finance part 2

A project will reduce costs by $34,000 but increase depreciation by $16,500. What is the operating cash flow of this project based on the tax shield approach if the tax rate is 40 percent? Selected Answer: Answers: $5,775 $9,275 $15,625 $20,400 $27,000

$27,000

Fig Newton Industries is considering a project and has developed the following estimates: unit sales = 7,300, price per unit = $149, variable cost per unit = $91, fixed costs = $216,400. The depreciation is $94,700 a year and the tax rate is 40 percent. What effect would an increase of $1 in the selling price have on the operating cash flow? Selected Answer: Answers: $4,380 $4,823 $5,316 $5,448 $7,300

$4,380

Lakeside Winery is considering expanding its winemaking operations. The expansion will require new equipment costing $649,000 that would be depreciated on a straight-line basis to a zero balance over the four-year life of the project. The estimated salvage value is $187,000. The project requires $38,000 initially for net working capital, all of which will be recouped at the end of the project. The projected operating cash flow is $198,500 a year. What is the net present value of this project if the relevant discount rate is 14 percent and the tax rate is 35 percent? Selected Answer: Answers: -$14,162 -$8,309 -$2,747 $2,311 $3,615

-$14,162

A new project you are considering is expected to generate an operating cash flow of $45,620 and will initially free up $22,000 in net working capital. Purchases of fixed assets costing $68,800 will be required to start up the project. What is the total cash flow for this project at time zero? Answers: -$68,800 -$46,800 -$1,040 -$26,580 -$41,220

-$46,800

Jim's Hardware is adding a new product line to its sales lineup. Initially, the firm will stock $41,000 of the new inventory, which will be purchased on 30 days' credit from a supplier. The firm will also invest $6,000 in accounts receivable and $4,000 in equipment. What amount should be included in the initial project costs for net working capital? Selected Answer: Answers: -$41,000 -$37,000 -$10,000 -$6,000 -$2,000

-$6,000

Lake City Plastics currently produces plastic plates and silverware. The company is considering expanding its product offerings to include plastic serving trays. Which of the following are cash flows relevant to the new product? I. Molds needed to form the serving trays II. Projected increase in plate and silverware sales if the trays are produced III. A portion of the production manager's current annual salary of $75,000 IV. Raw materials used in the production of the serving trays Answers: I and IV only III and IV only I, II, and IV only I, III, and IV only I, II, III, and IV

I, II, and IV only

The ability to delay an investment: Answers: is commonly referred to as the best-case scenario. is valuable provided there are conditions under which the investment will have a positive net present value. ensures that the investment will have an expected net present value that is positive. offsets the need to conduct sensitivity analysis. is referred to as the option to abandon.

is valuable provided there are conditions under which the investment will have a positive net present value.

Ignoring the option to wait: Answers: may overestimate the internal rate of return on a project. may underestimate the net present value of a project. ignores the ability of a manager to increase output after a project has been implemented. is the same as ignoring all strategic options. ignores the value of discontinuing a project early.

may underestimate the net present value of a project. ignores the ability of a manager to increase output after a project has been implemented.

irm A uses straight-line depreciation. Firm B uses MACRS depreciation. Both firms bought $60,000 worth of equipment last year. Both firms are in the 35 percent tax bracket. The operating cash flows for each firm are identical except for the depreciation effects. Given this, you know the: Selected Answer: Answers: depreciation expense for Firm A will be greater than Firm B's expense every year. equipment has a higher value on Firm B's books than on Firm A's at the end of year 2. operating cash flow of Firm A is less than that of Firm B for year 2. market value of Firm A's equipment is greater than the market value of Firm B's equipment. market value of Firm B's equipment is greater than the market value of Firm A's equipment.

operating cash flow of Firm A is less than that of Firm B for year 2.

A pro forma financial statement is a financial statement that: Answers: expresses all values as a percentage of either total assets or total sales. compares actual results to the budgeted amounts. compares the performance of a firm to its industry. projects future years' operations. values all assets based on their current market values.

projects future years' operations.