Question 1

The Buck Store is considering a project that will require additional inventory of $216,000 and

will increase accounts payable by $181,000. Accounts receivable are currently $525,000 and are

expected to increase by 9 percent if this project is accepted. What is the project’s initial cash flow

for net working capital?

$82,250

$12,250

$12,250

$36,250

$44,250

Question 2

Keyser Mining is considering a project that will require the purchase of $980,000 in new

equipment. The equipment will be depreciated straight-line to a zero book value over the 7-year

life of the project. The equipment can be scraped at the end of the project for 5 percent of its

original cost. Annual sales from this project are estimated at $420,000. Net working capital equal

to 20 percent of sales will be required to support the project. All of the net working capital will

be recouped. The required return is 16 percent and the tax rate is 35 percent. What is the amount

of the aftertax salvage value of the equipment?

$17,150

$31,850

$118,80

0

$237,60

0

$343,00

0

Question 3

Jefferson & Sons is evaluating a project that will increase annual sales by $145,000 and annual

cash costs by $94,000. The project will initially require $110,000 in fixed assets that will be

depreciated straight-line to a zero book value over the 4-year life of the project. The applicable

tax rate is 32 percent. What is the operating cash flow for this project?

$11,22

0

$29,92

0

$43,48

0

$46,48

0

$46,62

0

Question 4

Keyser Petroleum just purchased some equipment at a cost of $67,000. What is the proper

methodology for computing the depreciation expense for year 2 if the equipment is classified as

5-year property for MACRS?

$67,000 × (1 – 0.20) ×

0.32

$67,000/(1 – 0.20 0.32)

$67,000 × (1 + 0.32)

$67,000 × (1 – 0.32)

$67,000 × 0.32

Question 5

A company that utilizes the MACRS system of depreciation:

will have equal depreciation costs each year of an asset’s life.

will have a greater tax shield in year two of a project than it would have if the firm had

opted for straight-line depreciation, given the same depreciation life.

can depreciate the cost of land, if it so desires.

will expense less than the entire cost of an asset.

cannot expense any of the cost of a new asset during the first year of the asset’s life.

Question 6

Day Interiors is considering a project with the following cash flows. What is the IRR of this

project?

6.42

percent

7.03

percent

7.48

percent

8.22

percent

8.56

percent

Question 7

Which one of the following is an example of a sunk cost?

$1,500 of lost sales because an item was out of stock

$1,200 paid to repair a machine last year

$20,000 project that must be forfeited if another project is accepted

$4,500 reduction in current shoe sales if a store commences selling

sandals

$1,800 increase in comic book sales if a store commences selling

puzzles

Question 8

Kelly’s Corner Bakery purchased a lot in Oil City 6 years ago at a cost of $302,000. Today, that

lot has a market value of $340,000. At the time of the purchase, the company spent $15,000 to

level the lot and another $20,000 to install storm drains. The company now wants to build a new

facility on that site. The building cost is estimated at $1.51 million. What amount should be used

as the initial cash flow for this project?

$1,470,00

0

$1,850,00

0

$1,875,00

0

$1,925,00

0

$1,945,00

0

Question 9

The length of time a firm must wait to recoup the money it has invested in a project is called the:

internal return period.

payback period.

profitability period.

discounted cash

period.

valuation period.

Question 10

Tedder Mining has analyzed a proposed expansion project and determined that the internal rate

of return is lower than the firm desires. Which one of the following changes to the project would

be most expected to increase the project’s internal rate of return?

decreasing the required discount rate

increasing the initial investment in fixed assets

condensing the firm’s cash inflows into fewer years without lowering the total amount of

those inflows

eliminating the salvage value

decreasing the amount of the final cash inflow

Question 11

What is the profitability index for an investment with the following cash flows given a 14.5

percent required return?

0.9

4

0.9

8

1.0

2

1.0

6

1.1

1

Question 12

If a firm accepts Project A it will not be feasible to also accept Project B because both projects

would require the simultaneous and exclusive use of the same piece of machinery. These projects

are considered to be:

independent.

interdependent.

mutually exclusive.

economically

scaled.

operationally

distinct.

Question 13

Which one of the following best describes the concept of erosion?

expenses that have already been incurred and cannot be recovered

change in net working capital related to implementing a new project

the cash flows of a new project that come at the expense of a firm’s existing cash

flows

the alternative that is forfeited when a fixed asset is utilized by a project

the differences in a firm’s cash flows with and without a particular project

Question 14

What is the net present value of a project that has an initial cash outflow of $34,900 and the

following cash inflows? The required return is 15.35 percent.

$3,383.25

$2,784.62

–

$2,481.53

$52,311.0

8

$66,416.7

5

Question 15

You are considering the following two mutually exclusive projects. The required rate of return is

14.6 percent for project A and 13.8 percent for project B. Which project should you accept and

why?

project A; because it has the higher required rate of return

project A; because its NPV is about $4,900 more than the NPV of

project B

project B; because it has the largest total cash inflow

project B; because it has the largest cash inflow in year one

project B; because it has the lower required return

Question 16

A project has an initial cost of $6,500. The cash inflows are $900, $2,200, $3,600, and $4,100

over the next four years, respectively. What is the payback period?

1.73

years

2.51

years

2.94

years

3.51

years

3.94

years

Question 17

The internal rate of return is defined as the:

maximum rate of return a firm expects to earn on a project.

rate of return a project will generate if the project in financed solely with internal

funds.

discount rate that equates the net cash inflows of a project to zero.

discount rate which causes the net present value of a project to equal zero.

discount rate that causes the profitability index for a project to equal zero.

Question 18

If a project has a net present value equal to zero, then:

the total of the cash inflows must equal the initial cost of the project.

the project earns a return exactly equal to the discount rate.

a decrease in the project’s initial cost will cause the project to have a negative NPV.

any delay in receiving the projected cash inflows will cause the project to have a

positive NPV.

the project’s PI must be also be equal to zero.

Question 19

Which one of the following is a project cash inflow? Ignore any tax effects.

decrease in accounts payable

increase in inventory

decrease in accounts receivable

depreciation expense based on

MACRS

equipment acquisition

Question 20

Gateway Communications is considering a project with an initial fixed asset cost of $2.46

million which will be depreciated straight-line to a zero book value over the 10-year life of the

project. At the end of the project the equipment will be sold for an estimated $300,000. The

project will not directly produce any sales but will reduce operating costs by $725,000 a year.

The tax rate is 35 percent. The project will require $45,000 of inventory which will be recouped

when the project ends. Should this project be implemented if the firm requires a 14 percent rate

of return? Why or why not?

No; The NPV is $172,937.49.

No; The NPV is $87,820.48.

Yes; The NPV is

$251,860.34.

Yes; The NPV is

$387,516.67.

Yes; The NPV is

$466,940.57.

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