Question 1

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 provided in this chapter are the bottom-up,top-down,and tax-shield approaches.The first is useful when the analyst has prepared pro forma income statements for a project (since OCF is equal to net income plus depreciation).The top-down approach defines OCF as sales minus costs minus taxes,and is useful if one has reliable estimates of the relevant dollar costs (perhaps in a situation where fixed and variable costs are the focus of the analysis).Finally,the tax-shield approach separately illustrates the project benefits associated with after-tax gross profit (revenue gains and/or cost reductions)and with the depreciation tax shield.

Question 2

Milton Toy Co.recorded sales of $2,500 and costs of $1,875.Net accounts receivable rose by $350 and net accounts payable declined by $240.What were cash sales minus cash costs?

Accepted Answer

A)  $625 
B)  $35 
C)  ($110) 
D)  $90 
A)  $625 
B)  $35 
C)  ($110) 
D)  $90 B

Question 3

Cash revenues in a particular year are equal to sales less:

Accepted Answer

A)  the change in capital investment. 
B)  the change in accounts payable. 
C)  the change in NWC. 
D)  the change in accounts receivable. 
A)  the change in capital investment. 
B)  the change in accounts payable. 
C)  the change in NWC. 
D)  the change in accounts receivable. D

Question 4

Money that the firm has already spent or is committed to spend regardless of whether a project is taken is called a(n):

Accepted Answer

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

Question 5

Marshall's & Co.purchased a corner lot in Montreal five years ago at a cost of $640,000.The lot was recently appraised at $810,000.At the time of the purchase,the company spent $50,000 to grade the lot and another $4,000 to build a small building on the lot to house a parking lot attendant who has overseen the use of the lot for daily commuter parking.The company now wants to build a new retail store on the site.The building cost is estimated at $1.2 million.What amount should be used as the initial cash flow for this building project?

Accepted Answer

A)  $1,200,000 
B)  $1,840,000 
C)  $1,890,000 
D)  $2,010,000 
E)  $2,060,000 
A)  $1,200,000 
B)  $1,840,000 
C)  $1,890,000 
D)  $2,010,000 
E)  $2,060,000

Question 6

Bruno's,Inc.is analyzing two machines to determine which one it should purchase.The company requires a 14% rate of return and uses straight-line depreciation to a zero book value.Machine A has a cost of $290,000,annual operating costs of $8,000,and a 3-year life.Machine B costs $180,000,has annual operating costs of $12,000,and has a 2-year life.Whichever machine is purchased will be replaced at the end of its useful life.Which machine should Bruno's purchase and why? (Round your answer to whole dollars.)

Accepted Answer

Machine B; because it will sav

Question 7

The QT Company is generating cash flow of $333,000 per year.If they invest in a new press they expect to increase their cash flow to $400,000 per year.The cash outflow for the new press is $250,000; to accept or reject the investment they have to consider:

Accepted Answer

A)  the press cost of $250,000 and total cash flow of $400,000. 
B)  the change in cash flow of $67,000 versus the price cost of $250,000. 
C)  the current cash flow of $333,000 and the price cost of $250,000. 
D)  the opportunity cost of the facility of $333,000. 
A)  the press cost of $250,000 and total cash flow of $400,000. 
B)  the change in cash flow of $67,000 versus the price cost of $250,000. 
C)  the current cash flow of $333,000 and the price cost of $250,000. 
D)  the opportunity cost of the facility of $333,000.

Question 8

What is the nominal rate of interest given a real rate of interest of 5% and an inflation rate of 7%?

Accepted Answer

A)  12.00% 
B)  2.00% 
C)  12.35% 
D)  1.90% 
A)  12.00% 
B)  2.00% 
C)  12.35% 
D)  1.90%

Question 9

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

Question 10

You have been asked to evaluate an infinitely-lived project.Sales in the first year are projected to be $100.Costs are projected at $50.There is no depreciation,and the tax rate is 30%.The real required return is 10%.The inflation rate is projected to be 8%.Sales and costs will increase at the rate of inflation.The project costs $300.What is the NPV?

Accepted Answer

A)  $142.03 
B)  $36.36 
C)  $71.72 
D)  $50.00 
A)  $142.03 
B)  $36.36 
C)  $71.72 
D)  $50.00

Question 11

You spent $500 last week fixing the transmission in your car.Now,the brakes are acting up and you are trying to decide whether to fix them or trade the car in for a newer model.In analyzing the brake situation,the $500 you spent fixing the transmission is a(n)_____ cost.

Accepted Answer

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

Question 12

Bluedo's has sales of $435,000,depreciation of $35,000,and net working capital of $56,000.The firm has a tax rate of 34% and a profit margin of 8%.The firm has no interest expense.What is the amount of the operating cash flow?

Accepted Answer

A)  $46,068 
B)  $57,968 
C)  $69,800 
D)  $322,100 
E)  $114,340 
A)  $46,068 
B)  $57,968 
C)  $69,800 
D)  $322,100 
E)  $114,340

Question 13

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 14

Sales for year 2 of the new project are expected to increase by 10%.Current assets are expected to increase by 17% for every dollar increase in sales while accounts payable are expected to increase by 6%.For year 2 the change in cash flows due to working capital will be:

Accepted Answer

A)  +10% of sales. 
B)  -10% of sales. 
C)  +1.1% of sales. 
D)  -1.1% of sales. 
A)  +10% of sales. 
B)  -10% of sales. 
C)  +1.1% of sales. 
D)  -1.1% of sales.

Question 15

A machine lasts 3 years and has a purchase price of $100.It costs $40 per year to operate and can be sold as junk for $15 at the end of its life.What is the EAC of the costs of operating a series of such machines into perpetuity if the discount rate is 15%?
A.15,3-15/(1.15)3 = $181.47
The machine's equivalent annual cost is: $181.47/2.283 = $79.48

Accepted Answer

The present value of the cost

Question 16

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(

Question 17

The equivalent annual cost method is useful in determining:

Accepted Answer

A)  the 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)  the 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 18

What is the inflation rate given a nominal interest rate is 13% when the real rate is 6%?

Accepted Answer

A)  19.00% 
B)  6.60% 
C)  7.00% 
D)  19.78% 
A)  19.00% 
B)  6.60% 
C)  7.00% 
D)  19.78%

Question 19

A project will produce an operating cash flow of $7,300 a year for three years.The initial cash investment in the project will be $11,600.The net after-tax salvage value is estimated at $3,500 and will be received during the last year of the project's life.What is the net present value of the project if the required rate of return is 11%?

Accepted Answer

A)  $8,798.29 
B)  $9,896.87 
C)  $10,072.72 
D)  $13,353.41 
E)  $20,398.29 
A)  $8,798.29 
B)  $9,896.87 
C)  $10,072.72 
D)  $13,353.41 
E)  $20,398.29

Question 20

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 EA

Exam 8: Net Present Value and Capital Budgeting

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

Milton Toy Co.recorded sales of $2,500 and costs of $1,875.Net accounts receivable rose by $350 and net accounts payable declined by $240.What were cash sales minus cash costs?

Cash revenues in a particular year are equal to sales less:

Money that the firm has already spent or is committed to spend regardless of whether a project is taken is called a(n):

The QT Company is generating cash flow of $333,000 per year.If they invest in a new press they expect to increase their cash flow to $400,000 per year.The cash outflow for the new press is $250,000; to accept or reject the investment they have to consider:

What is the nominal rate of interest given a real rate of interest of 5% and an inflation rate of 7%?

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

You spent $500 last week fixing the transmission in your car.Now,the brakes are acting up and you are trying to decide whether to fix them or trade the car in for a newer model.In analyzing the brake situation,the $500 you spent fixing the transmission is a(n)_____ cost.

Bluedo's has sales of $435,000,depreciation of $35,000,and net working capital of $56,000.The firm has a tax rate of 34% and a profit margin of 8%.The firm has no interest expense.What is the amount of the operating cash flow?

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?

Sales for year 2 of the new project are expected to increase by 10%.Current assets are expected to increase by 17% for every dollar increase in sales while accounts payable are expected to increase by 6%.For year 2 the change in cash flows due to working capital will be:

The equivalent annual cost method is useful in determining:

What is the inflation rate given a nominal interest rate is 13% when the real rate is 6%?

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

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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