current assets are expected to increase by 17% for every dollar increase in sales while accounts payable are expected to increase by 6%. For year 2 the change in cash flows due to working capital will be:

Accepted Answer

A)  +10% of sales. 
B)  -10% of sales. 
C)  +1.1% of sales. 
D)  -1.1% of sales. 
A)  +10% of sales. 
B)  -10% of sales. 
C)  +1.1% of sales. 
D)  -1.1% of sales.

Question 5

Tax shield refers to a reduction in taxes created by:

Accepted Answer

A)  a reduction in sales. 
B)  an decrease in interest expense. 
C)  non-cash expenses. 
D)  a project's incremental expenses. 
E)  opportunity costs. 
A)  a reduction in sales. 
B)  an decrease in interest expense. 
C)  non-cash expenses. 
D)  a project's incremental expenses. 
E)  opportunity costs.

Question 6

A cost that has already been paid, or the liability to pay has already been incurred, is a(n):

Accepted Answer

A)  salvage value expense. 
B)  net working capital expense. 
C)  sunk cost. 
D)  opportunity cost. 
E)  erosion cost. 
A)  salvage value expense. 
B)  net working capital expense. 
C)  sunk cost. 
D)  opportunity cost. 
E)  erosion cost.

Question 7

Jackson & Sons uses packing machines to prepare its products for shipping. One machine costs $136,000 and lasts about 4 years before it needs replaced. The operating cost per machine is $6,000 a year. What is the equivalent annual cost of one packing machine if the required rate of return is 12%? (Round your answer to whole dollars.)

Accepted Answer

Equivalent Annual Cost = $50,7

Question 8

The QT Company is generating cash flow of $333,000 per year. If they invest in a new press they expect to increase their cash flow to $400,000 per year. The cash outflow for the new press is $250,000; to accept or reject the investment they have to consider:

Accepted Answer

A)  the press cost of $250,000 and total cash flow of $400,000. 
B)  the change in cash flow of $67,000 versus the price cost of $250,000. 
C)  the current cash flow of $333,000 and the price cost of $250,000. 
D)  the opportunity cost of the facility of $333,000. 
A)  the press cost of $250,000 and total cash flow of $400,000. 
B)  the change in cash flow of $67,000 versus the price cost of $250,000. 
C)  the current cash flow of $333,000 and the price cost of $250,000. 
D)  the opportunity cost of the facility of $333,000.

Question 9

Which of the following is not a relevant item to consider in cash flow estimation?

Accepted Answer

A)  A change in current assets invested in the project. 
B)  A change in current liabilities to finance new inventories. 
C)  Regular meeting fees for the board of directors incurred when the go-no go decision is made. 
D)  Any net changes in working capital over the life of the investment. 
A)  A change in current assets invested in the project. 
B)  A change in current liabilities to finance new inventories. 
C)  Regular meeting fees for the board of directors incurred when the go-no go decision is made. 
D)  Any net changes in working capital over the life of the investment.

Question 10

One of the key differences between corporate finance and financial accounting courses is:

Accepted Answer

A)  the focus on cash flows instead of earnings. 
B)  the focus on marginal tax rates versus average tax rates. 
C)  the role of total income flow versus incremental flows. 
D)  the focus on corporate avarice versus stewardship. 
A)  the focus on cash flows instead of earnings. 
B)  the focus on marginal tax rates versus average tax rates. 
C)  the role of total income flow versus incremental flows. 
D)  the focus on corporate avarice versus stewardship.

Question 11

You have been asked to evaluate an infinitely-lived project. Sales in the first year are projected to be $100. Costs are projected at $50. There is no depreciation, and the tax rate is 30%. The real required return is 10%. The inflation rate is projected to be 8%. Sales and costs will increase at the rate of inflation. The project costs $300. What is the NPV?

Accepted Answer

A)  $142.03 
B)  $36.36 
C)  $71.72 
D)  $50.00 
A)  $142.03 
B)  $36.36 
C)  $71.72 
D)  $50.00

Question 12

The cash flow in dollars received in year 3 is expected to be $12,372. The firm uses a real discount rate of 4% and the inflation rate is expected to be 2.5%. What is the real cash flow for year 3?

Accepted Answer

A)  $13,916.82 
B)  $11,488.63 
C)  $10,998.66 
D)  $10,242.15 
E)  $14,944.75 
A)  $13,916.82 
B)  $11,488.63 
C)  $10,998.66 
D)  $10,242.15 
E)  $14,944.75

Question 13

The cash flow tax savings generated as a result of a firm's tax-deductible depreciation expense is called the:

Accepted Answer

A)  after-tax depreciation savings. 
B)  depreciable basis. 
C)  depreciation tax shield. 
D)  operating cash flow. 
E)  after-tax salvage value. 
A)  after-tax depreciation savings. 
B)  depreciable basis. 
C)  depreciation tax shield. 
D)  operating cash flow. 
E)  after-tax salvage value.

Question 14

Ben's Border Café is considering a project which will produce sales of $16,000 and increase cash expenses by $10,000. If the project is implemented, taxes will increase from $23,000 to $24,500 and depreciation will increase from $4,000 to $5,500. What is the amount of the operating cash flow using the top-down approach?

Accepted Answer

A)  $4,000 
B)  $4,500 
C)  $6,000 
D)  $7,500 
E)  $8,500 
A)  $4,000 
B)  $4,500 
C)  $6,000 
D)  $7,500 
E)  $8,500

Question 15

Ronnie's Coffee House is considering a project which will produce sales of $6,000 and increase cash expenses by $2,500. If the project is implemented, taxes will increase by $1,300. The additional depreciation expense will be $1,000. An initial cash outlay of $2,000 is required for net working capital. What is the amount of the operating cash flow using the top-down approach?

Accepted Answer

A)  $2,000 
B)  $1,500 
C)  $2,200 
D)  $3,500 
E)  $4,200 
A)  $2,000 
B)  $1,500 
C)  $2,200 
D)  $3,500 
E)  $4,200

Question 16

Le Place has sales of $439,000, depreciation of $32,000, and net working capital of $56,000. The firm has a tax rate of 34% and a profit margin of 6%. The firm has no interest expense. What is the amount of the operating cash flow?

Accepted Answer

A)  $49,384 
B)  $52,616 
C)  $54,980 
D)  $58,340 
E)  $114,340 
A)  $49,384 
B)  $52,616 
C)  $54,980 
D)  $58,340 
E)  $114,340

Question 17

You have been asked to evaluate 2 pollution control devices. The wet scrub costs $100 to set up and $50 per year to operate. It must be completely replaced every 3 years, and it has no salvage value. The dry scrub device costs $200 to set up and $30 per year to operate. It lasts for 5 years and has no salvage value. Assuming that pollution control equipment is replaced as it wears out, which device do you recommend if the cost of capital is 10%?

Accepted Answer

A)  Dry scrub, the EAC is $11.00. 
B)  Wet scrub, the EAC is $90.21. 
C)  Dry scrub, the EAC is $82.76. 
D)  Wet scrub, the EAC is $9.79. 
E)  Dry scrub, the EAC is $124.34. 
A)  Dry scrub, the EAC is $11.00. 
B)  Wet scrub, the EAC is $90.21. 
C)  Dry scrub, the EAC is $82.76. 
D)  Wet scrub, the EAC is $9.79. 
E)  Dry scrub, the EAC is $124.34.

Question 18

Recently, you calculated the cashflows for the Highfeed Dryer project to determine the feasibility of a new feed mix process. Since that time you have now discovered that the calculation of the standard cash flow for Year 1 of $55,000 did not consider the following anticipated changes: account receivable are expected to increase $7,000; cash will rise by $2,000; inventory will increase by $4,000; and account payable are expected to increase $5,000. Determine the new estimated cashflow for Year 1.

Accepted Answer

Change in Working Capital = ($

Question 19

Milton Toy Co. recorded sales of $2,500 and costs of $1,875. Net accounts receivable rose by $350 and net accounts payable declined by $240. What were cash sales minus cash costs?

Accepted Answer

A)  $625 
B)  $35 
C)  ($110) 
D)  $90 
A)  $625 
B)  $35 
C)  ($110) 
D)  $90

Question 20

Your boss just turned back your capital budgeting report because she is unsure of your results. The yearly revenues are going up at a constant rate equal to the consumer price index of 4% and the discount used was 6%. The boss also mentions that the long term Treasury bond rate is only 71/2%. Explain the boss' dilemma and how it should be corrected.

Accepted Answer

The rates do not match. Nominal cashflow

Exam 8: Net Present Value and Capital Budgeting

Changes in the net working capital:

You spent $500 last week fixing the transmission in your car. Now, the brakes are acting up and you are trying to decide whether to fix them or trade the car in for a newer model. In analyzing the brake situation, the $500 you spent fixing the transmission is a(n) _____ cost.

Sales for year 2 of the new project are expected to increase by 10%. Current assets are expected to increase by 17% for every dollar increase in sales while accounts payable are expected to increase by 6%. For year 2 the change in cash flows due to working capital will be:

Tax shield refers to a reduction in taxes created by:

A cost that has already been paid, or the liability to pay has already been incurred, is a(n):

The QT Company is generating cash flow of $333,000 per year. If they invest in a new press they expect to increase their cash flow to $400,000 per year. The cash outflow for the new press is $250,000; to accept or reject the investment they have to consider:

Which of the following is not a relevant item to consider in cash flow estimation?

One of the key differences between corporate finance and financial accounting courses is:

The cash flow in dollars received in year 3 is expected to be $12,372. The firm uses a real discount rate of 4% and the inflation rate is expected to be 2.5%. What is the real cash flow for year 3?

The cash flow tax savings generated as a result of a firm's tax-deductible depreciation expense is called the:

Le Place has sales of $439,000, depreciation of $32,000, and net working capital of $56,000. The firm has a tax rate of 34% and a profit margin of 6%. The firm has no interest expense. What is the amount of the operating cash flow?

Milton Toy Co. recorded sales of $2,500 and costs of $1,875. Net accounts receivable rose by $350 and net accounts payable declined by $240. What were cash sales minus cash costs?

Introduction to Corporate Finance

Accounting Statements and Cash Flow

Financial Planning and Growth

Financial Markets and Net Present Value: First Principles of Finance

The Time Value of Money

How to Value Bonds and Stocks

Net Present Value and Other Investment Rules

Risk Analysis, Real Options, and Capital Budgeting

Risk and Return: Lessons From Market History

Risk and Return: the Capital Asset Pricing Model

An Alternative View of Risk and Return: the Arbitrage Pricing Theory

Risk, Return, and Capital Budgeting

Corporate Financing Decisions and Efficient Capital Markets

Long-Term Financing: an Introduction

Capital Structure: Basic Concepts

Capital Structure: Limits to the Use of Debt

Valuation and Capital Budgeting for the Levered Firm

Dividends and Other Payouts

Issuing Equity Securities to the Public

Long-Term Debt

Leasing

Options and Corporate Finance: Basic Concepts

Options and Corporate Finance: Extensions and Applications

Warrants and Convertibles

Derivatives and Hedging Risk

Short-Term Finance and Planning

Cash Management

Credit Management

Mergers and Acquisitions

Financial Distress

International Corporate Finance

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