Question 1

Which one of the following is not a basic principle for estimating a project's net cash flows?

Accepted Answer

A) Sunk costs are relevant. 
B) Cash flows should be estimated on an incremental basis. 
C) Cash flows should be estimated on an after-tax basis. 
D) Opportunity costs are relevant. 
A) Sunk costs are relevant. 
B) Cash flows should be estimated on an incremental basis. 
C) Cash flows should be estimated on an after-tax basis. 
D) Opportunity costs are relevant.

Question 2

Spencers Majestic Foods is considering the replacement of some old equipment. The new equipment will cost $300,000 including delivery and installation. The old equipment to be replaced has a book value of $100,000 and can be sold pre-tax for $120,000. If the firm's effective tax rate is 40%, compute the net investment.

Accepted Answer

A) $192,000 
B) $188,000 
C) $180,000 
D) $228,000 
A) $192,000 
B) $188,000 
C) $180,000 
D) $228,000

Question 3

Tokyo Food Supplies Corporation is considering an expansion to a new market. Tokyo Food Supplies has already conducted and paid $35,000 for a marketing survey. The expansion will cost $400,000 for new assets, another $25,000 for shipping and delivery costs, and another $70,000 for installation costs. In addition, $150,000 in net working capital will be needed immediately. Compute the net investment.

Accepted Answer

A) $495,000 
B) $680,000 
C) $645,000 
D) $550,000 
A) $495,000 
B) $680,000 
C) $645,000 
D) $550,000

Question 4

A firm is planning a project that will both expand the firm's operations and replace some of the older, less efficient assets of the firm. The new assets will cost the firm $200,000 plus an additional $5,000 for delivery and $25,000 for installation. Old assets being replaced have a book value of $50,000 and can be sold pre-tax for $40,000. The new project will require additional land. The land to be used was purchased three years ago for $75,000 but could be sold today for $140,000 net of taxes. The new project will require an increase of $20,000 in net working capital immediately. What is this project's net investment? Use 40% for the effective tax rate.

Accepted Answer

A) $350,000 
B) $281,000 
C) $390,000 
D) $346,000 
A) $350,000 
B) $281,000 
C) $390,000 
D) $346,000

Question 5

What impact will an increase in depreciation have upon a firm?

Accepted Answer

A) decrease profit and decrease cash flow 
B) decrease profit and increase cash flow 
C) increase profit and decrease cash flow 
D) increase profit and increase cash flow 
A) decrease profit and decrease cash flow 
B) decrease profit and increase cash flow 
C) increase profit and decrease cash flow 
D) increase profit and increase cash flow

Question 6

Why do a project's net cash flows not include additional interest expense?

Accepted Answer

A) Interest expense is a sunk cost and thus not relevant. 
B) Interest expense is not an actual cash expense. 
C) Interest expense is an indirect cost and thus not relevant. 
D) Interest expense is taken into account by the use of a required rate of return used in the decision method. 
A) Interest expense is a sunk cost and thus not relevant. 
B) Interest expense is not an actual cash expense. 
C) Interest expense is an indirect cost and thus not relevant. 
D) Interest expense is taken into account by the use of a required rate of return used in the decision method.

Question 7

Indirect cash flows caused by a capital budgeting project are not relevant to the project investment decision.

Accepted Answer

A) True 
 B)False

Question 8

Which one of the following is not part of the estimated net investment for a capital budgeting project?

Accepted Answer

A) the estimated salvage value of the new assets at the end of their 10-year expected economic life 
B) the immediate increase in net working capital required by the project 
C) the after-tax salvage value of assets to be replaced by the project 
D) the cost of new assets required by the project 
A) the estimated salvage value of the new assets at the end of their 10-year expected economic life 
B) the immediate increase in net working capital required by the project 
C) the after-tax salvage value of assets to be replaced by the project 
D) the cost of new assets required by the project

Question 9

A project is expected to increase a firm's sales revenue by $50,000 annually, increase it cash expenses by $20,000 annually, and increase its depreciation by $15,000 annually. Given this information, what is the project's expected annual net cash flow? Use a 40% effective tax rate.

Accepted Answer

A) $24,000 
B) $9,000 
C) $21,000 
D) $33,000 
A) $24,000 
B) $9,000 
C) $21,000 
D) $33,000

Question 10

Jose's Cantinas Incorporated plans to expand. This will require the acquisition of new equipment. The equipment will cost $85,000 including delivery and installation. Additional net working capital of $25,000 will be needed immediately. Land for the expansion cost Jose's $100,000 three years ago, but could be sold to net $200,000 after taxes today. Compute the net investment for this project.

Accepted Answer

A) $185,000 
B) $310,000 
C) $210,000 
D) $285,000 
A) $185,000 
B) $310,000 
C) $210,000 
D) $285,000

Which one of the following is not a basic principle for estimating a project's net cash flows?

What impact will an increase in depreciation have upon a firm?

Why do a project's net cash flows not include additional interest expense?

Indirect cash flows caused by a capital budgeting project are not relevant to the project investment decision.

Which one of the following is not part of the estimated net investment for a capital budgeting project?

A project is expected to increase a firm's sales revenue by $50,000 annually, increase it cash expenses by $20,000 annually, and increase its depreciation by $15,000 annually. Given this information, what is the project's expected annual net cash flow? Use a 40% effective tax rate.

Introduction

Financial Markets and Financial Instruments

Review of Financial Statements and Selected Ratios

The Relationship Between Risk and Return

Time Value of Money

Fixed Income Securities: Bonds and Preferred Stock

Common Stock

Cost of Capital

Capital Budgeting Decision Methods

An Introduction to Hotel Valuation

Capital Structure

Filters

Exam 9: Introduction to Capital Budgeting and Cash Flow Estimation

Which one of the following is not a basic principle for estimating a project's net cash flows?

What impact will an increase in depreciation have upon a firm?

Why do a project's net cash flows not include additional interest expense?

Indirect cash flows caused by a capital budgeting project are not relevant to the project investment decision.

Which one of the following is not part of the estimated net investment for a capital budgeting project?

A project is expected to increase a firm's sales revenue by $50,000 annually, increase it cash expenses by $20,000 annually, and increase its depreciation by $15,000 annually. Given this information, what is the project's expected annual net cash flow? Use a 40% effective tax rate.

Introduction

Financial Markets and Financial Instruments

Review of Financial Statements and Selected Ratios

The Relationship Between Risk and Return

Time Value of Money

Fixed Income Securities: Bonds and Preferred Stock

Common Stock

Cost of Capital

Capital Budgeting Decision Methods

An Introduction to Hotel Valuation

Capital Structure

Filters