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

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

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?












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?


















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?


























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) ×




$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
























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




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








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?






















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




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?






















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:






mutually exclusive.










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




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.





















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




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?






















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




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




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




Yes; The NPV is




Yes; The NPV is



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