Question 1

Initial cash flows and subsequent operating cash flows for a project are sometimes referred to as

Accepted Answer

A)  necessary cash flows. 
B)  relevant cash flows. 
C)  consistent cash flows. 
D)  ordinary cash flows. 
A)  necessary cash flows. 
B)  relevant cash flows. 
C)  consistent cash flows. 
D)  ordinary cash flows.

Question 2

The change in net working capital regardless of whether an increase or decrease is not taxable because it merely involves a net build-up or reduction of current balance sheet accounts.

Accepted Answer

A) True 
 B)False

Question 3

Table 11.2
Computer Disk Duplicators, Inc. has been considering several capital investment proposals for the year beginning in 2004. For each investment proposal, the relevant cash flows and other relevant financial data are summarized in the table below. In the case of a replacement decision, the total installed cost of the equipment will be partially offset by the sale of existing equipment. The firm is subject to a 40 percent tax rate on ordinary income and on long-term capital gains. The firm's cost of capital is 15 percent.
__________________________________________________________   *Not applicable
-For Proposal 3, the tax effect on the sale of the existing asset results in ________. (See Table 11.2)

Accepted Answer

A)  $8,000 tax liability 
B)  $16,000 tax liability 
C)  $20,000 tax liability 
D)  $23,200 tax liability 
A)  $8,000 tax liability 
B)  $16,000 tax liability 
C)  $20,000 tax liability 
D)  $23,200 tax liability

Question 4

Table 11.4
Degnan Dance Company, Inc., a manufacturer of dance and exercise apparel, is considering replacing an existing piece of equipment with a more sophisticated machine. The following information is given.     The firm pays 40 percent taxes on ordinary income and capital gains.
-Calculate the book value of the existing asset being replaced. (See Table 11.4)

Accepted Answer

Book value of existi

Question 5

An opportunity cost is a cash flow that could be realized from the best alternative use of an owned asset.

Accepted Answer

A) True 
 B)False

Question 6

Table 11.2
Computer Disk Duplicators, Inc. has been considering several capital investment proposals for the year beginning in 2004. For each investment proposal, the relevant cash flows and other relevant financial data are summarized in the table below. In the case of a replacement decision, the total installed cost of the equipment will be partially offset by the sale of existing equipment. The firm is subject to a 40 percent tax rate on ordinary income and on long-term capital gains. The firm's cost of capital is 15 percent.
__________________________________________________________   *Not applicable
-For Proposal 2, the incremental depreciation expense for year 2 is ________. (See Table 11.2)

Accepted Answer

A)  $16,800 
B)  $26,400 
C)  $38,400 
D)  $60,000 
A)  $16,800 
B)  $26,400 
C)  $38,400 
D)  $60,000

Question 7

Table 11.2
Computer Disk Duplicators, Inc. has been considering several capital investment proposals for the year beginning in 2004. For each investment proposal, the relevant cash flows and other relevant financial data are summarized in the table below. In the case of a replacement decision, the total installed cost of the equipment will be partially offset by the sale of existing equipment. The firm is subject to a 40 percent tax rate on ordinary income and on long-term capital gains. The firm's cost of capital is 15 percent.
__________________________________________________________   *Not applicable
-For Proposal 1, the depreciation expense for year 1 is ________. (See Table 11.2)

Accepted Answer

A)  $110,400 
B)  $115,200 
C)  $150,000 
D)  $300,000 
A)  $110,400 
B)  $115,200 
C)  $150,000 
D)  $300,000

Question 8

Table 11.5
Nuff Folding Box Company, Inc. is considering purchasing a new gluing machine. The gluing machine costs $50,000 and requires installation costs of $2,500. This outlay would be partially offset by the sale of an existing gluer. The existing gluer originally cost $10,000 and is four years old. It is being depreciated under MACRS using a five-year recovery schedule and can currently be sold for $15,000. The existing gluer has a remaining useful life of five years. If held until year 5, the existing machine's market value would be zero. Over its five-year life, the new machine should reduce operating costs (excluding depreciation) by $17,000 per year. Training costs of employees who will operate the new machine will be a one-time cost of $5,000 which should be included in the initial outlay. The new machine will be depreciated under MACRS using a five-year recovery period. The firm has a 12 percent cost of capital and a 40 percent tax on ordinary income and capital gains.
-The net present value of the project is ________. (See Table 11.5)

Accepted Answer

A)  $3,874 
B)  $2,445 
C)  $5,614 
D)  $7,500 
A)  $3,874 
B)  $2,445 
C)  $5,614 
D)  $7,500

Question 9

Table 11.2
Computer Disk Duplicators, Inc. has been considering several capital investment proposals for the year beginning in 2004. For each investment proposal, the relevant cash flows and other relevant financial data are summarized in the table below. In the case of a replacement decision, the total installed cost of the equipment will be partially offset by the sale of existing equipment. The firm is subject to a 40 percent tax rate on ordinary income and on long-term capital gains. The firm's cost of capital is 15 percent.
__________________________________________________________   *Not applicable
-For Proposal 2, the book value of the existing asset is ________. (See Table 11.2)

Accepted Answer

A)  $13,600 
B)  $34,400 
C)  $66,400 
D)  $80,000 
A)  $13,600 
B)  $34,400 
C)  $66,400 
D)  $80,000

Question 10

Table 11.2
Computer Disk Duplicators, Inc. has been considering several capital investment proposals for the year beginning in 2004. For each investment proposal, the relevant cash flows and other relevant financial data are summarized in the table below. In the case of a replacement decision, the total installed cost of the equipment will be partially offset by the sale of existing equipment. The firm is subject to a 40 percent tax rate on ordinary income and on long-term capital gains. The firm's cost of capital is 15 percent.
__________________________________________________________   *Not applicable
-For Proposal 1, the annual incremental after-tax cash flow from operations for year 1 is ________. (See Table 11.2)

Accepted Answer

A)  $60,000 
B)  $255,000 
C)  $300,000 
D)  $210,000 
A)  $60,000 
B)  $255,000 
C)  $300,000 
D)  $210,000

Question 11

The portion of an asset's sale price that is above its book value and below its initial purchase price is called

Accepted Answer

A)  a capital gain. 
B)  recaptured depreciation. 
C)  a capital loss. 
D)  book value. 
A)  a capital gain. 
B)  recaptured depreciation. 
C)  a capital loss. 
D)  book value.

Question 12

Relevant cash flows are the incremental cash outflows and inflows associated with a proposed capital expenditure.

Accepted Answer

A) True 
 B)False

Question 13

The tax treatment regarding the sale of existing assets that are sold for more than the book value and more than the original purchase price results in

Accepted Answer

A)  an ordinary tax benefit. 
B)  no tax benefit or liability. 
C)  recaptured depreciation taxed as ordinary income. 
D)  a capital gain tax liability and recaptured depreciation taxed as ordinary income. 
A)  an ordinary tax benefit. 
B)  no tax benefit or liability. 
C)  recaptured depreciation taxed as ordinary income. 
D)  a capital gain tax liability and recaptured depreciation taxed as ordinary income.

Question 14

Recaptured depreciation is the portion of the sale price that is in excess of the initial purchase price.

Accepted Answer

A) True 
 B)False

Question 15

Table 11.2
Computer Disk Duplicators, Inc. has been considering several capital investment proposals for the year beginning in 2004. For each investment proposal, the relevant cash flows and other relevant financial data are summarized in the table below. In the case of a replacement decision, the total installed cost of the equipment will be partially offset by the sale of existing equipment. The firm is subject to a 40 percent tax rate on ordinary income and on long-term capital gains. The firm's cost of capital is 15 percent.
__________________________________________________________   *Not applicable
-For Proposal 3, the annual incremental after-tax cash flow from operations for year 3 is ________. (See Table 11.2)

Accepted Answer

A)  $45,000 
B)  $75,150 
C)  $90,150 
D)  $109,140 
A)  $45,000 
B)  $75,150 
C)  $90,150 
D)  $109,140

Question 16

If an asset is sold for book value, the gain on the sale is composed of two parts: a capital gain and recaptured depreciation.

Accepted Answer

A) True 
 B)False

Question 17

A corporation is selling an existing asset for $1,700. The asset, when purchased, cost $10,000, was being depreciated under MACRS using a five-year recovery period, and has been depreciated for four full years. If the assumed tax rate is 40 percent on ordinary income and capital gains, the tax effect of this transaction is

Accepted Answer

A)  $0 tax liability. 
B)  $840 tax liability. 
C)  $3,160 tax liability. 
D)  $3,160 tax benefit. 
A)  $0 tax liability. 
B)  $840 tax liability. 
C)  $3,160 tax liability. 
D)  $3,160 tax benefit.

Initial cash flows and subsequent operating cash flows for a project are sometimes referred to as

The change in net working capital regardless of whether an increase or decrease is not taxable because it merely involves a net build-up or reduction of current balance sheet accounts.

An opportunity cost is a cash flow that could be realized from the best alternative use of an owned asset.

The portion of an asset's sale price that is above its book value and below its initial purchase price is called

Relevant cash flows are the incremental cash outflows and inflows associated with a proposed capital expenditure.

The tax treatment regarding the sale of existing assets that are sold for more than the book value and more than the original purchase price results in

Recaptured depreciation is the portion of the sale price that is in excess of the initial purchase price.

If an asset is sold for book value, the gain on the sale is composed of two parts: a capital gain and recaptured depreciation.

The Role of Managerial Finance

The Financial Market Environment

Financial Statements and Ratio Analysis

Cash Flow and Financial Planning

Time Value of Money

Interest Rates and Bond Valuation

Stock Valuation

Risk and Return

The Cost of Capital

Capital Budgeting Techniques

Risk and Refinements in Capital Budgeting

Leverage and Capital Structure

Payout Policy

Working Capital and Current Assets Management

Current Liabilities Management

Hybrid and Derivative Securities

Mergers, Lbos, Divestitures, and Business Failure

International Managerial Finance

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Exam 11: Capital Budgeting Cash Flows

Initial cash flows and subsequent operating cash flows for a project are sometimes referred to as

The change in net working capital regardless of whether an increase or decrease is not taxable because it merely involves a net build-up or reduction of current balance sheet accounts.

An opportunity cost is a cash flow that could be realized from the best alternative use of an owned asset.

The portion of an asset's sale price that is above its book value and below its initial purchase price is called

Relevant cash flows are the incremental cash outflows and inflows associated with a proposed capital expenditure.

The tax treatment regarding the sale of existing assets that are sold for more than the book value and more than the original purchase price results in

Recaptured depreciation is the portion of the sale price that is in excess of the initial purchase price.

If an asset is sold for book value, the gain on the sale is composed of two parts: a capital gain and recaptured depreciation.

The Role of Managerial Finance

The Financial Market Environment

Financial Statements and Ratio Analysis

Cash Flow and Financial Planning

Time Value of Money

Interest Rates and Bond Valuation

Stock Valuation

Risk and Return

The Cost of Capital

Capital Budgeting Techniques

Risk and Refinements in Capital Budgeting

Leverage and Capital Structure

Payout Policy

Working Capital and Current Assets Management

Current Liabilities Management

Hybrid and Derivative Securities

Mergers, Lbos, Divestitures, and Business Failure

International Managerial Finance

Filters