Question 1

The operating cash flow for a project should exclude which one of the following?

Accepted Answer

A) taxes 
B) variable costs 
C) fixed costs 
D) interest expense 
E) depreciation tax shield 
A) taxes 
B) variable costs 
C) fixed costs 
D) interest expense 
E) depreciation tax shield D

Question 2

Your firm is contemplating the purchase of a new $1,628,000 computer-based order entry system.The system will be depreciated straight-line to zero over its 5-year life.It will be worth $156,300 at the end of that time.You will save $642,500 before taxes per year in order processing costs and you will be able to reduce working capital by $115,764 (this is a one-time reduction).The net working capital will return to its original level when the project ends.The tax rate is 35 percent.What is the internal rate of return for this project?

Accepted Answer

A) 11.78 percent 
B) 13.49 percent 
C) 18.21 percent 
D) 22.15 percent 
E) 23.58 percent 
A) 11.78 percent 
B) 13.49 percent 
C) 18.21 percent 
D) 22.15 percent 
E) 23.58 percent D

Question 3

Webster & Moore paid $148,000, in cash, for a piece of equipment 3 years ago.At the beginning of last year, the company spent $21,000 to update the equipment with the latest technology.The company no longer uses this equipment in its current operations and has received an offer of $96,000 from a firm that would like to purchase it.Webster & Moore is debating whether to sell the equipment or to expand its operations so that the equipment can be used.When evaluating the expansion option, what value, if any, should the firm assign to this equipment as an initial cost of the project?

Accepted Answer

A) $0 
B) $21,000 
C) $96,000 
D) $110,000 
E) $160,000 
A) $0 
B) $21,000 
C) $96,000 
D) $110,000 
E) $160,000 C

Question 4

Which one of the following is a project cash inflow? Ignore any tax effects.

Accepted Answer

A) decrease in accounts payable 
B) increase in inventory 
C) decrease in accounts receivable 
D) depreciation expense based on MACRS 
E) equipment acquisition 
A) decrease in accounts payable 
B) increase in inventory 
C) decrease in accounts receivable 
D) depreciation expense based on MACRS 
E) equipment acquisition

Question 5

You are working on a bid to build two apartment buildings a year for the next 5 years for a local college.This project requires the purchase of $750,000 of equipment that will be depreciated using straight-line depreciation to a zero book value over the project's life.The equipment can be sold at the end of the project for $325,000.You will also need $140,000 in net working capital over the life of the project.The fixed costs will be $628,000 a year and the variable costs will be $1,298,000 per building.Your required rate of return is 14.5 percent for this project and your tax rate is 35 percent.What is the minimal amount, rounded to the nearest $100, you should bid per building?

Accepted Answer

A) $1,423,700 
B) $1,489,500 
C) $1,733,000 
D) $2,780,600 
E) $3,465,900 
A) $1,423,700 
B) $1,489,500 
C) $1,733,000 
D) $2,780,600 
E) $3,465,900

Question 6

The Pancake House has sales of $1,642,000, depreciation of $27,000, and net working capital of $218,000.The firm has a tax rate of 35 percent and a profit margin of 6 percent.The firm has no interest expense.What is the amount of the operating cash flow?

Accepted Answer

A) $98,520 
B) $125,520 
C) $147,480 
D) $268,480 
E) $343,520 
A) $98,520 
B) $125,520 
C) $147,480 
D) $268,480 
E) $343,520

Question 7

Eads Industrial Systems Company (EISC) is trying to decide between two different conveyor belt systems.System A costs $427,000, has a 6-year life, and requires $115,000 in pretax annual operating costs.System B costs $502,000, has an 8-year life, and requires $79,000 in pretax annual operating costs.Both systems are to be depreciated straight-line to zero over their lives and will have a zero salvage value.Whichever system is chosen, it will not be replaced when it wears out.The tax rate is 33 percent and the discount rate is 24 percent.Which system should the firm choose and why?

Accepted Answer

A) A; The net present value is $211,516. 
B) A; The net present value is -$588,792. 
C) A; The net present value is -$314,216. 
D) B; The net present value is $308,222. 
E) B: The net present value is -$612,240. 
A) A; The net present value is $211,516. 
B) A; The net present value is -$588,792. 
C) A; The net present value is -$314,216. 
D) B; The net present value is $308,222. 
E) B: The net present value is -$612,240.

Question 8

The equivalent annual cost method is useful in determining:

Accepted Answer

A) which one of two machines to purchase if the machines are mutually exclusive, have differing lives, and are a one-time purchase. 
B) the tax shield benefits of depreciation given the purchase of new assets for a project. 
C) the operating cash flows of a cost-cutting project. 
D) which one of two investments to accept when the investments have different required rates of return. 
E) which one of two machines should be purchased when the machines are mutually exclusive, have different machine lives, and will be replaced once they are worn out. 
A) which one of two machines to purchase if the machines are mutually exclusive, have differing lives, and are a one-time purchase. 
B) the tax shield benefits of depreciation given the purchase of new assets for a project. 
C) the operating cash flows of a cost-cutting project. 
D) which one of two investments to accept when the investments have different required rates of return. 
E) which one of two machines should be purchased when the machines are mutually exclusive, have different machine lives, and will be replaced once they are worn out.

Question 9

Phone Home, Inc.is considering a new 5-year expansion project that requires an initial fixed asset investment of $2.484 million.The fixed asset will be depreciated straight-line to zero over its 5-year tax life, after which time it will be worthless.The project is estimated to generate $2,208,000 in annual sales, with costs of $883,200.The tax rate is 32 percent and the required return on the project is 11 percent.What is the net present value for this project?

Accepted Answer

A) $1,432,155 
B) $1,433,059 
C) $1,434,098 
D) $1,434,217 
E) $1,435,008 
A) $1,432,155 
B) $1,433,059 
C) $1,434,098 
D) $1,434,217 
E) $1,435,008

Question 10

Net working capital:

Accepted Answer

A) can be ignored in project analysis because any expenditure is normally recouped at the end of the project. 
B) requirements, such as an increase in accounts receivable, create a cash inflow at the beginning of a project. 
C) is rarely affected when a new product is introduced. 
D) can create either a cash inflow or a cash outflow at time zero of a project. 
E) is the only expenditure where at least a partial recovery can be made at the end of a project. 
A) can be ignored in project analysis because any expenditure is normally recouped at the end of the project. 
B) requirements, such as an increase in accounts receivable, create a cash inflow at the beginning of a project. 
C) is rarely affected when a new product is introduced. 
D) can create either a cash inflow or a cash outflow at time zero of a project. 
E) is the only expenditure where at least a partial recovery can be made at the end of a project.

Question 11

Northern Railway is considering a project which will produce annual sales of $975,000 and increase cash expenses by $848,000.If the project is implemented, taxes will increase from $141,000 to $154,000 and depreciation will increase from $194,000 to $272,000.The company is debt-free.What is the amount of the operating cash flow using the top-down approach?

Accepted Answer

A) $25,000 
B) $114,000 
C) $157,000 
D) $181,000 
E) $209,000 
A) $25,000 
B) $114,000 
C) $157,000 
D) $181,000 
E) $209,000

Question 12

Which one of the following statements is correct concerning bid prices?

Accepted Answer

A) The bid price is the maximum price that a firm should bid. 
B) A firm can submit a bid that is higher than the computed bid price and still break even. 
C) A bid price ignores taxes. 
D) A bid price should be computed based solely on the operating cash flows of the project. 
E) A bid price should be computed based on a zero percent required rate of return. 
A) The bid price is the maximum price that a firm should bid. 
B) A firm can submit a bid that is higher than the computed bid price and still break even. 
C) A bid price ignores taxes. 
D) A bid price should be computed based solely on the operating cash flows of the project. 
E) A bid price should be computed based on a zero percent required rate of return.

Question 13

Dexter Smith & Co.is replacing a machine simply because it has worn out.The new machine will not affect either sales or operating costs and will not have any salvage value at the end of its 5-year life.The firm has a 34 percent tax rate, uses straight-line depreciation over an asset's life, and has a positive net income.Given this, which one of the following statements is correct?

Accepted Answer

A) As a project, the new machine has a net present value equal to minus one times the machine's purchase price. 
B) The new machine will have a zero rate of return. 
C) The new machine will generate positive operating cash flows, at least in the first few years of its life. 
D) The new machine will create a cash outflow when the firm disposes of it at the end of its life. 
E) The new machine creates erosion effects. 
A) As a project, the new machine has a net present value equal to minus one times the machine's purchase price. 
B) The new machine will have a zero rate of return. 
C) The new machine will generate positive operating cash flows, at least in the first few years of its life. 
D) The new machine will create a cash outflow when the firm disposes of it at the end of its life. 
E) The new machine creates erosion effects.

Question 14

G & L Plastic Molders spent $1,200 last week repairing a machine.This week the company is trying to decide if the machine could be better utilized if they assigned it a proposed project.When analyzing the proposed project, the $1,200 should be treated as which type of cost?

Accepted Answer

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

Question 15

You just purchased some equipment that is classified as 5-year property for MACRS.The equipment cost $147,000.What will the book value of this equipment be at the end of 4 years should you decide to resell the equipment at that point in time?

Accepted Answer

A) $8,467.20 
B) $25,401.60 
C) $42,336.00 
D) $121,598.40 
E) $138,532.80 
A) $8,467.20 
B) $25,401.60 
C) $42,336.00 
D) $121,598.40 
E) $138,532.80

Question 16

You own a house that you rent for $1,100 a month.The maintenance expenses on the house average $200 a month.The house cost $219,000 when you purchased it 4 years ago.A recent appraisal on the house valued it at $239,000.If you sell the house you will incur $14,000 in real estate fees.The annual property taxes are $4,000.You are deciding whether to sell the house or convert it for your own use as a professional office.What value should you place on this house when analyzing the option of using it as a professional office?

Accepted Answer

A) $211,800 
B) $221,000 
C) $225,000 
D) $235,000 
E) $239,000 
A) $211,800 
B) $221,000 
C) $225,000 
D) $235,000 
E) $239,000

Question 17

When using the equivalent annual cost as a basis for deciding which equipment should be purchased, the equipment under consideration must fit which two of the following criteria?
I.differing productive lives
II.differing manufacturers
III.required replacement at end of economic life
IV.differing initial cost

Accepted Answer

A) I and II 
B) I and III 
C) I and IV 
D) II and IIII 
E) II and IV 
A) I and II 
B) I and III 
C) I and IV 
D) II and IIII 
E) II and IV

Question 18

The option that is foregone so that an asset can be utilized by a specific project is referred to as which one of the following?

Accepted Answer

A) salvage value 
B) wasted value 
C) sunk cost 
D) opportunity cost 
E) erosion 
A) salvage value 
B) wasted value 
C) sunk cost 
D) opportunity cost 
E) erosion

Question 19

Bruno's Lunch Counter is expanding and expects operating cash flows of $29,000 a year for 4 years as a result.This expansion requires $39,000 in new fixed assets.These assets will be worthless at the end of the project.In addition, the project requires $3,000 of net working capital throughout the life of the project.What is the net present value of this expansion project at a required rate of return of 15 percent?

Accepted Answer

A) $18,477.29 
B) $21,033.33 
C) $28,288.70 
D) $29,416.08 
E) $42,509.63 
A) $18,477.29 
B) $21,033.33 
C) $28,288.70 
D) $29,416.08 
E) $42,509.63

Question 20

Which one of the following best describes the concept of erosion?

Accepted Answer

A) expenses that have already been incurred and cannot be recovered 
B) change in net working capital related to implementing a new project 
C) the cash flows of a new project that come at the expense of a firm's existing cash flows 
D) the alternative that is forfeited when a fixed asset is utilized by a project 
E) the differences in a firm's cash flows with and without a particular project 
A) expenses that have already been incurred and cannot be recovered 
B) change in net working capital related to implementing a new project 
C) the cash flows of a new project that come at the expense of a firm's existing cash flows 
D) the alternative that is forfeited when a fixed asset is utilized by a project 
E) the differences in a firm's cash flows with and without a particular project

The operating cash flow for a project should exclude which one of the following?

Which one of the following is a project cash inflow? Ignore any tax effects.

The Pancake House has sales of $1,642,000, depreciation of $27,000, and net working capital of $218,000.The firm has a tax rate of 35 percent and a profit margin of 6 percent.The firm has no interest expense.What is the amount of the operating cash flow?

The equivalent annual cost method is useful in determining:

Net working capital:

Which one of the following statements is correct concerning bid prices?

G & L Plastic Molders spent $1,200 last week repairing a machine.This week the company is trying to decide if the machine could be better utilized if they assigned it a proposed project.When analyzing the proposed project, the $1,200 should be treated as which type of cost?

You just purchased some equipment that is classified as 5-year property for MACRS.The equipment cost $147,000.What will the book value of this equipment be at the end of 4 years should you decide to resell the equipment at that point in time?

The option that is foregone so that an asset can be utilized by a specific project is referred to as which one of the following?

Which one of the following best describes the concept of erosion?

Introduction to Corporate Finance

Corporate Governance

Financial Statement Analysis

Introduction to Valuation: the Time Value of Money

Discounted Cash Flow Valuation

Bond Valuation

Equity Valuation

Net Present Value and Other Investment Criteria

Making Capital Investment Decisions

Some Lessons From Recent Capital Market History

Return, Risk and the Security Market

Cost of Capital

Raising Capital

Financial Leverage and Capital Structure Policy

Dividends and Payout Policy

Short-Term Financial Planning and Management

International Corporate Finance

Behavioural Finance

Financial Risk Management

Options and Corporate Finance

Filters

Exam 10: Project Analysis and Evaluation

The operating cash flow for a project should exclude which one of the following?

Which one of the following is a project cash inflow? Ignore any tax effects.

The Pancake House has sales of $1,642,000, depreciation of $27,000, and net working capital of $218,000.The firm has a tax rate of 35 percent and a profit margin of 6 percent.The firm has no interest expense.What is the amount of the operating cash flow?

The equivalent annual cost method is useful in determining:

Net working capital:

Which one of the following statements is correct concerning bid prices?

G & L Plastic Molders spent $1,200 last week repairing a machine.This week the company is trying to decide if the machine could be better utilized if they assigned it a proposed project.When analyzing the proposed project, the $1,200 should be treated as which type of cost?

You just purchased some equipment that is classified as 5-year property for MACRS.The equipment cost $147,000.What will the book value of this equipment be at the end of 4 years should you decide to resell the equipment at that point in time?

The option that is foregone so that an asset can be utilized by a specific project is referred to as which one of the following?

Which one of the following best describes the concept of erosion?

Introduction to Corporate Finance

Corporate Governance

Financial Statement Analysis

Introduction to Valuation: the Time Value of Money

Discounted Cash Flow Valuation

Bond Valuation

Equity Valuation

Net Present Value and Other Investment Criteria

Making Capital Investment Decisions

Some Lessons From Recent Capital Market History

Return, Risk and the Security Market

Cost of Capital

Raising Capital

Financial Leverage and Capital Structure Policy

Dividends and Payout Policy

Short-Term Financial Planning and Management

International Corporate Finance

Behavioural Finance

Financial Risk Management

Options and Corporate Finance

Filters