Question 1

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. C

Question 2

The value of a previously purchased building used by a proposed project is an example of a(n):

Accepted Answer

A)  sunk cost. 
B)  opportunity cost. 
C)  erosion cost. 
D)  fixed cost. 
A)  sunk cost. 
B)  opportunity cost. 
C)  erosion cost. 
D)  fixed cost. B

Question 3

The top-down approach to computing the operating cash flow:

Accepted Answer

A)  ignores all noncash items. 
B)  applies only if a project produces sales. 
C)  can only be used if the entire cash flows of a firm are included. 
D)  is equal to sales-costs-taxes + depreciation. 
E)  includes the interest expense related to a project. 
A)  ignores all noncash items. 
B)  applies only if a project produces sales. 
C)  can only be used if the entire cash flows of a firm are included. 
D)  is equal to sales-costs-taxes + depreciation. 
E)  includes the interest expense related to a project. A

Question 4

A firm purchases a new truck for $30,000. It will be depreciated over 5 years at $6,000 per year. If the tax rate is 30% what is the time 0 cashflow.

Accepted Answer

A)  -6,000 
B)  -21,000 
C)  -30,000 
D)  -28,200 
A)  -6,000 
B)  -21,000 
C)  -30,000 
D)  -28,200

Question 5

The bottom-up approach to computing the operating cash flow applies only when:

Accepted Answer

A)  both the depreciation expense and the interest expense are equal to zero. 
B)  the interest expense is equal to zero. 
C)  the project is a cost-cutting project. 
D)  no fixed assets are required for the project. 
E)  taxes are ignored and the interest expense is equal to zero. 
A)  both the depreciation expense and the interest expense are equal to zero. 
B)  the interest expense is equal to zero. 
C)  the project is a cost-cutting project. 
D)  no fixed assets are required for the project. 
E)  taxes are ignored and the interest expense is equal to zero.

Question 6

If the inflation rate was positive the expected NPV of an investment would be:

Accepted Answer

A)  understated if real cashflows were discounted by the nominal discount rate. 
B)  understated if nominal cashflows were discounted by the nominal discount rate. 
C)  overstated if the real cashflows were discounted by the nominal discount rate. 
D)  understated if the nominal cashflows were discounted by the real discount rate. 
E)  overstated if the real cashflows are discounted by the real discount rate. 
A)  understated if real cashflows were discounted by the nominal discount rate. 
B)  understated if nominal cashflows were discounted by the nominal discount rate. 
C)  overstated if the real cashflows were discounted by the nominal discount rate. 
D)  understated if the nominal cashflows were discounted by the real discount rate. 
E)  overstated if the real cashflows are discounted by the real discount rate.

Question 7

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 present value of the year 3 cash flow?

Accepted Answer

A)  $10,213.35. 
B)  $12,372.00. 
C)  $9,777,77. 
D)  $9,105.23. 
E)  $13,285.83. 
A)  $10,213.35. 
B)  $12,372.00. 
C)  $9,777,77. 
D)  $9,105.23. 
E)  $13,285.83.

Question 8

A proposed investment has a cost of $250. It will have a life of 4 years. The cost will be depreciated straight-line to a zero salvage value, and will be worth $50 at that time. Cash sales will be $230 per year and cash costs will run $120 per year. The firm will also need to invest $70 in net working capital at year 0. The appropriate discount rate is 8% (use for all flows), and the corporate tax rate is 40%. What are the cash flows in years 1, 2, 3, and 4?

Accepted Answer

Year 1: (Rev-Exp) (1-t) + t(CC

Question 9

The equivalent annual cost method is useful in determining:

Accepted Answer

A)  he annual operating cost of a machine if the annual maintenance is performed versus when the maintenance is not performed as recommended. 
B)  the tax shield benefits of depreciation given the purchase of new assets for a project. 
C)  which one of two machines to acquire given equal machine lives but unequal machine costs. 
D)  which one of two machines to purchase when the machines are mutually exclusive, have different machine lives, and will be replaced once they are worn out. 
A)  he annual operating cost of a machine if the annual maintenance is performed versus when the maintenance is not performed as recommended. 
B)  the tax shield benefits of depreciation given the purchase of new assets for a project. 
C)  which one of two machines to acquire given equal machine lives but unequal machine costs. 
D)  which one of two machines to purchase when the machines are mutually exclusive, have different machine lives, and will be replaced once they are worn out.

Question 10

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

Question 11

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 method 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 12

You are considering whether to replace an existing flow meter. The existing meter can be sold now for $50 or it can be sold in 1 year for $10. It costs $30 per year to operate and maintain. A new meter costs $400 and has a 10-year life. It could be sold for $40 at the end of its life. The new meter costs $14 per year to operate and maintain. What do you recommend if the cost of capital is 12%?

Accepted Answer

-The cost of keeping the old machine 1 m

Question 13

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 14

Which of the following is not a relevant consideration for evaluating new projects?

Accepted Answer

A)  The change in the firm's fixed costs. 
B)  The change in the firm's variable costs. 
C)  The change in the firm's depreciation expense. 
D)  The change in the firm's overhead expense. 
E)  All of the above are relevant. 
A)  The change in the firm's fixed costs. 
B)  The change in the firm's variable costs. 
C)  The change in the firm's depreciation expense. 
D)  The change in the firm's overhead expense. 
E)  All of the above are relevant.

Question 15

You have been asked to evaluate two machines. The benefits from ownership are identical. Machine A costs $300 to buy and install, lasts for 5 years, and costs $160 per year to operate. Machine B costs $500, lasts for 7 years, and costs $120 per year to operate. Both machines have zero salvage value. Assuming that this is a one-time acquisition, which machine do you recommend if the cost of capital is 15%?

Accepted Answer

A)  Machine A, the PV is $163 more than Machine B. 
B)  Machine A, the PV of its costs is $163 less than Machine B. 
C)  Machine A, because the project length is two years less than Machine B. 
D)  Machine B, the PV is $163 more than Machine A. 
E)  Machine B, the PV of its costs is $163 less than Machine A. 
A)  Machine A, the PV is $163 more than Machine B. 
B)  Machine A, the PV of its costs is $163 less than Machine B. 
C)  Machine A, because the project length is two years less than Machine B. 
D)  Machine B, the PV is $163 more than Machine A. 
E)  Machine B, the PV of its costs is $163 less than Machine A.

Question 16

You are considering replacing your current dado cutter with a new machine. The current machine is expected to last three more years but faces increasing repair costs of $2,500; $3,500; and $4,000 over the three years. You could salvage the machine now for $5,000; and then $3,000; $1,500; and 0 thereafter. The new dado cutter would cost $12,000 and require upkeep of $1,500 a year. The machine would last six years and be salvaged for $1,000. Should you replace the old machine now or wait one year? (Assume the tax rate is 0% and the cost of capital is 11%).

Accepted Answer

EACNEW= [12000+1500A.11,6+ 1000PV.11,6]/

Question 17

This chapter introduced three new methods for calculating project operating cash flow (OCF). Under what circumstances is each method appropriate?

Accepted Answer

Three additional formulations of OCF pro

Question 18

The Equivalent Annual Cost method allows comparison of the costs of equipment with unequal lives. If Quick-roll machine has an eleven year life, and an NPV of $2,100, while the Zip-roller machine has a seven year life and an NPV of $2,000. Which machine would you choose if the business is expected to continue and the discount rate for both is 14%?

Accepted Answer

EAC11= 2,100/6.4951 = 323.32
E

Question 19

Peter's Boats has sales of $760,000 and a profit margin of 5%. The annual depreciation expense is $80,000. What is the amount of the operating cash flow if the company has no long-term debt?

Accepted Answer

A)  $34,000 
B)  $86,400 
C)  $118,000 
D)  $120,400 
E)  $123,900 
A)  $34,000 
B)  $86,400 
C)  $118,000 
D)  $120,400 
E)  $123,900

Question 20

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

Exam 8: Net Present Value and Capital Budgeting

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

The value of a previously purchased building used by a proposed project is an example of a(n):

The top-down approach to computing the operating cash flow:

A firm purchases a new truck for $30,000. It will be depreciated over 5 years at $6,000 per year. If the tax rate is 30% what is the time 0 cashflow.

The bottom-up approach to computing the operating cash flow applies only when:

If the inflation rate was positive the expected NPV of an investment would be:

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 present value of the year 3 cash flow?

The equivalent annual cost method is useful in determining:

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?

Which of the following is not a relevant consideration for evaluating new projects?

This chapter introduced three new methods for calculating project operating cash flow (OCF). Under what circumstances is each method appropriate?

Peter's Boats has sales of $760,000 and a profit margin of 5%. The annual depreciation expense is $80,000. What is the amount of the operating cash flow if the company has no long-term debt?

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?

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 Capm

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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