Question 1

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 2

What rate of nominal growth is expected in sales if they are currently $1,000,000 and expected to reach $1,600,000 in five years?

Accepted Answer

A)  3.20 percent 
B)  9.86 percent 
C)  12.00 percent 
D)  16.00 percent 
A)  3.20 percent 
B)  9.86 percent 
C)  12.00 percent 
D)  16.00 percent

Question 3

How should the cash flows of a proposed new project be calculated?

Accepted Answer

Here is a checklist to bear in mind when

Question 4

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 5

Which of the following represents a common reason for increases in net working capital with new projects?

Accepted Answer

A)  inventory can now be held at lower levels 
B)  accounts receivable are often not paid on time 
C)  inventory increases more than accounts payable increase 
D)  accounts payable must be increased 
A)  inventory can now be held at lower levels 
B)  accounts receivable are often not paid on time 
C)  inventory increases more than accounts payable increase 
D)  accounts payable must be increased

Question 6

When the real rate of interest is less than the nominal rate of interest,then:

Accepted Answer

A)  inflation must be added to the nominal rate. 
B)  investment returns do not increase purchasing power. 
C)  nominal flows should be discounted with real rates. 
D)  inflation is expected to occur. 
A)  inflation must be added to the nominal rate. 
B)  investment returns do not increase purchasing power. 
C)  nominal flows should be discounted with real rates. 
D)  inflation is expected to occur.

Question 7

Discuss the statement,"Changes in working capital necessitated by a project represent only an opportunity cost to the firm."

Accepted Answer

Most capital budgeting projects require

Question 8

Accurate capital budgeting analysis depends on total cash flows as opposed to incremental cash flows.

Accepted Answer

A) True 
 B)False

Question 9

As a project comes to its end,there is a disinvestment in working capital,which also generates positive cash flow as inventories are sold off and accounts receivable are collected.

Accepted Answer

A) True 
 B)False

Question 10

Calculate the present value of the depreciation tax shield for an asset with a three-year estimated life costing $100,000.The firm has a 35 percent tax rate and a 10 percent cost of capital.Its CCA is 30 percent declining balance with a half-year rule.Compare this present value to that calculated for straight-line depreciation with no salvage value in both cases.

Accepted Answer

straight line: $100,000/4 = 25,000; 25,0

Question 11

A firm generates sales of $250,000,depreciation expense of $50,000,taxable income of $50,000,and has a 35 percent tax rate.By how much does net cash flow deviate from net income?

Accepted Answer

A)  $17,500 
B)  $50,000 
C)  $67,500 
D)  $82,500 
A)  $17,500 
B)  $50,000 
C)  $67,500 
D)  $82,500

Question 12

What is the NPV of a project that costs $100,000,provides $23,000 in cash flows annually for six years,requires a $5,000 increase in net working capital,and depreciates the asset at 15 percent declining balance over six years and sold at zero salvage value? The discount rate is 14 percent.The tax rate is 40 percent.

Accepted Answer

A)  -$23,460 
B)  -$13,283 
C)  $13,283 
D)  $44,866 
A)  -$23,460 
B)  -$13,283 
C)  $13,283 
D)  $44,866

Question 13

Opportunity costs for organizational resources:

Accepted Answer

A)  are limited to the explicit cash flows involved. 
B)  are determined according to the marginal tax rate. 
C)  can involve no cash flows. 
D)  should not be determined for existing products. 
A)  are limited to the explicit cash flows involved. 
B)  are determined according to the marginal tax rate. 
C)  can involve no cash flows. 
D)  should not be determined for existing products.

Question 14

The value of a proposed capital budgeting project depends upon the:

Accepted Answer

A)  total cash flows produced. 
B)  incremental cash flows produced. 
C)  accounting profits produced. 
D)  increase in total sales produced. 
A)  total cash flows produced. 
B)  incremental cash flows produced. 
C)  accounting profits produced. 
D)  increase in total sales produced.

Question 15

Sunk costs influence capital budgeting decisions when the sunk costs exceed future cash inflows.

Accepted Answer

A) True 
 B)False

Question 16

What nominal annual return is required on an investment in order that an investor experiences a 12 percent gain in purchasing power? Assume inflation to be 4 percent.

Accepted Answer

A)  7.69 percent 
B)  9.29 percent 
C)  12.00 percent 
D)  16.48 percent 
A)  7.69 percent 
B)  9.29 percent 
C)  12.00 percent 
D)  16.48 percent

Question 17

If a project permits a reduction in the level of working capital,this reduction is assumed to increase cash flows.

Accepted Answer

A) True 
 B)False

Question 18

What is the net effect on a firm's working capital if a new project requires: $30,000 increase in inventory,$10,000 increase in accounts receivable,$25,000 increase in machinery,and a $20,000 increase in accounts payable?

Accepted Answer

A)  - $5,000 
B)  + $10,000 
C)  + $20,000 
D)  + $45,000 
A)  - $5,000 
B)  + $10,000 
C)  + $20,000 
D)  + $45,000

Question 19

Assume your firm has an unused machine that originally cost $75,000,has a book value of $20,000,and is currently worth $25,000.Ignoring taxes,the correct opportunity cost for this machine in capital budgeting decisions is:

Accepted Answer

A)  $75,000. 
B)  $25,000. 
C)  $20,000. 
D)  $5,000. 
A)  $75,000. 
B)  $25,000. 
C)  $20,000. 
D)  $5,000.

Question 20

What is the amount of the operating cash flow for a firm with $500,000 profit before tax,$100,000 depreciation expense,and a 35 percent marginal tax rate?

Accepted Answer

A)  $260,000 
B)  $325,000 
C)  $360,000 
D)  $425,000 
A)  $260,000 
B)  $325,000 
C)  $360,000 
D)  $425,000

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

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

What rate of nominal growth is expected in sales if they are currently $1,000,000 and expected to reach $1,600,000 in five years?

How should the cash flows of a proposed new project be calculated?

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

Which of the following represents a common reason for increases in net working capital with new projects?

When the real rate of interest is less than the nominal rate of interest,then:

Discuss the statement,"Changes in working capital necessitated by a project represent only an opportunity cost to the firm."

Accurate capital budgeting analysis depends on total cash flows as opposed to incremental cash flows.

As a project comes to its end,there is a disinvestment in working capital,which also generates positive cash flow as inventories are sold off and accounts receivable are collected.

A firm generates sales of $250,000,depreciation expense of $50,000,taxable income of $50,000,and has a 35 percent tax rate.By how much does net cash flow deviate from net income?

Opportunity costs for organizational resources:

The value of a proposed capital budgeting project depends upon the:

Sunk costs influence capital budgeting decisions when the sunk costs exceed future cash inflows.

What nominal annual return is required on an investment in order that an investor experiences a 12 percent gain in purchasing power? Assume inflation to be 4 percent.

If a project permits a reduction in the level of working capital,this reduction is assumed to increase cash flows.

What is the net effect on a firm's working capital if a new project requires: $30,000 increase in inventory,$10,000 increase in accounts receivable,$25,000 increase in machinery,and a $20,000 increase in accounts payable?

Assume your firm has an unused machine that originally cost $75,000,has a book value of $20,000,and is currently worth $25,000.Ignoring taxes,the correct opportunity cost for this machine in capital budgeting decisions is:

What is the amount of the operating cash flow for a firm with $500,000 profit before tax,$100,000 depreciation expense,and a 35 percent marginal tax rate?

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