FINA 320 Mock Quiz 4

The Seattle Corporation has been presented with an investment opportunity that will yield

$51,138

Your company is considering investing in a new system that will cost $160,000. What is operation cash flow in year 3?

$51,360

If a project has some negative cash flow during its life ( other than the start of the project) or at the end of its life, the project most likely has:

more than one internal rate of return

An NPV of zero implies that an investment

none of the above

Haig Aircraft is considering a project that requires some initial investment today

none of the above answer should be 2.54 years

A firm generates sales of $250,000, depreciation expense of $50,000, taxable income of $50,000, and has a 35% tax rate. But how much does Net cash flow deviate from net income?

$50,000

Whether to retire your current computer modem product and replace it

$50,000 spent on research and development costs over time on the older modem

Whether to retire your current computer modem product and replace it with a new modem that incorporates new features. Which of the following would not be relevant to your decision-making process?

$50,000 spent on research and development costs over time on the older modem

What is the internal rate of return of an investment with an initial cost of $50,000, cash inflows at the end of years 1, 2 and 3 of $30,000, $35,000 and $40,000, respectively. Is this investment that would go in the acceptable group to the evaluating company, or not or don't know? What is the best answer?

45.7%; Cannot tell with the information provided with her it would be acceptable

Which of the following statements about the internal rate of return (IRR) and Net Present Value (NPV) is least accurate?

For mutually exclusive projects, if the NPV rankings in the IRR rankings give conflicting signals, you should select the project with a higher IRR

If the calculated net present value (NPV) is negative which of the following must be correct. The discount rate used is:

Greater than the internal rate of return (IRR)

Which of the following calculations ignored the impact of the time value of money?

I only

Consider a project with an initial investment and positive future cash flows. As the discount rate is decreased the

IRR remains constant while NPV increases

The financial manager at Genesis Company is looking into the purchase of an apartment complex for $550,000. Net after-tax cash flows are expected to be $65,000 for each of the next 5 years, then drop to $50,000 for 4 years. Genesis' Required rate of return is 9% on projects of this nature. After 9 years, Genesis Company expects to sell the property for after-tax proceeds of $300,000. What is .the respective internal rate of return (IRR) and net present value (NPV) on this project?

IRR=7.0% and NPV=-$53,765

Which of the following statements is most correct?

If an asset is to be used by a potential project is already on by the firm, and if the answer could be leased to another firm if the new project were not undertaken, then the rent that could be obtained should be charged as a cost to the project under consideration.

Which Is NOT A Step In The Estimation Of After-Tax Cash Flow At Disposal?

If book value is less than selling price: Selling price+tax credit on loss.

Which is not a step in the estimation of after-tax cash flow at disposal?

If book value is less than selling price: selling price + tax credit on loss

Which of the following statements regarding making investment decisions using net present value (NPV) and internal rate of return (IRR) is least accurate?

If projects are mutually exclusive, one should always choose the project with the highest IRR

Which of the following statements is true?

If the NPV of a project is positive, it should be accepted

Sunk costs are in estimating an investment's cash flow, since sunk costs are

Ignored, not recoverable

The value of a proposed capital budgeting project depends on the

Incremental cash flows produced

Which of the following statements regarding investment in working capital is correct?

Investments in working capital, unlike investment in plant and Equipment, represents a positive cash flow.

Which of the following statements about the internal rate of return (IRR) for a project with the following cash flow pattern is correct?

It has to IRRs of approximately 38.2% and 261.8%

Which of the following statements about internal rate of return for a project with the following cash flow patterns is CORRECT: (YEAR 0 -$2000) (YEAR 1 $10,000) (YEAR 2 -$10,000)

It has two IRRs of approximately 38.2% and 261.8%

Your financial team has done a detailed analysis of a proposed 10 year project and reported that the project npv is $456 at a discount rate of 10%. a later review by the marketing team suggests that the project requires an additional 2,000$ ay year 0 which will be maintained throughout the life the project but liquidated at the end of the project. how does the requirement for additional inventory impact the project NPV?

It will decrease the NPV by $1,228.91

Your financial team has done a detailed analysis of a proposed 10-year project and reported that the project NPV is $456 at a discount rate of 10%. A later review by the marketing team suggests that the project requires an additional $2,000 of inventory at year zero, which will be maintained throughout the life of the project but liquidated (without any loss or gain) at the end of project. How does the requirement for additional inventory impact the estimated project NPV?

It will decrease the NPV by $1,228.91

If a project has a cost of $50,000 and profitability index of 0.4, then

Its NPV is $20,000.

If a firm suffers reduced profits to the point of moving into a lower tax bracket, one would expect the depreciation tax shield, all else the same, to become _______________?

Less valuable

Landen, INC. uses several methods to evaluate capital projects. An appropriate decision rule for landen would be to invest in a project if it has a positive:

NPV

Dog Up! Franks is looking at a new sausage system with an installed cost of $410,000. This cost will be depreciated straight-line to zero over the project's five-year life, at the end of which the sausage system can be scrapped for $70,000. The sausage system will save the firm $115,000 per year in pretax operating costs, and the system requires an initial investment in new working capital of $15,000. If the tax rate is 34% and the discount rate is 10%, what is the NPV of this project?

NPV = $6,408

Which of the following statement is false?

NPV and IRR are both similar and different. They are similar in that they are both additive and can be divided into component parts.

A new more efficient machine will last 4 years and allow inventory levels to decrease to $100,000 during its life

NPV will increase

A new, more efficient machine will last 4 years and allow inventory levels to decrease by $100,000 during its life. At a cost of capital of 13% , how does the net working capital change affect the project's NPV?

NPV will increase

Quark Industries has four potential projects, all with an initial cost of $2,000,000. The capital budget for the year will allow Quark to accept only one of the four projects. Given the discount rate and the future cash flow of each project, determine what project Quark should accept.

Project 2

Which mutually exclusive project would you select, if both are priced at $1,000 and your required return is 15%: Project A with three annual cash flows of $1,000; or Project B, with 3 years of zero cash flow followed by 3 years of $1,500 annually?

Project A

Allied, Inc. is considering Project A and Project B, which are mutually exclusive. Project A is an eight-year project that has an initial outlay or cost of $180,000. Its future cash inflows for years one through 8 are $38,000. Project B is also an eight year project that has an initial outlay or cost of $160,000. It's future cash inflows four years one through eight are the same at $34,500. The appropriate discount rate for both project is 7.5%. Which project should Allied accept?

Project A because it has a higher NPV

The financial manager at Johnson & Smith estimates that its required rate of return is 11 percent. Which of the following independent projects should Johnson & Smith accept?

Project C requires an up-front expenditure of $600,000 and generates a positive internal rate of return of 12.0%.

The financial manager at IBFM, a farm implement distributor, contemplating the following three mutually exclusive projects. IBMF's Required rate of return is 9.5%. Based on the information provided, which should the financial manager select and why?

Project C with the highest net present value

Which of the following projects would have multiple internal rates of return (IRRs)? The cost of capital for all projects is 9.75 percent.

Project blackjack only

Flynn, Inc. is considering a four-year project that has an initial after-tax outlay or after-tax cost of $80,000. The future after-tax cash inflows from its project for years one, two, three, and four are $40,000, $40,000, $30,000, and $30,000, respectively. Flynn uses the internal rate of return method to evaluate projects. What is the approximate IRR for this project?

The IRR is about 28.89%

For a project with conventional cash flows, if PI ( Profitability Index ) is greater than 1

The NPV is greater than zero

Which of the following statements about NPV and IRR is not correct?

The NPV will be positive if the IRR is less than the cost of capital or discount rate

Which of the following statements about the discounted payback period is least accurate?

The discounted payback period is generally shorter than the regular payback

Which of the statements below is true?

The graphic plot of project NPV against discount rate is called the NPV profile

Which of the following statements about independent projects is least accurate?

The internal rate of return and net present value methods can yield different accept/reject decisions for independent projects

Sarah Kelly CFA is analyzing two mutually exclusive investment projects Kelly has calculator The Net Present Value and internal rate of return for each project. Project 1: NPV=$230; IRR=15% Project 2:NPV=$4,000;IRR=9%

Accept project 2 only

If we know the __________ and the EBIT, we can estimate the taxes for a project for the year.

Tax rate

Flynn, Inc. is considering a four-year project that has an initial outlay or cost of $80,000

The IRR is about 28.88%

Flynna four-year project that has an initial after-tax outlay or after-tax cost of $80,000

The IRR is about 28.88%

When a company is evaluating two mutually exclusive projects that both have positive NPV but have conflicting NPV and IRR project rankings, the company should

When a company is evaluating two mutually exclusive projects that both have positive NPV but have conflicting NPV and IRR project rankings, the company should

An analyst has gathered the following data about a company with a 12% cost of capital: P: Cost ($15,000), Life (5years), Cash inflows ($5,000/yr) Q: Cost ($25,000), Life (5years), Cash inflows ($7,500/yr)

Accept project P and reject project Q

Which of the following is the most appropriate decision rule for mutually exclusive projects?

Accept the project with the highest positive NPV

The discounted payback rule can be best stated as:

An investment is acceptable if it's discounted payback period is less than some prespecified number of years

Is at the heart of corporate finance because it is concerned with making the best choices about project selection.

capital budgeting

The advantage of MACRS over straight-line depreciation is that

earlier

The advantage of MACRS over straight-line depreciation is that you can write off more of your capital costs in the _________ year(s).

earlier

A project whose NPV equals zero

has a discounted payback period that exactly matched the life of the project

What is not a step in the estimations of after-tax cash flows at disposal?

if book value is less than selling price: selling price+ tax credit on loss

The Modified Accelerated Cost Recovery System allows an increase

in annual depreciation during earlier years.

A firm is considering an investment in a project whose risk is greater than the current risk of the firm

increase the cost of capital used to evaluate the project

The building of the project's ______________ cash flow is the cornerstone of the financial decision models

incremental

The building of the project's______ cash flow is the cornerstone of the financial decision modeling.

incremental

In a Net Present Value (NPV) profile, the internal rate of return is represented as the

intersection of the NPV profile with the horizontal axis

Which of the following statements regarding investment in working capital is incorrect?

investment in working capital, unlike investment in plant and equipment, represent a positive cash flow

Which Of The Following Statements Is True For A Project With $20,000 Initial Cost, Cash Inflows Of $5,800 Per Year For 6 Years, And a discount rate of 15%.

it's payback period is roughly 3 ½ years

If a firm suffers reduced profits to the point of moving into a lower tax bracket jet

less valuable

Whenever a new product competes against a company's already existing products

negative side effects

As the director of capital budgeting for Denver Corporation, two mutually exclusive projects

neither project

Model is usually considered the best of the capital budgeting

net present value (NPV)

A firm is considering a project which would increase accounts receivables by $10,000

net working capital has decreased

Involve(s) a cash flow that never occurs, but we need to add it as a cost or outflow

opportunity costs

If the cost of capital for this project is 10 percent, what is its NPV?

-$1,544

Your company is considering investing in a new system that will cost $160,000. What is the total cash outflow in year 0.

$225,000

Bush Boomerang, Inc., is considering a new three year expansion project that requires an initial fixed asset investment of $2.1 million. The fixed asset will be depreciated straight-line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate $1,900,000 in annual sales, with costs of $850,000. If the tax rate is 35%, what is the OCF for this project?

$0.9275 m

Assume that a firm takes on a project that requires initial investments in year zero of $20,000. Also assume that the project produce his cash inflows of $1,800 in all future years ( a perpetuity). if the required rate of return for this project is 6 percent, and what is the net present value for this project?

$10,000

A firm has revenue of $50,000, the cost of goods sold is $23,000, other expenses ( selling as Administration (are $14,000 and depreciation is $5,000. The Firm tax rate is 33%. What is the operating cash flow?

$10,360

Your company has invested 5 million in R&D on self-driving car technology. As a consequence of the investment, you acquired a patent on the technology. GM Is interested in buying the patent at $7 million. Instead, you decide to use the existing idle facility to manufacture self-driving cars based on the technology. The facility is fully depreciated and has a book value of $0. The market value of the facility is 3 million. It will cost 2 million to refurbish the facility to start production. What is the initial cash flow of the self-driving car manufacturing projects that year 0?

$12 million cash outflow

Company XYZ is evaluating a project and here is some information for the project. What is EBIT for the project in the first year

$2,000

What is EBIT for the project in the first year?

$2,000

A project for The Ultimate recreational tennis racket, guaranteed to correct that wimpy backhand. What is EBIT for the project in the first year?

$20,000

A project for the ultimate recreational tennis racket, guaranteeing to correct that went a backhand. The project has a three-year life. You estimate the revenue for the next three years are as follows: $400,000 in your 1, $500,000 in year 2, and $530,000 in year 3. The cash expenses are expected to be $325,000 in Year 1, 380 $1,250 in year 2, and $398,125 in your 3. The project requires an initial investment of $165,000, which is appreciated straight-line 0 over the three-year Project Life. The actual market value of the initial Investments at the end of year 3 is $35,000.Initial net working capital Investments as $75,000 per month to see you (at year 0) and NWC will maintain an equal level to 20% of sales each year thereafter. The tax rate is 34% and the required return on the project is 10%.

$20,000

What is the operating cash flow in year 1?

$20,000

What is the net effect on a firm's working capital if a new project requires: $30,000 increase in inventory, $10,000 increase in accounts receivable, $35,000 increase in machinery, and a $20,000 increase in accounts payable?

$20,000 increase in NWC

An investment opportunity in year 3 is forecast to create revenue of $120,000 and cost of goods sold 40% of revenue. SG&A is expected to be $30,000. Depreciation will be $15,000. Tax rate is 40%. Working capital will be increased by $30,000 during year 3. What is net cash flow projected for year 3?

$21,200

Assume your firm has an unused machine that originally cost $75,000, has a book value of $20,000, and is currently worth $25,000. Ignoring taxes, the correct opportunity cost for this machine Capital budgeting decisions is:

$25,000

Your company is considering an expansion into a new product area. The company has collected the following information about the proposed product. What is the total cash flow in year 5?

$260,000

Our company is considering investing in a new system that will cost $160,000. In addition, it costs $40,000 to adapt the system to be compatible with existing IT infrastructure and operational. It is estimated that the system will increase sales/revenues by $150,000 annually for Years 1-6. Operating expenses, other than depreciation, are expected to be equal to 60 percent of sales in each year. The system will be depreciated on a MACRS basis over 6 years (20% in year 1, 32% in year 2, 19.20% in year 3, 11.52% in year 4, 11.52% in year 5, and 5.76% in year 6) What is the after tax salvage value at the end of year 5.

$28,608

Your company is faced with an investment project. The following information is associated with this project: The project involves an initial investment of $300,000 in equipment that falls in the 3-year MACRS class and has an estimated salvage value (after-tax) of $45,000. In addition, the company expects an initial increase in net operating working capital of $25,000 that will be recovered in year 4. The costs of capital for the percent. Determine the project's net present value.

$295,574.29

Anthony, Ltd. purchases a duplicating machine for $15,000

$3,535.36

Your company is considering an expansion into a new product area. The company has collected the following information about the proposed product. (Note: You may or may not need to use all of this information, use only the information that is relevant.) What is the operating cash flow in year 2 (T=2)?

$330,000

Your company is considering an expansion into a new product area. The company has collected the following information about the proposed product. What is the operating cash flow in your two (T=2)

$330,000

Winnebagel Corp. currently sells 20,000 motor homes per year at $45,000 each, and 8,000 luxury motor coaches per year at $78,000 each. The company wants to introduce a new portable camper to fill out its product line; it hopes to sell 16,000 of these campers per year at $12,000 each. An independent consultant has determined that if Winnebagel introduces the new campers, it should boost the sales of its existing motor homes by 5,000 units per year, and reduce the sales of its motor coaches by 1,000 units per year. What is the amount to use as the annual sales figure when evaluating this project? Why?

$339 million

Depreciable assets were purchased for $70,000 5 years ago. Accumulated depreciation is $37,000. The asset is sold for $40,000. If the company faces a 40% tax rate, how much total net after-tax cash will the sale of these assets generate?

$37,200

The revenue is $24,000, the cost of goods sold is $12,000

$4,000

The revenue is $24,000, the cost of goods sold is $12,000, other expenses (from selling and administration) are $6,000, and depreciation is $2,000. What is the EBIT?

$4,000

What is the npv of the following set of cash flows if the required rate of return is 15%. Year 0: -$10,000, year 1: -$1000, year 2: $10,000, year 3 $10,000, year 4 -$5,000

$408.27

Eastern Inc. Purchases a machine for $70,000. This machine qualifies as a five-year recovery asset under MARCS with the fixed depreciation percentage as follows: year 1 = 20.00%; year 2 = 32.00%; year 3 = 19.20%; year 4 = 11.52%. The firm has a tax rate of 40%. If the machine is sold at the end of 2 years for $50,000, what does the cash flow from disposal?

$43,440

The project has a payback period of 1.5 years. The firm's cost of capital is 10 percent. Determine the project's NPV?

$6.12

Your company is considering an expansion into a new product area. The company has collected the following information about the proposed product. What is the total cash flow in year 0 (T=0)

$770,000 cash outflow

What is the net present value of an investment with the initial cost of $50,000, and cash inflows at the end of years 1, 2 and 3 of $20,000, $35,000 and $40,000, respectively. The required return is 25%. Is this an investment that would go in the acceptable group to the evaluating company, or not or do not know? What is the best answer?

$8,880; it would be acceptable as it is expected to create shareholder value

The BBM Corp. is considering the expansion into the production of Wuk, a revolutionary new product. The firm has forecasted the following Information with the expansion and without. The firm is in the 35% marginal tax bracket

$8.3 Million

What is the operating cash flows for the project in year 2?

$9,708

Company XYZ is evaluating a project and here is some information for the project. The unit sales price is projected to be $40 and sales volume to be 1,000 units in year 1, 1250 units in year 2, and 1325 units in year 3. The project has a 3 year life. Variable costs amount to $22.5 per unit and fixed costs are $10,000 per year. The project requires an initial investment of $16,500, which is depreciated straight-line to zero over the three-year project life. The actual market value of the initial investment at the end of the year three is $3,500. Initial net working capital investment of $7,500 and NWC will maintain a level equal to 20% of sales each year thereafter. The tax rate is 34% and the required return on the project is 10%. Given the $7,500 initial investment and NWC, what change occurs for NWC during year 2?

$9.70

A project for The Ultimate recreational tennis racket, guaranteed to correct that wimpy backhand. What is the operating cash flow for the project in year 2?

$97,075

Company XYZ is evaluating a project and here is some information for the project. The unit sales price is projected to be $40 and sales volume to be 1,000 units in year 1, 1,250 units in year 2, and 1,325 units in year 3. The project Has a three year life. Variable cost to $22.5 per hour and fixed costs are $10,000 per year. The project requires an initial investment of $16,500 which is depreciated Street line 20 over the three year project life. The actual market value of the initial investment at the end of year three is $3500. Initial net working capital investment of $7500 and NWC will maintain a level equal to 20% of sales each year there after. The tax rate is 34% and the required return on the project is 10%. What is the operating cash flow for the project in year two?

$9708

You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck. The truck's base price is $50,000, and it will cost another $10,000 to modify it for special use by your firm. The truck falls in the MACRS 3-year class, and it will be sold after three years for $20,000. Use of the truck will require an increase in net operating working capital (spare parts inventory) of $2,000. The truck will have no effect on revenues, but it is expected to save the firm $20,000 per year in before-tax operating costs, mainly labo. The firm's marginal tax rate is 40 percent. The three-year MACRS schedule is as follows Year percentage 1 33.3333% 2 44.4444% 3 14.8149% 4 7.4074% If the cost of capital for this project is 10 percent. What is its NPV?

-$1,544

You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck. The three year MACRS schedule is as follows.

-$62,000

For the cash flows in the previous problem, what is the NPV at a discount rate of zero percent? What if the discount rate is 10%? If it is 20%? If it is 30%?

0%= 2500 10%= 1277.99 20%= 386.57 30%= -283.57

The profitability index for a project costing $40,000 and returning $15,000 annually for 4 years at an opportunity cost of capital of 12% is:

0.139

Which of the following calculations ignores the impact of the time value of money? 1. Payback 2. IRR 3. Profitability index

1 only

Your assistant has estimated the cash flows of a new proposed four-year project as follows:

10%

What Is The IRR Of An Investment That Costs $18,500 And Pays $5,250 A Year For 5 Years?

12.92%

For the cash flows below, what is the NPV at a discount rate of 0%? Round your answer to the nearest dollar.

2,500

For the cash flows below, what is the NPV play discount rate of zero percent?

2,500

The Seattle corporation has been presented with an investment opportunity which will yield cash flows

4.86 years

You have been asked by the president of your company to evaluate the proposed acquisition of a new special-purpose truck. The truck's base price is $50,000, and it will cost another $10,000 to modify it for special use by your firm. The truck falls in the MACRS 3-year class, and it will be sold after three years for $20,000. Use of the truck will require an increase in net operating working capital (spare parts inventory) of $2,000. The truck will have no effect on revenues, but it is expected to save the firm $20,000 per year in before-tax operating costs, mainly labo. The firm's marginal tax rate is 40 percent. The three-year MACRS schedule is as follows Year percentage 1 33.3333% 2 44.4444% 3 14.8149% 4 7.4074% What is the operating cash flow in year 1?

20,000

An investment with a cost of $5,000 is expected to have cash inflows of $3,000 in year 1, and $4,000 in year 2. The internal rate of return (IRR) for this investment is closest to:

24%

What is the IRR of the following set of cash flows? round your answer to the nearest basis point, or hundreds of percent.

25.43

Your company is considering Investing in a new system that will cost $160,000. What is the after-tax salvage value at the end of year 5?

28,480

Anthony, Ltd. purchases a duplicating machine for $15,000. This machine qualifies as a five-year recovery asset under MACRS. The company has a tax rate of 33%. If the company sells the machine at the end of four years for $4,000, what is the cash flow from disposal?

3,535.36

A project costs $100 and has cash flows of $40 per year for the next seven years. If the discount rate is 15%, what is the discounted payback period?

3.38 years

What is the payback period for an investment with these cash flows: YR 0, -60,000; YR1, 10,000; YR2, 20,000; YR 3, 15,000; YR 4, 20,000; YR 5, 15,000?

3.75 years

Lane Industries has a project with the following cash flows: The Project's cost of capital is 12%. The discounted payback period is closest to:

3.9 years

Your company is considering two mutually exclusive projects. The projects have the following cash flows: if the cost of capital for both of these projects it's 10%, and what is the IRR for the project that has a higher NPV?

31.92 %

Your company is considering two mutually exclusive projects. The projects have the following cash flows: If the cost of capital for both of these projects is 10%, then what is the IRR for the project that has the higher NPV?

31.92%

Grady Precision Measurement has forecasted the following sales and costs for a new GPS system: annual sales of 48,000 units at $18 a unit, production costs at 37% of sales price, annual fixed costs for production at $180,000, and straight-line depreciation expense of $240,000 per year. The company tax rate is 35%. What is the annual operating cash flow of the new GPS system? Round your answer to the nearest dollar.

320,808

Bush Boomerang, Inc., is considering a new three-year Expansion Project that requires the initial fixed asset investment of $2.1 million. The fixed asset will be depreciated straight line to zero over its three-year tax life, after which time it will be worthless. The project is estimated to generate 1900000 dollars in annual sales, with costs of $850,000. If the tax rate is 35%, what is the OCF for this product?

927,500

Kong Petroleum, Inc. is trying to evaluate a generator project with the following cash flows: a. If the company requires a 10% return on its investments, should it accept this project? Why? b. Compute the IRR for this project. How many IRRs are there? If you apply the IRR decision rule, should you accept the project or not? What's going on here?

A. NPV > 0 so accept the project B. IRR = 72.75%, -83.46% When there are multiple IRRs, the IRR decision rule is ambiguous; in this case, if the correct IRR is 72.75%, then we would accept the project, but if the correct IRR is -83.46%, we would reject the project.

A firm is evaluating two mutually exclusive projects of the same risk class, project x and project Y. Both have the same initial cash outlay and both have positive NPV's. Which of the following is a sufficient reason to choose project X over project Y. Project Y has a lower profitability index than project X. Jack smith, CFA, is analyzing independent investment projects X and Y. Smith has calculated the net present value (NPV) and internal Rate ( IRR ) for each project: Project X: NPV= $250; IRR=15% Project Y: NPV=$5,000; IRR=8%

Accept both projects

A firm is considering purchasing two assets.

Asset A has $30,000 more in depreciation per year

A firm is considering purchasing two assets. Asset A will have a useful life of fifteen years and cost $3 million. It will have installation costs of $400,000, but no salvage or residual value. Asset B will have a useful life of six years and cost $1.3 million. It will have installation costs of $180,000 and a salvage or residual value of $300,000. Which asset will have a greater annual straight-line depreciation?

Asset A has $30,000 more in depreciation per year

The sunnyside corporation has calculated the following information for the projects Y and Z: Both projects have conventional cash flow patterns. Which of the following must be true?

Both projects IRR are higher than 16%

Sunny side corporation has calculated the following information for the projects Y and Z: Initial costs for both are 125,000. NPV at 16% for project Y is 15,000. NPV at 16% for project Z is 18,500.

Both projects have IRR are higher than 16%

Which of the following statements regarding the internal rate of return (IRR) is most accurate?

Both statements B and C are correct

___________ is at the heart of corporate finance because it is concerned with making the best choices about project selection

Capital budgeting

Financing costs for a capital project are

Captured in the projects required rate of return

Which of the statements below is false:

Cash flow is an accounting measure of performance during a specific period of time

One of the basic principles of capital budgeting is that:

Decisions are based on cash flows not accounting income

The NPV profile is a graphical representation of the change in net present value relative to a change in the

Discount rate

Dweller, Inc. is considering a four-year project that has an initial after-tax outlay or after-tax cost of $80,000. The future after-tax cash inflows from its project are $40,000, $40,000, $30,000, and $30,000 for years one, two, three, and four, respectively. Dweller uses the NPV method and has a discount rate of 12%. Will Dweller accept the project?

Dweller accepts the project because the NPV is greater than $28,000

Dweller, Inc. is considering a four-year project that has an initial after-tax outlay, or after-tax cost of $80,000

Dweller accepts the project because the NPV is greater than $28,000

Edelman Engineering is considering including an overhead pulley system in this year's capital budget. The cash outlay for the pulley system is $22,430. The firm's cost of capital is 14%. After-tax cash flows are $7,500 for each of the next 5 years. Calculate the internal rate of return (IRR) and the net present value (NPV) for the project, and indicate the correct accept/ reject decision.

NPV= $3,318; IRR= 20%; Accept

A company is considering the purchase of a copier that costs $5,000. Assume a cost of capital of 10 percent and the following cash flow schedule. Year 1:$3000 year 2:$2000 year 3: $2000

NPV=$883 and IRR= 20.6%

A proposed new investment has projected sales of $700,000. Variable costs are 60 percent of sales, and fixed costs are $175,000; depreciation is $75,000. Prepare a pro forma income statement assuming a tax rate of 35 percent. What is the projected net income?

Net income $ 19,500

Which of the following is not accurate in depicting cash flows from operations?

Net profit + depreciation + tax paid

A firm is considering a project which would increase accounts receivable by $10,000, accounts payable by $55,000, and inventory by $30,000. Which of the following is true?

Net working capital has decreased

Which of the following changes would be likely to increase the NPV of a project.?

None of the above

Your company is considering investing in a new system that will cost $160,000. In addition, it costs $40,000 to adapt the system to be compatible with existing IT infrastructure and operational. It is estimated that the system will increase sales/revenues by $150,000 annually for Years 1-6. Operating expenses, other than depreciation, are expected to be equal to 60 percent of sales in each year. The system will be depreciated on a MACRS basis over 6 years (20% in year 1, 32% in year 2, 19.20% in year 3, 11.52% in year 4, 11.52% in year 5, and 5.76% in year 6) what is depreciation expense in year 2?

None of the above

___________ involve(s) a cash flow that never occurs, but we need to add it as a cost or outflow of a new project

Opportunity costs

A company is considering the purchase of a copier that costs $5,000. Assume a cost of capital of 10 percent and the following cash flow schedule: Year 1: $3,000 Year 2: $2,000 Year 3: $2,000 Determining the project's payback period and discounted payback period.

Payback period = 2.0 years; discounted payback period = 2.4 years

Allocations of overhead should not affect a projects incremental cash flows unless the

Projects actually increase overhead expenses

New projects or products can have an indirect effect on the firm as well as a direct effect. Which of the following appears to be an indirect effect of launching a new product?

Sales of a similar product of your firm's will decline

A project for The Ultimate recreational tennis racket, guaranteed to correct that wimpy backhand. What is the effect of the $35,000 salvage value on year 2 cash flows:

Salvage value does not affect incremental cash flow until year 3.

Which of the following statements about depreciation is false?

Since depreciation is a non-cash expense, The Firm does not need to know the rate of depreciation when calculating operating cash flows

Ashlyn Lutz makes the following statements to her supervisor, Paul Ulring, regarding the basic principles of capital budgeting: Statement 1: The timing of expected cash flows is crucial for determining the profitability of a capital budgeting project. Statement 2: Capital budgeting decisions should be based on the after-tax net income produced by the capital project. Which of the following regarding Lutz's statements is most accurate?

Statement 1 is correct and statement 2 is incorrect

Pags Industrial Systems Company is trying to decide between two different conveyor belt systems

System A because it has the more positive NPV

Which of the following statements about the payback period is not correct?

The payback method considers all cash flows throughout the entire life of a project if the cutoff year is shorter than the project life

Your firm disposes of an asset which is worthless in the open market, but still has remaining undepreciated book value. The tax benefit to the firm from the writeoff of this asset is equal to

The tax rate multiplied by the remaining book value

A project for the ultimate recreational tennis racket, guaranteed so correct that when he backhand. I'm giving the $75,000 initial investment in NWC, what change occurs for NWC during year 1?

There is a $5,000 increase in NWC

Company XYZ is evaluating a project and here is some information for the project. The unit sales price is projected to be $40 and sales volume to be 1,000 units in year 1, 1250 units in year 2, and 1325 units in year 3. The project has a 3 year life. Variable costs amount to $22.5 per unit and fixed costs are $10,000 per year. The project requires an initial investment of $16,500, which is depreciated straight-line to zero over the three-year project life. The actual market value of the initial investment at the end of the year three is $3,500. Initial net working capital investment of $7,500 and NWC will maintain a level equal to 20% of sales each year thereafter. The tax rate is 34% and the required return on the project is 10%. Given the $7,500 initial investment and NWC, what change occurs for NWC during year 1?

There is a $500 increase in NWC

The accelerated depreciation of capital investments in MACRS depreciation provides a taxable expense that reduces taxes at a faster rate than with straight-line depreciation. Therefore, according to_____ concepts, we can surmise that lower tax expenses in the earlier years and higher tax expenses in the later years are better than a steady tax expense each year a

Time value of money

Simpson, Inc. is considering a five-year project that has an initial after-tax outlay or after-tax cost of $48,000. The respective future cash inflows from its project for years 1, 2, 3, 4 and 5 are: $15,000, $25,000, $35,000, $45,000 and -$70,000 (note that year 5 cash flow is negative). The appropriate discount rate for this project is 9%. Should Simpson accept the project?

Yes because the NPV is positive

Tapley Acquisition, Inc., is considering the purchase of Tangent Company. The acquisition would require an initial investment of $190,000, but Tapley's after text net cash flows would increase by $30,000 per year and remain at this new level forever. Assume a cost of capital of 15%. Should Tapley by Tangent?

Yes, because the NPV = $10,000

Bumble's Bees, Inc., has identified the following two mutually exclusive projects: A. What is the IRR for each of these projects? If you apply the IRR decision rule, which project should the company accept? Is this decision necessarily correct? B. If the required return is 11%, what is the NPV for each of these projects? Which project will you choose if you apply the NPV decision rule? C. Over what range of discount rates would you choose Project A? Project B? At what discount rate would you be indifferent between these two projects? Explain

a. IRRa= 15.86% IRRb= 14.69% IRRA > IRRB, so IRR decision rule implies accepting project A. This may not be a correct decision; however, because the IRR criterion has a ranking problem for mutually exclusive projects. To see if the IRR decision rule is correct or not, we need to evaluate the project NPVs. b. NPVa= 1,520.71 NPVb= 1,698.58 NPVB > NPVA, so NPV decision rule implies accepting project B. At discount rates above 12.18% choose project A; for discount rates below 12.18% choose project B; indifferent between A and B at a discount rate of 12.18%.

Consider the following four-year project. The initial outlay or cost is $180,000

about 2.427 years

Assume a project has normal cash flows

all else equal, a project's NPV increases as the cost of capital declines

Normal projects C and D are mutually exclusive. Project C has a higher

all of the above

Which of the statements below is true?

an increase in working capital can be brought about by an increase in inventory or accounts receivable

The discounted payback rule can be best stated as

an investment is acceptable if its discounted payback period is less than some prespecified number of years

In capital budgeting analysis, an increase in working capital can be shown as

an outflow at the beginning and an equal inflow at the end of the project

A company is considering a new project. The company's CFO plans to calculate the project's NPV

any opportunity costs associated with the project

Firms that make investment decisions based on the payack rule may be biased toward rejecting projects with

both b and c

Apple Industries, a firm with unlimited funds, Is evaluating five projects. Project A and B are independent and projects C, D, and E are mutually exclusive. The projects are listed with their rate of return and npv. Assume that the applicable discount rate is 10%.

project A, project B, and project C

Project selection ambiguity can arise if one relies on IRR instead of NPV when

project cash flows are not conventional

What is the effect of the $3,500 salvage value on year 2?

salvage value does not affect incremental cash flow until year 3

The CFO of Axis Manufacturing is evaluating the introduction of a new product. The costs of a recently completed marketing study for the new product and the possible increase in the sales of a related product made by Axis are best described (respectively) as:

sunk costs; positive side effect

If we know the _____ and the EBIT. The building of the project's ____

tax rate, incremental

St. John's Paper is considering purchasing equipment today that has a depreciable cost of $1 million

the company would have to pay $44,000 in taxes

Which of the statements below is false?

the discounted payback period methods is the time it takes to recover the initial investment in future dollars

Your firm disposes of an asset which is worthless in the open market

the tax rate multiplied by the remaining book value

Given the $7,500 initial investment in NWC

there is a $500 increase in NWC