Question 1

Which of the following statements is correct?

Accepted Answer

A)  Incremental net operating profits after-tax should include sunk costs associated with a project. 
B)  Incremental net operating profits after-tax should include the effects of financing costs associated with a project. 
C)  Incremental net operating profits after-tax should exclude the effects of depreciation costs associated with a project. 
D)  Incremental net operating profits after-tax should exclude the effects of financing costs associated with a project.

Question 2

The unadjusted NPV of two projects with different useful lives can be compared to evaluate which project is the better of the two.

Accepted Answer

A) True 
 B)False

Question 3

The proper time to harvest an asset is when

Accepted Answer

A)  the percentage NPV increase of harvesting a project at a future point in time is at the last date where the increase is greater than the cost of capital. 
B)  the percentage NPV increase of harvesting a project at a future point in time is at the first date where the increase is less than the cost of capital. 
C)  the percentage NPV increase of harvesting a project at a future point in time is at the first date where the increase is greater than the cost of capital. 
D)  none of the above.

Question 4

Projects with different lives: Your firm is deciding whether to purchase a high-quality printer for your office or one of lesser quality. The high-quality printer costs $40,000 and should last four years. The lesser quality printer costs $30,000 and should last three years. If the cost of capital for the firm is 13 percent, then what is the equivalent annual cost for the best choice for the firm? Round to the nearest dollar.

Accepted Answer

A)  $10,000, either printer 
B)  $10,000, lesser quality printer 
C)  $12,706, lesser quality printer 
D)  $13,448, high-quality printer

Question 5

Free cash flow: What is Champagne's NOPAT for 2008?

Accepted Answer

A)  $1,750,000 
B)  $2,500,000 
C)  $3,250,000 
D)  $4,000,000

Question 6

In order for a project to generate a positive net working capital cash flow at the conclusion of a project,

Accepted Answer

A)  the project must have generated a cumulative negative cash flow during the life of the project. 
B)  the project must have generated a cumulative positive cash flow during the life of the project. 
C)  the project must have generated a cumulative negative cash flow at the conclusion of the project. 
D)  the project could not have generated a positive cash flow at the opening of the project.

Question 7

Operating Cash Flow: Premier Steel, Inc. is considering the purchase of a new machine for $100,000 that has a useful life of 3 years. The firm's cost of capital is 11.0% and the tax rate is 40%. This machine will be sold for its salvage value of $20,000 at the end of 3-years. The machine will require an investment of $2,500 in spare parts inventory upon installation. The machine will cost $8,000 to ship and $4,000 to install and modify it.
Sales are as follows: year 1 = $90,000; year 2 = $97,500; year 3 = $105,000. Operating expenses are year 1 = $25,000; year 2 = $27,000; year 3 = $29,000. The investment in working capital will be liquidated at termination of the project at the end of year 3.
MACRS Rates 33% 45% 15% 7%
Using MACRS, what is the operating cash flow in year 1?

Accepted Answer

A)  $53,784 
B)  $35,238 
C)  $86,999 
D)  $42,512

Question 8

Opportunity costs should always be included in the cash flow calculations of a project.

Accepted Answer

A) True 
 B)False

Question 9

Marginal and average tax rates: Use the tax rate taken from Exhibit 11.6 to calculate the average tax rate for Lansing, Inc., this year. Lansing's pretax income was $275,000.
Exhibit 11.6 U.S. Corporate Tax Rate Schedule in 2007
Taxable Income
More
Than
But Not More Than
Tax Owed
$0
$50,000
15% of amount beyond $0
$50,000
$75,000
$7,500 +
25% of amount beyond $50,000
$75,000
$100,000
$13,750 +
34% of amount beyond $75,000
$100,000
$335,000
$22,250 +
39% of amount beyond $100,000
$335,000
$10,000,000
$113,900 +
34% of amount beyond $335,000
$10,000,000
$15,000,000
$3,400,000 +
35% of amount beyond $10,000,000
$15,000,000
$18,333,333
$5,150,000 +
38% of amount beyond $15,000,000
$18,333,333
-------
35% on all income

Accepted Answer

A)  8.2% 
B)  24.8% 
C)  33.0% 
D)  39.0%

Question 10

If taken without accompanying changes in cash flow, changes in a company's accounting earnings do not impact the overall value of the firm.

Accepted Answer

A) True 
 B)False

Question 11

The cash flows used in capital budgeting calculations are based on.

Accepted Answer

A)  historical estimates. 
B)  forecasts of future cash revenues, expenses, and investment outlays. 
C)  forecasts of net income. 
D)  forecasts of retained earnings available for financing projects.

Exam 11: Cash Flows and Capital Budgeting

Which of the following statements is correct?

The unadjusted NPV of two projects with different useful lives can be compared to evaluate which project is the better of the two.

The proper time to harvest an asset is when

Free cash flow: What is Champagne's NOPAT for 2008?

In order for a project to generate a positive net working capital cash flow at the conclusion of a project,

Opportunity costs should always be included in the cash flow calculations of a project.

If taken without accompanying changes in cash flow, changes in a company's accounting earnings do not impact the overall value of the firm.

The cash flows used in capital budgeting calculations are based on.