Quiz 2 MAS

Which one of the following creates a tax shield? a. dividend payment b. increase in accounts payable c. decrease in inventory d. noncash expense e. sunk cost

d

23. A project has a discounted payback period that is equal to the required payback period. Given this, which of the following statements must be true? I. The project must also be acceptable under the payback rule. II. The project must have a profitability index that is equal to or greater than 1.0. III. The project must have a zero net present value. IV. The project's internal rate of return must equal the required return. A. I only B. I and II only C. II and III only D. I, III, and IV only E. I, II, III, and IV Refer to section 9.3

B

A group of individuals got together and purchased all of the outstanding shares of common stock of DL Smith, Inc. What is the return that these individuals require on this investment called? A. dividend yield B. cost of equity C. capital gains yield D. cost of capital E. income return

B

All of the following are related to a proposed project. Which should be included in the cash flow at time zero? I. initial inventory increase of $2,500 II. loan of $125,000 to commence a project III. depreciation tax shield of $1,100 IV. initial purchase of $6,500 of fixed assets a. I and II only b. I and IV only c. II and IV only d. I, II, and IV only e. I, II, III, and IV

B

If a project has a net present value equal to zero, then: A. the total of the cash inflows must equal the initial cost of the project. B. the project earns a return exactly equal to the discount rate. C. a decrease in the project's initial cost will cause the project to have a negative NPV. D. any delay in receiving the projected cash inflows will cause the project to have a positive NPV. E. the project's PI must be also be equal to zero.

B

A project has a required payback period of three years. Which one of the following statements is correct concerning the payback analysis of this project? A. The cash flows in each of the three years must exceed one-third of the project's initial cost if the project is to be accepted. B. The cash flow in year three is ignored. C. The project's cash flow in year three is discounted by a factor of (1 + R)3. D. The cash flow in year two is valued just as highly as the cash flow in year one. E. The project is acceptable whenever the payback period exceeds three years.

D

A project with financing type cash flows is typified by a project that has which one of the following characteristics? A. conventional cash flows B. cash flows that extend beyond the acceptable payback period C. a year or more in the middle of a project where the cash flows are equal to zero D. a cash inflow at time zero E. cash inflows which are equal in amount

D

Changes in the net working capital: A. can affect the cash flows of a project every year of the project's life. b. only affect the initial cash flows of a project. c. are included in project analysis only if they represent cash outflows. d. are generally excluded from project analysis due to their irrelevance to the total project. e. affect the initial and the final cash flows of a project but not the cash flows of the middle years.

D

Kristi wants to start training her most junior assistant, Amy, in the art of project analysis. Amy has just started college and has no experience or background in business finance. To get her started, Kristi is going to assign the responsibility for all projects that have initial costs less than $1,000 to Amy to analyze. Which method is Kristi most apt to ask Amy to use in making her initial decisions? A. discounted payback B. profitability index C. internal rate of return D. payback E. average accounting return

D

The final decision on which one of two mutually exclusive projects to accept ultimately depends upon which one of the following? A. initial cost of each project B. timing of the cash inflows C. total cash inflows of each project D. required rate of return E. length of each project's life

D

The present value of an investment's future cash flows divided by the initial cost of the investment is called the: A. net present value. B. internal rate of return. C. average accounting return. D. profitability index. E. profile period.

D

The profitability index is most closely related to which one of the following? A. payback B. discounted payback C. average accounting return D. net present value E. modified internal rate of return

D

Which of the following are considered weaknesses in the average accounting return method of project analysis? I. exclusion of time value of money considerations II. need of a cutoff rate III. easily obtainable information for computation IV. based on accounting values A. I only B. I and IV only C. II and III only D. I, II, and IV only E. I, II, III, and IV Refer to section 9.4

D

Which of the following should be included in the analysis of a project? I. sunk costs II. opportunity costs III. erosion costs IV. noncash expenses a. I and II only b. III and IV only c. II and III only D. II, III, and IV only e. I, II, and IV only

D

There are two distinct discount rates at which a particular project will have a zero net present value. In this situation, the project is said to: A. have two net present value profiles. B. have operational ambiguity. C. create a mutually exclusive investment decision. D. produce multiple economies of scale. E. have multiple rates of return.

E

The cash flows of a project should: a. be computed on a pre-tax basis. b. include all sunk costs and opportunity costs. c. include the effects of erosion. d. be included in the year when the related expense or income is recognized by GAAP. e. include all financing costs related to the project.

c

The cash flows of a project should exclude the incremental changes in which one of the following accounts? a. taxes b. accounts payable c. fixed assets d. long-term debt e. depreciation

d

The operating cash flows for a cost reduction project: a. cannot be computed since there is no incremental sales revenue. b. will equal zero because there will be no incremental sales. c. can only be analyzed if all the sales and expenses of a firm are considered. d. must consider the depreciation tax shield. e. will always be negative values.

d

25. Which one of the following statements is correct for a firm that uses debt in its capital structure? A. The WACC should decrease as the firm's debt-equity ratio increases. B. When computing the WACC, the weight assigned to the preferred stock is based on the coupon rate multiplied by the par value of the preferred. C. The firm's WACC will decrease as the corporate tax rate decreases. D. The weight of the common stock used in the computation of the WACC is based on the number of shares outstanding multiplied by the book value per share. E. The WACC will remain constant unless a firm retires some of its debt.

A

Applying the discounted payback decision rule to all projects may cause: A. some positive net present value projects to be rejected. B. the most liquid projects to be rejected in favor of the less liquid projects. C. projects to be incorrectly accepted due to ignoring the time value of money. D. a firm to become more long-term focused. E. some projects to be accepted which would otherwise be rejected under the payback rule.

A

Assigning discount rates to individual projects based on the risk level of each project: A. may cause the firm's overall weighted average cost of capital to either increase or decrease over time. B. will prevent the firm's overall cost of capital from changing over time. C. will cause the firm's overall cost of capital to decrease over time. D. decreases the value of the firm over time. E. negates the firm's goal of creating the most value for the shareholders.

A

Net present value: A. is the best method of analyzing mutually exclusive projects. B. is less useful than the internal rate of return when comparing different sized projects. C. is the easiest method of evaluation for non-financial managers to use. D. is less useful than the profitability index when comparing mutually exclusive projects. E. is very similar in its methodology to the average accounting return.

A

The changes in a firm's future cash flows that are a direct consequence of accepting a project are called _____ cash flows. a. incremental b. stand-alone c. after-tax d. net present value e. erosion

A

The cost of preferred stock: A. is equal to the dividend yield. B. is equal to the yield to maturity. C. is highly dependent on the dividend growth rate. D. is independent of the stock's price. E. decreases when tax rates increase.

A

The dividend growth model: A. is only as reliable as the estimated rate of growth. B. can only be used if historical dividend information is available. C. considers the risk that future dividends may vary from their estimated values. D. applies only when a firm is currently paying dividends. E. uses beta to measure the systematic risk of a firm.

A

The pre-tax cost of debt: A. is based on the current yield to maturity of the firm's outstanding bonds. B. is equal to the coupon rate on the latest bonds issued by a firm. C. is equivalent to the average current yield on all of a firm's outstanding bonds. D. is based on the original yield to maturity on the latest bonds issued by a firm. E. has to be estimated as it cannot be directly observed in the market.

A

Which of the following are definite indicators of an accept decision for an independent project with conventional cash flows? I. positive net present value II. profitability index greater than zero III. internal rate of return greater than the required rate IV. positive internal rate of return A. I and III only B. II and IV only C. I, II, and III only D. II, III, and IV only E. I, II, III, and IV

A

Which one of the following is an advantage of the average accounting return method of analysis? A. easy availability of information needed for the computation B. inclusion of time value of money considerations C. the use of a cutoff rate as a benchmark D. the use of pre-tax income in the computation E. use of real, versus nominal, average income

A

Which one of the following methods determines the amount of the change a proposed project will have on the value of a firm? A. net present value B. discounted payback C. internal rate of return D. profitability index E. payback

A

Roger's Meat Market is considering two independent projects. The profitability index decision rule indicates that both projects should be accepted. This result most likely does which one of the following? A. conflicts with the results of the net present value decision rule B. assumes the firm has sufficient funds to undertake both projects C. agrees with the decision that would also apply if the projects were mutually exclusive D. bases the accept/reject decision on the same variables as the average accounting return E. fails to provide useful information as the firm must reject at least one of the projects

B

Rossiter Restaurants is analyzing a project that requires $180,000 of fixed assets. When the project ends, those assets are expected to have an aftertax salvage value of $45,000. How is the $45,000 salvage value handled when computing the net present value of the project? A. reduction in the cash outflow at time zero B. cash inflow in the final year of the project C. cash inflow for the year following the final year of the project D. cash inflow prorated over the life of the project E. not included in the net present value

B

The aftertax cost of debt generally increases when: I. a firm's bond rating increases. II. the market rate of interest increases. III. tax rates decrease. IV. bond prices rise. A. I and III only B. II and III only C. I, II, and III only D. II, III, and IV only E. I, II, III, and IV

B

The length of time a firm must wait to recoup the money it has invested in a project is called the: A. internal return period. B. payback period. C. profitability period. D. discounted cash period. E. valuation period.

B

The weighted average cost of capital for a firm is the: A. discount rate which the firm should apply to all of the projects it undertakes. B. rate of return a firm must earn on its existing assets to maintain the current value of its stock. C. coupon rate the firm should expect to pay on its next bond issue. D. minimum discount rate the firm should require on any new project. E. rate of return shareholders should expect to earn on their investment in this firm.

B

When a manager develops a cost of capital for a specific project based on the cost of capital for another firm which has a similar line of business as the project, the manager is utilizing the _____ approach. A. subjective risk B. pure play C. divisional cost of capital D. capital adjustment E. security market line

B

When the present value of the cash inflows exceeds the initial cost of a project, then the project should be: A. accepted because the internal rate of return is positive. B. accepted because the profitability index is greater than 1. C. accepted because the profitability index is negative. D. rejected because the internal rate of return is negative. E. rejected because the net present value is negative.

B

Which one of the following statements is correct in relation to independent projects? A. The internal rate of return cannot be used to determine the acceptability of a project that has financing type cash flows. B. A project with investing type cash flows is acceptable if its internal rate of return exceeds the required return. C. A project with financing type cash flows is acceptable if its internal rate of return exceeds the required return. D. The net present value profile is upsloping for projects with both investing and financing type cash flows. E. Projects with financing type cash flows are acceptable only when the internal rate of return is negative.

B

Which one of the following statements is correct? A. The subjective approach assesses the risks of each project and assigns an adjustment factor that is unique just for that project. B. Overall, a firm makes better decisions when it uses the subjective approach than when it uses its WACC as the discount rate for all projects. C. Firms will correctly accept or reject every project if they adopt the subjective approach. D. Mandatory projects should only be accepted if they produce a positive NPV when the firm's WACC is used as the discount rate. E. The pure play approach should only be used with low-risk projects.

B

A firm's overall cost of equity is: A. is generally less that the firm's WACC given a leveraged firm. B. unaffected by changes in the market risk premium. C. highly dependent upon the growth rate and risk level of the firm. D. generally less than the firm's aftertax cost of debt. E. inversely related to changes in the firm's tax rate.

C

A project's average net income divided by its average book value is referred to as the project's average: A. net present value. B. internal rate of return. C. accounting return. D. profitability index. E. payback period.

C

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: A. independent. B. interdependent. C. mutually exclusive. D. economically scaled. E. operationally distinct.

C

In actual practice, managers frequently use the: I. average accounting return method because the information is so readily available. II. internal rate of return because the results are easy to communicate and understand. III. discounted payback because of its simplicity. IV. net present value because it is considered by many to be the best method of analysis. A. I and III only B. II and III only C. I, II, and IV only D. II, III, and IV only E. I, II, III, and IV

C

Lester's Dairy gathers and processes cow's milk for distribution to retail outlets. Lester's is currently considering processing goat's milk as well. Which one of the following is most apt to be an incremental cash flow related to the goat milk project? a. processing the goat's milk in the same building as the cow's milk b. utilizing the same pasteurizing equipment to process both kinds of milk c. purchasing additional milk jugs to handle the increased volume of milk d. researching the market to ascertain if goat milk sales might be profitable before deciding to proceed e. reducing the projected interest expense by assuming the proceeds of the goat milk sales will reduce the outstanding debt

C

Phil's is a sit-down restaurant that specializes in home-cooked meals. Theresa's is a walk-in deli that specializes in specialty soups and sandwiches. Both firms are currently considering expanding their operations during the summer months by offering pre-wrapped donuts, sandwiches, and wraps at a local beach. Phil's currently has a WACC of 14 percent while Theresa's WACC is 10 percent. The expansion project has a projected net present value of $12,600 at a 10 percent discount rate and a net present value of -$2,080 at a 14 percent discount rate. Which firm or firms should expand and offer food at the local beach during the summer months? A. Phil's only B. Theresa's only C. both Phil's and Theresa's D. neither Phil's nor Theresa's E. cannot be determined from the information provided

C

Russell's of Westerfield is a furniture store which is considering offering carpet for sale. Which of the following should be considered incremental cash flows of theproject? I. utilizing the credit offered by a carpet supplier to build an initial inventory II. granting credit to a customer so she can purchase carpet and pay for it at a later date III. borrowing money from a bank to fund the carpet project IV. purchasing carpet to hold in inventory a. I and II only b. III and IV only c. I, II, and IV only d. II, III, and IV only e. I, II, III, and IV

C

Textile Mills borrows money at a rate of 13.5 percent. This interest rate is referred to as the: A. compound rate. B. current yield. C. cost of debt. D. capital gains yield. E. cost of capital.

C

The cost of equity for a firm: A. tends to remain static for firms with increasing levels of risk. B. increases as the unsystematic risk of the firm increases. C. ignores the firm's risks when that cost is based on the dividend growth model. D. equals the risk-free rate plus the market risk premium. E. equals the firm's pretax weighted average cost of capital.

C

The internal rate of return is: A. the discount rate that makes the net present value of a project equal to the initial cash outlay. B. equivalent to the discount rate that makes the net present value equal to one. C. tedious to compute without the use of either a financial calculator or a computer. D. highly dependent upon the current interest rates offered in the marketplace. E. a better methodology than net present value when dealing with unconventional cash flows.

C

The subjective approach to project analysis: A. is used only when a firm has an all-equity capital structure. B. uses the WACC of firm X as the basis for the discount rate for a project under consideration by firm Y. C. assigns discount rates to projects based on the discretion of the senior managers of a firm. D. allows managers to randomly adjust the discount rate assigned to a project once the project's beta has been determined. E. applies a lower discount rate to projects that are financed totally with equity as compared to those that are partially financed with debt.

C

Which one of the following statements is correct? A. Firms should accept low risk projects prior to funding high risk projects. B. Making subjective adjustments to a firm's WACC when determining project discount rates unfairly punishes low-risk divisions within a firm. C. A project that is unacceptable today might be acceptable tomorrow given a change in market returns. D. The pure play method is most frequently used for projects involving the expansion of a firm's current operations. E. Firms that elect to use the pure play method for determining a discount rate for a project cannot subjectively adjust the pure play rate.

C

Which one of the following statements related to the SML approach to equity valuation is correct? Assume the firm uses debt in its capital structure. A. This model considers a firm's rate of growth. B. The model applies only to non-dividend paying firms. C. The model is dependent upon a reliable estimate of the market risk premium. D. The model generally produces the same cost of equity as the dividend growth model. E. This approach generally produces a cost of equity that equals the firm's overall cost of capital.

C

Which one of the following statements would generally be considered as accurate given independent projects with conventional cash flows? A. The internal rate of return decision may contradict the net present value decision. B. Business practice dictates that independent projects should have three distinct accept indicators before a project is actually implemented. C. The payback decision rule could override the net present value decision rule should cash availability be limited. D. The profitability index rule cannot be applied in this situation. E. The projects cannot be accepted unless the average accounting return decision ruling is positive.

C

Which two methods of project analysis are the most biased towards short-term projects? A. net present value and internal rate of return B. internal rate of return and profitability index C. payback and discounted payback D. net present value and discounted payback E. discounted payback and profitability index

C

Why is payback often used as the sole method of analyzing a proposed small project? A. Payback considers the time value of money. B. All relevant cash flows are included in the payback analysis. C. It is the only method where the benefits of the analysis outweigh the costs of that analysis. D. Payback is the most desirable of the various financial methods of analysis. E. Payback is focused on the long-term impact of a project.

C

Which of the following statements generally apply to the cash flows of a financing type project? I. nonconventional cash flows II. cash outflows exceed cash inflows prior to any time value adjustments III. cash for services rendered is received prior to the cash that is spent providing the services IV. the total of all cash flows must equal zero on an unadjusted basis A. I only B. I and III only C. II and IV only D. I, II, and III only E. I, II, III, and IV

D

Which one of the following increases the net present value of a project? A. an increase in the required rate of return B. an increase in the initial capital requirement C. a deferment of some cash inflows until a later year D. an increase in the aftertax salvage value of the fixed assets E. a reduction in the final cash inflow

D

Which one of the following will decrease the net present value of a project? A. increasing the value of each of the project's discounted cash inflows B. moving each of the cash inflows forward to a sooner time period C. decreasing the required discount rate D. increasing the project's initial cost at time zero E. increasing the amount of the final cash inflow

D

Wilderness Adventures specializes in back-country tours and resort management. Travel Excitement specializes in making travel reservations and promoting vacation travel. Wilderness Adventures has an aftertax cost of capital of 13 percent and Travel Excitement has an aftertax cost of capital of 11 percent. Both firms are considering building wilderness campgrounds complete with man-made lakes and hiking trails. The estimated net present value of such a project is estimated at $87,000 at a discount rate of 11 percent and -$12,500 at a 13 percent discount rate. Which firm or firms, if either, should accept this project? A. Wilderness Adventures only B. Travel Excitement only C. both Wilderness Adventures and Travel Excitement D. neither Wilderness Adventures nor Travel Excitement E. cannot be determined without further information

D

24. Which one of the following statements related to payback and discounted payback is correct? A. Payback is a better method of analysis than is discounted payback. B. Discounted payback is used more frequently in business than is payback. C. Discounted payback does not require a cutoff point like the payback method does. D. Discounted payback is biased towards long-term projects while payback is biased towards short-term projects. E. Payback is used more frequently even though discounted payback is a better method. Refer to sections 9.2 and 9.3

E

A firm's cost of capital: A. will decrease as the risk level of the firm increases. B. for a specific project is primarily dependent upon the source of the funds used for the project. C. is independent of the firm's capital structure. D. should be applied as the discount rate for any project considered by the firm. E. depends upon how the funds raised are going to be spent.

E

A project has a net present value of zero. Which one of the following best describes this project? A. The project has a zero percent rate of return. B. The project requires no initial cash investment. C. The project has no cash flows. D. The summation of all of the project's cash flows is zero. E. The project's cash inflows equal its cash outflows in current dollar terms.

E

Markley and Stearns is a multi-divisional firm that uses its WACC as the discount rate for all proposed projects. Each division is in a separate line of business and each presents risks unique to those lines. Given this, a division within the firm will tend to: A. receive less project funding if its line of business is riskier than that of the other divisions. B. avoid risky projects so it can receive more project funding. C. become less risky over time based on the projects that are accepted. D. have equal probability of receiving funding as compared to the other divisions. E. prefer higher risk projects over lower risk projects.

E

The aftertax cost of debt: A. varies inversely to changes in market interest rates. B. will generally exceed the cost of equity if the relevant tax rate is zero. C. will generally equal the cost of preferred if the tax rate is zero. D. is unaffected by changes in the market rate of interest. E. has a greater effect on a firm's cost of capital when the debt-equity ratio increases.

E

The average of a firm's cost of equity and aftertax cost of debt that is weighted based on the firm's capital structure is called the: A. reward to risk ratio. B. weighted capital gains rate. C. structured cost of capital. D. subjective cost of capital. E. weighted average cost of capital.

E

The discount rate assigned to an individual project should be based on: A. the firm's weighted average cost of capital. B. the actual sources of funding used for the project. C. an average of the firm's overall cost of capital for the past five years. D. the current risk level of the overall firm. E. the risks associated with the use of the funds required by the project.

E

The dividend growth model can be used to compute the cost of equity for a firm in which of the following situations? I. firms that have a 100 percent retention ratio II. firms that pay a constant dividend III. firms that pay an increasing dividend IV. firms that pay a decreasing dividend A. I and II only B. I and III only C. II and III only D. I, II, and III only E. II, III, and IV only

E

The internal rate of return: A. may produce multiple rates of return when cash flows are conventional. B. is best used when comparing mutually exclusive projects. C. is rarely used in the business world today. D. is principally used to evaluate small dollar projects. E. is easy to understand.

E

The weighted average cost of capital for a firm may be dependent upon the firm's: I. rate of growth. II. debt-equity ratio. III. preferred dividend payment. IV. retention ratio. A. I and III only B. II and IV only C. I, II, and IV only D. I, III, and IV only E. I, II, III, and IV

E

Which of the following statements are correct? I. The SML approach is dependent upon a reliable measure of a firm's unsystematic risk. II. The SML approach can be applied to firms that retain all of their earnings. III. The SML approach assumes a firm's future risks are similar to its past risks. IV. The SML approach assumes the reward-to-risk ratio is constant. A. I and III only B. II and IV only C. III and IV only D. I, II, and III only E. II, III, and IV only

E

Which of the following statements related to the internal rate of return (IRR) are correct? I. The IRR method of analysis can be adapted to handle non-conventional cash flows. II. The IRR that causes the net present value of the differences between two project's cash flows to equal zero is called the crossover rate. III. The IRR tends to be used more than net present value simply because its results are easier to comprehend. IV. Both the timing and the amount of a project's cash flows affect the value of the project's IRR. A. I and II only B. III and IV only C. I, II, and III only D. II, III, and IV only E. I, II, III, and IV

E

Which one of the following correctly applies to the average accounting rate of return? A. It considers the time value of money. B. It measures net income as a percentage of the sales generated by a project. C. It is the best method of analyzing mutually exclusive projects from a financial point of view. D. It is the primary methodology used in analyzing independent projects. E. It can be compared to the return on assets ratio.

E

Which one of the following is a project acceptance indicator given an independent project with investing type cash flows? A. profitability index less than 1.0 B. project's internal rate of return less than the required return C. discounted payback period greater than requirement D. average accounting return that is less than the internal rate of return E. modified internal rate of return that exceeds the required return

E

Which one of the following is the primary determinant of a firm's cost of capital? A. debt-equity ratio B. applicable tax rate C. cost of equity D. cost of debt E. use of the funds

E

Which one of the following methods of analysis provides the best information on the cost-benefit aspects of a project? A. net present value B. payback C. internal rate of return D. average accounting return E. profitability index

E

The top-down approach to computing the operating cash flow: a. ignores all noncash items. b. applies only if a project increases sales. c. can only be used if the entire cash flows of a firm are analyzed. d. is equal to sales costs taxes + depreciation. e. includes the interest expense related to a project.

a

A project which improves the operating efficiency of a firm but which generates no revenue is referred to as a(n) _____ project. a. sunk cost b. opportunity c. cost-cutting d. erosion e. cashless

c

A company which utilizes the MACRS system of depreciation: a. will have equal depreciation costs each year of an asset's life. b. will have a greater tax shield in year two of a project than they would have if the firm had opted for straight-line depreciation. c. can depreciate the cost of land, if they so desire. d. will expense less than the entire cost of an asset over the asset's class life. e. cannot expense any of the cost of a new asset during the first year of the asset's life.

b

The bottom-up approach to computing the operating cash flow applies only when: a. both the depreciation expense and the interest expense are equal to zero. b. the interest expense is equal to zero. c. the project is a cost-cutting project. d. no fixed assets are required for a project. e. taxes are ignored and the interest expense is equal to zero.

b

Which one of the following statements is correct? a. Project analysis should only include the cash flows which affect the income statement. b. A project can create a positive operating cash flow without affecting sales. c. For the majority of projects that increase sales, there will be a cash outflow related to net working capital that occurs at the end of the project. d. Interest expense should always be included as a cash outflow when analyzing a project. e. The opportunity cost of a company-owned building that is going to be used in a new project should be included as a cash inflow to the project.

b

Net working capital: a. can be ignored in project analysis because any expenditure is normally recouped by the end of the project. b. requirements generally, but not always, create a cash inflow at the beginning of a project. c. expenditures commonly occur at the end of a project. d. is frequently affected by the additional sales generated by a new project. e. is the only expenditure where at least a partial recovery can be made at the end of a project.

d

A project's operating cash flow will increase when: a. the tax rate increases. b. sales decrease. c. interest expense decreases. d. depreciation expense increases. e. earnings before interest and taxes decreases

d

Increasing which one of the following will increase the operating cash flow? a. erosion b. taxes c. fixed expenses d. salaries e. depreciation

e

The book value of equipment will: a. remain constant over the life of the equipment. b. vary in response to changes in the market value. c. decrease at a constant rate when MACRS depreciation is used. d. increase over the taxable life of an asset. e. decrease slower under straight-line depreciation than under MACRS

e

Which of the following statements are correct regarding the analysis of a cost-cutting project that has an initial cash outflow for fixed assets? I. The costs shown on the pro forma income statement represent a cash inflow. II. The depreciation expense related to the fixed assets creates a tax shield. III. The project operating cash flow can be computed as (Costs Taxes). IV. The earnings before interest and taxes are equal to the costs. a. I and II only b. III and IV only c. I and III only d. II and IV only e. I, II, and III only

e