FIN 301 Ch. 10 Practice Q's

Which one of the following costs was incurred in the past cannot be recouped? a. Incremental b. Side c. Sunk d. Opportunity e. Erosion

c. Sunk

Which one of the following best describes pro forma financial statements? a. Financial statements expressed in foreign currency b. ... c. ... d. ... e. ...

...

The bottom up approach to computing the operating cash flow applies only when:

the interest expense is equal to zero

G&L Plastic Molders spent $1,200 last week repairing a machine. This week the company is trying to decide if the machine could be better utilized if they assigned it a proposed project. When analyzing the proposed project, the $1,200 should be treated as which type of cost? a. Opportunity b. Fixed c. Incremental d. Erosion e. Sunk

...

The fluffy feather sells customized handbags. Currently, it sells 18,000 handbags annually at an average price of $89 each. It is considering adding a lower-priced line of handbags that sells for $59 each. The firm estimates it can sell 7,000 of the lower-priced handbags, but will sell 3,000 less of the higher-priced handbags by doing so. What is the amount of the sales that should be used when evaluating the addition of the lower-priced handbags? a. $146,000 b. $275,000 c. $413,000 d. $623,000 e. $880,000

...

The top-down approach to computing the operating cash flow: a. Ignores non-cash expenses b. Applies only if a project increases sales c. Applies only to cost cutting projects d. ... e. ...

...

Which one of the following is the depreciation method which allows accelerated write-offs of property under various lifetime classifications? a. IRR b. ACRS c. AAR d. Straight- line to zero e. Straight line- with salvage

...

Which one of the following is an example of a sunk cost: a. $1500 of lost sales because an item was out of stock b. $1,200 paid to repair a machine last year c. $20,00 project that must be forfeited

b. $1,200 paid to repair a machine last year

Kwik 'n Hot Dogs is considering the installation of a new computerized pressure cooker that will cut annual operating costs by $23,000. The system will cost $39,000 to purchase and install. The system is expected to have a 4-year life and will be depreciated to zero using straight line depreciation. What is the amount of the earnings before interest and taxes for this project? a. $10,525 b. $13,025 c. $15,525 d. $16,900 e. $19,400

b. $13,025

A project will produce an operating cash flow of $14,600 a year for 7 years. The initial fixed asset investment in the project will be $48,900. The net after-tax salvage value is estimated at $12,000 and will be received during the last year of the project's life. What is the net present value of the project if the required rate of return is 12%? a. $22,627.54 b. $23,159.04 c. $34,627.54 d. $39,070.26 e. $41,040.83

b. $23,159.04

Hollister & Hollister is considering a new project. The project will require $543,000 for new fixed assets, $218,000 for additional inventory, and $42,000 for additional accounts receivable. Short-term debt is expected to increase by $165,000. The project has a 6-year life. The fixed assets will be depreciated straight line to a zero book value over the life of the project. At the end of the project, the fixed assets can be sold for 20 percent of their original costs. The net working capital returns to its original level at the end of the project. The project is expected to generate annual sales of $875,000 with costs of $640,000. The tax rate is 34 percent and the required rate of return is 13 percent. What is the project's cash flow at time zero? a. -$536,000 b. -$638,000 c. -$720,000 d. -$779,000 e. -$944,000

b. -$638,000

Webster & Moore paid $148,000, in cash, for a piece of equipment 3 years ago. At the beginning of last year, the company spent $21,000 to update the equipment with the latest technology. The company no longer uses this equipment in its current operations and has received an offer of $96,000 from a firm that would like to purchase it. Webster & Moore is debating whether to sell the equipment or to expand its operations so that the equipment can be used. When evaluating the expansion option, what value, if any, should the firm assign to this equipment as an initial cost of the project? a. $0 b. $21,000 c. $96,000 d. $110,000 e. $160,000

c. $96,000

Which one of the following best describes the concept of erosion? a. Expenses that have already been incurred and cannot be recovered b. Change in net working capital related to implementing a new project c. The cash flows of a new project that come at the expense of a firm's existing cash flows d. The alternative that is forfeited when a fixed asset is utilized by a project e. The differences in a firm's cash flows with and without a particular project

c. The cash flows of a new project that come at the expense of a firm's existing cash flows

Which one of the following best illustrates erosion as it relates to a hot dog stand located on the beach?

c. selling fewer hotdogs because hamburgers were added to the menu

Colors and More is considering replacing the equipment it uses to produce crayons. The equipment would cost $1.37 million, have a 12-year life, and lower manufacturing costs by an estimated $310,000 a year. The equipment will be depreciated using straight-line depreciation to a book value of zero. The required rate of return is 15 percent and the tax rate is 35 percent. What is the net income from this proposed project? a. $18,508.75 b. $40,211.24 c. $66,441.67 d. $127,291.67 e. $136,709.48

d. $127,291.67

Home Furnishing Express is expanding its product offerings to reach a wider range of customers. The expansion project includes increasing the floor inventory by $430,000 and increasing its debt to suppliers by 70 percent of that amount. The company will also spend $450,000 for a building contractor to expand the size of its showroom. As part of the expansion plan, the company will be offering credit to its customers and thus expects accounts receivable to rise by $90,000. For the project analysis, what amount should be used as the initial cash flow for net working capital? a. -$39,000 b. -$70,000 c. -$156,000 d. -$219,000 e. -$391,000

d. -$219,000

The operating cash flow for a project should exclude which of the following? a. Taxes b. Variable costs c. Fixed cost d. Interest expense

d. Interest expense

The depreciation tax shield is best defined as the a. Amount of tax that is saved when an asset is purchased b. Tax that is avoided when c. ... d. amount of tax that is saved because of the depreciation expense

d. amount of tax that is saved because of the depreciation expense

The option that is foregone so that an asset can be utilized by a specific project is referred to as which of the following? a. Salvage value b. Wasted value c. Sunk cost d. Opportunity cost e. erosion

d. opportunity cost