Question 1

The opportunity cost of an asset:

Accepted Answer

A) should be depreciated annually. 
B) can differ depending on market conditions. 
C) is typically ignored in capital budgeting. 
D) is important only for parcels of land. 
A) should be depreciated annually. 
B) can differ depending on market conditions. 
C) is typically ignored in capital budgeting. 
D) is important only for parcels of land. B

Question 2

Class 10 asset purchased for $150,000 at the start of Year 1; Sold at the end of year 4 for $60,000.Analyze what will transpire at the end of year 4.

Accepted Answer

$$\begin{array}{l}
\begin{array}{|c|c|c|c|c|}
\hline \text { Year } & \text { Cost of Asset } & \text { Begimning UCC } & \text { CCA } & \text { Ending UCC } \
\hline 1 & 150,000 & 150,000 & 22,500 & 127,500 \
\hline 2 & 150,000 & 127,500 & 38,250 & 89,250 \
\hline 3 & 150,000 & 89,250 & 26,775 & 62,475 \
\hline 4 & 150,000 & 62,475 & 18,743 & 43,733 \
\hline
\end{array}\
\hline \text {Selling Price >UCC=  Recapture }\
\hline \text {The recapture amount is \$ 60,000-43,733=\$ 16,267.00 }\
\end{array}$$

Question 3

Recaptured depreciation and terminal loss occur when:

Accepted Answer

A) all assets are depreciated over five years. 
B) depreciable percentages decline throughout the asset's class life. 
C) straight-line depreciation percentages are doubled. 
D) a business terminates an asset pool. 
A) all assets are depreciated over five years. 
B) depreciable percentages decline throughout the asset's class life. 
C) straight-line depreciation percentages are doubled. 
D) a business terminates an asset pool. D

Question 4

Sunk costs remain the same whether or not you accept the project.

Accepted Answer

A) True 
 B)False

Question 5

If a project is expected to increase inventory by $15,000, increase accounts payable by $10,000, and decrease accounts receivable by $1,000, what effect does working capital have during the life of the project?

Accepted Answer

A) increases investment by $4,000 
B) increases investment by $5,000 
C) increases investment by $6,000 
D) working capital has no effect during the life of the project 
A) increases investment by $4,000 
B) increases investment by $5,000 
C) increases investment by $6,000 
D) working capital has no effect during the life of the project

Question 6

A tax shield loss is created upon the sale of an asset from a pool will occur whenever:

Accepted Answer

A) salvage is greater than zero. 
B) the asset has been partially depreciated. 
C) the corporation keeps two sets of books. 
D) the asset's market value exceeds its book value. 
A) salvage is greater than zero. 
B) the asset has been partially depreciated. 
C) the corporation keeps two sets of books. 
D) the asset's market value exceeds its book value.

Question 7

Which of the following statements is most likely to be correct for a project in which the NPV is negative when based on the inflows from net income?

Accepted Answer

A) NPV may turn positive after adjusting for depreciation expense. 
B) NPV should be calculated with pretax cash flows. 
C) NPV has probably been overestimated. 
D) The project should be rejected or abandoned. 
A) NPV may turn positive after adjusting for depreciation expense. 
B) NPV should be calculated with pretax cash flows. 
C) NPV has probably been overestimated. 
D) The project should be rejected or abandoned.

Question 8

Corporate income statements are designed primarily to show:

Accepted Answer

A) cash flows during a period. 
B) account balances at the end of a period. 
C) performance during a period. 
D) market values of assets and liabilities. 
A) cash flows during a period. 
B) account balances at the end of a period. 
C) performance during a period. 
D) market values of assets and liabilities.

Question 9

What effect is expected at the end of the life of a project that initially required a $20,000 increase in net working capital?

Accepted Answer

A) the $20,000 must now be paid by the firm 
B) the firm receives a $20,000 cash inflow 
C) taxable income is reduced by $20,000 
D) no effects are expected from sunk costs 
A) the $20,000 must now be paid by the firm 
B) the firm receives a $20,000 cash inflow 
C) taxable income is reduced by $20,000 
D) no effects are expected from sunk costs

Question 10

A parcel of corporate land was recently dedicated as the new plant site.What cost allocation should the land receive, based on the following: original cost of $200,000, market value of $300,000, net book value of $200,000, a recent offer to purchase for $250,000?

Accepted Answer

A) $200,000 
B) $250,000 
C) $275,000 
D) $300,000 
A) $200,000 
B) $250,000 
C) $275,000 
D) $300,000

Question 11

What are the three methods to calculate cash flow from operations?

Accepted Answer

There are several ways to work out cash

Question 12

The method of financing a project affects the determination of its cash flows for capital budgeting purposes.

Accepted Answer

A) True 
 B)False

Question 13

Determine the change in net working capital that appears warranted for the following proposed project: Inventory levels will increase 20% from their current value of $500,000; cash will increase by $25,000; wage accruals will increase by $60,000; machinery will increase by $75,000; accounts receivable--because of a new collection system--will increase by only $15,000; accounts payable will increase by $45,000.What happens to net working capital at the end of the project's life?

Accepted Answer

@#IMG-DLM& At the end of the project's l

Question 14

Which of the following typically results from using straight-line depreciation in the set of books for shareholders?

Accepted Answer

A) net income appears higher during the early periods of depreciation. 
B) less money is paid to the Canada Revenue Agency. 
C) financial managers have more funds from operations available. 
D) depreciable assets last for a longer period of time. 
A) net income appears higher during the early periods of depreciation. 
B) less money is paid to the Canada Revenue Agency. 
C) financial managers have more funds from operations available. 
D) depreciable assets last for a longer period of time.

Question 15

Calculate the NPV for the following capital budgeting proposal: $100,000 initial cost, to be depreciated straight-line over five years to an expected salvage value of $5,000, 35 percent tax rate, $45,000 additional annual revenues, $15,000 additional annual expense, $8,000 additional investment in working capital, 11 percent cost of capital.
 $\begin{array}{|l|r|r|r|r|r|r|}
\hline & {\text { Year 0 }} & \text { Year 1 } & \text { Year 2 } & \text { Year 3 } & \text { Year 4 } & \text { Year 5 } \
\hline \text { Cost } & -100,000 & & & & & \
\hline \text { Change in Working } & -8,000 & & & & & 8,000 \
\hline \text { Capital } & & & & & & \
\hline \text { Revenues } & 45,000 & 45,000 & 45,000 & 45,000 & 45,000 & \
\hline \text { - Expenses } & -15,000 & -15,000 & -15,000 & -15,000 & -15,000 & \
\hline \text { - Dep } & & -19,000 & -19,000 & -19,000 & -19,000 & -19,000 \
\hline \text { = Pretax Profit } & & 11,000 & 11,000 & 11,000 & 11,000 & 11,000 \
\hline \text { Taxes } & & 3,850 & 3,850 & 3,850 & 3,850 & 3,850 \
\hline \text { Profit } & & 7,150 & 7,150 & 7,150 & 7,150 & 7,150 \
\hline \text { Salvage Value } & & & & & & 5,000 \
\hline \text { Tax effect } & & & & & 0 & 5,000 \
\hline \text { Cash Flows } & -108,000 & 26,150 & 26,150 & 26,150 & 26,150 & 39,150\
\hline
\end{array}$

Accepted Answer

NPV = $26,150 @#IMG-DLM& + @#IMG-DLM& = 108,000
=

Question 16

A project that increased sales was accompanied by a $50,000 increase in inventory, a $20,000 increase in accounts receivable, and a $25,000 increase in accounts payable.Assuming these amounts remain constant, by how much has net working capital increased?

Accepted Answer

A) $5,000 
B) $25,000 
C) $30,000 
D) $45,000 
A) $5,000 
B) $25,000 
C) $30,000 
D) $45,000

Question 17

How can the cash flows of a project be computed from standard financial statements?

Accepted Answer

Projected cash flow does not equal profi

Question 18

When additional funds must be committed to working capital, those funds are assumed to be recovered at the end of the project's life.

Accepted Answer

A) True 
 B)False

Question 19

Working capital will affect incremental cash flows if:

Accepted Answer

A) current liabilities change more than current assets. 
B) current assets change more than current liabilities. 
C) inventory changes from previous levels. 
D) net working capital changes from previous levels. 
A) current liabilities change more than current assets. 
B) current assets change more than current liabilities. 
C) inventory changes from previous levels. 
D) net working capital changes from previous levels.

Question 20

The primary difficulty in the allocation of overhead costs to prospective projects is that the:

Accepted Answer

A) allocation will reduce the project's NPV. 
B) discount rate is unknown. 
C) costs may not represent an incremental expense. 
D) expenses may have been previously allocated. 
A) allocation will reduce the project's NPV. 
B) discount rate is unknown. 
C) costs may not represent an incremental expense. 
D) expenses may have been previously allocated.

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

The opportunity cost of an asset:

Class 10 asset purchased for $150,000 at the start of Year 1; Sold at the end of year 4 for $60,000.Analyze what will transpire at the end of year 4.

Recaptured depreciation and terminal loss occur when:

Sunk costs remain the same whether or not you accept the project.

If a project is expected to increase inventory by $15,000, increase accounts payable by $10,000, and decrease accounts receivable by $1,000, what effect does working capital have during the life of the project?

A tax shield loss is created upon the sale of an asset from a pool will occur whenever:

Which of the following statements is most likely to be correct for a project in which the NPV is negative when based on the inflows from net income?

Corporate income statements are designed primarily to show:

What effect is expected at the end of the life of a project that initially required a $20,000 increase in net working capital?

A parcel of corporate land was recently dedicated as the new plant site.What cost allocation should the land receive, based on the following: original cost of $200,000, market value of $300,000, net book value of $200,000, a recent offer to purchase for $250,000?

What are the three methods to calculate cash flow from operations?

The method of financing a project affects the determination of its cash flows for capital budgeting purposes.

Which of the following typically results from using straight-line depreciation in the set of books for shareholders?

A project that increased sales was accompanied by a $50,000 increase in inventory, a $20,000 increase in accounts receivable, and a $25,000 increase in accounts payable.Assuming these amounts remain constant, by how much has net working capital increased?

How can the cash flows of a project be computed from standard financial statements?

When additional funds must be committed to working capital, those funds are assumed to be recovered at the end of the project's life.

Working capital will affect incremental cash flows if:

The primary difficulty in the allocation of overhead costs to prospective projects is that the:

Goals and Governance of the Firm

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