BCOR 340 Exam 2

E. Recognizes that depreciation creates a cash inflow

The tax shield approach to computing the operating cash flow, given a tax-paying firm: A. ignores both interest expense and taxes. B. separates cash inflows from cash outflows. C. considers the changes in net working capital resulting from a new project. D. ignores all noncash expenses and their effects. E. recognizes that depreciation creates a cash inflow

E. The project never pays back

Today, Sweet Snacks is investing $491,000 in a new oven. As a result, the company expects its cash flows to increase by $64,000 a year for the next two years and by $98,000 a year for the following three years. How long must the firm wait until it recovers all of its initial investment? A. 3.97 years B. 4.18 years C. 4.46 years D. 4.70 years E. The project never pays back. The cash inflow is $422,000

C. $1,992.43

What is the net present value of a project that has an initial cost of $42,700 and produces cash inflows of $9,250 a year for 9 years if the discount rate is 14.65 percent? A. $798.48 B. $1,240.23 C. $1,992.43 D. $2,111.41 E. $2,470.01 NPV = -$42,700 + $9,250 {1 - [1 / (1 + .1465)9]} / .1465

B. $3,643.38

What is the net present value of a project with the following cash flows if the discount rate is 13.6 percent? Year Cash Flow 0 -$63,600 1 18,200 2 34,500 3 35,900 A. $406.11 B. $3,643.38 C. $3,207.20 D. -$1,407.92 E. -$5,433.67 NPV = -63,600 + 18,200/1.136 + 34,500/1.136^2 + 35,900/1.136^3

A. -$2,687.98

What is the net present value of a project with the following cash flows if the discount rate is 15 percent? Year Cash Flow 0 -$48,100 1 15,600 2 28,900 3 15,200 A. -$2,687.98 B. -$1,618.48 C. $1,044.16 D. $1,035.24 E. $9,593.19 NPV = -48,100 + 15,600/1.15 + 28,900/1.15^2 + 15,200/1.15^3

A. $4,887.26

What is the net present value of the following cash flows if the relevant discount rate is 11.4 percent? Year Cash Flow 0 -$32,400 1 10,620 2 15,800 3 - 3,110 4 26,600 A. $4,887.26 B. $5,006.19 C. $8,215.46 D. $13,058.39 E. $18,519.71 NPV = -$32,400 + $10,620 / 1.114 + $15,800 / 1.1142 + (-$3,110 / 1.1143) + $26,600 / 1.1144

B. -$1,232.68

What is the net present value of the following cash flows if the relevant discount rate is 5.75 percent? Year Cash Flow 0 $11,400 1 -2,500 2 -2,500 3 -9,500 A. -$1,482.15 B. -$1,232.68 C. $507.19 D. $1,211.40 E. $1,402.02 NPV = $11,400 + (-$2,500 / 1.0575) + (-$2,500 / 1.05752) + (-$9,500 / 1.05753)

A. $2,861.62

What is the net present value of the following cash flows if the relevant discount rate is 7 percent? Year Cash Flow 0 -$11,520 1 81 2 650 3 880 4 2,300 5 15,800 A. $2,861.62 B. $2,311.92 C. $2,900.15 D. $3,248.87 E. $3,545.60 NPV = -$11,520 + $81 / 1.07 + $650 / 1.072 + $880 / 1.073 + $2,300 / 1.074 + $15,800 / 1.075

B. $1,620.17; -$2,618.99

What is the net present value of the following set of cash flows at a discount rate of 5 percent? At 15 percent? Year Cash Flow 0 -$62,000 1 16,500 2 23,800 3 27,100 4 23,300 A. $1,018.47; -$628.30 B. $1,620.17; -$2,618.99 C. $1,620.17; -$525.13 D. $722.09; -$1,708.16 E. $722.09; -$418.05 NPV5% = -$23,600 + $8,200 / 1.05 + $9,100 + 1.052 + $10,600 / 1.053 NPV15% = -$23,600 + $8,200 / 1.15 + $9,100 + 1.152 + $10,600 / 1.153

C. 3.08 years

What is the payback period for a project with the following cash flows? Year Cash Flow 0 -$75,00 1 15,000 2 23,000 3 35,000 4 25,000 A. 2.56 years B. 2.89 years C. 3.08 years D. 3.24 years E. Never Payback = 3 + ($75,000 -15,000 -23,000 -35,000)/$25,000

C. Positive net present value

Which one of the following indicates that a project is expected to create value for its owners? A. Profitability index less than 1.0 B. Payback period greater than the requirement C. Positive net present value D. Positive average accounting rate of return E. Internal rate of return that is less than the requirement

E. Positive NPV

Which one of the following indicators offers the best assurance that a project will produce value for its owners? A. PI equal to zero B. Negative rate of return C. Positive AAR D. Positive IRR E. Positive NPV

E. Net present value

Which one of the following is generally considered to be the best form of analysis if you have to select a single method to analyze a variety of investment opportunities? A. Payback B. Profitability index C. Accounting rate of return D. Internal rate of return E. Net present value

B. Ease of use

Which one of the following is the primary advantage of payback analysis? A. Incorporation of the time value of money concept B. Ease of use C. Research and development bias D. Arbitrary cutoff point E. Long-term bias

C. The payback period ignores the time value of money

Which one of the following statements is correct? A. A longer payback period is preferred over a shorter payback period. B. The payback rule states that you should accept a project if the payback period is less than one year. C. The payback period ignores the time value of money. D. The payback rule is biased in favor of long-term projects. E. The payback period considers the timing and amount of all of a project's cash flows

D. If the internal rate of return equals the required return, the net present value will equal zero

Which one of the following statements is correct? A. The net present value is a measure of profits expressed in today's dollars. B. The net present value is positive when the required return exceeds the internal rate of return. C. If the initial cost of a project is increased, the net present value of that project will also increase. D. If the internal rate of return equals the required return, the net present value will equal zero. E. Net present value is equal to an investment's cash inflows discounted to today's dollars.

A. $7,881.55

You are making an investment of $110,000 and require a rate of return of14.6 percent. You expect to receive $48,000 in the first year, $52,500 in the second year, and $55,000 in the third year. There will be a cash outflow of $900 in the fourth year to close out the investment. What is the net present value of this investment? A. $7,881.55 B. $4,305.56 C. $1,879.63 D. $633.33 E. $8,534.25 NPV = -$110,000 + $48,000 / 1.146 + $52,500 / 1.1462 + $55,000 / 1.1463 + (-$900 / 1.1464)

C. $107,235.60

Your local athletic center is planning a $1.08 million expansion to its current facility. This cost will be depreciated on a straight-line basis over a 20-year period. The expanded area is expected to generate $489,000 in additional annual sales. Variable costs are 46 percent of sales, the annual fixed costs are $129,400, and the tax rate is 34 percent. What is the operating cash flow for the first year of this project? A. $118,336.82 B. $92,509.15 C. $107,235.60 D. $106,666.67 E. $119,323.33 OCF = [$489, 000 - (.46 x $489,000) - $129,400] x [1 -.34] + [$1,080,000 /20 x .34]

D. 3.13

. A project has the following cash flows. What is the payback period? Year Cash Flow 0 -$14,500 1 2,200 2 4,800 3 6,500 4 7,500 A. 3.04 years B. 2.59 years C. 2.96 years D. 3.13 years E. 3.24 years Payback = 3 + ($14,500-2,200 -4,800- 6,500)/$7,500

E. $26,282

A cost-cutting project will decrease costs by $37,400 a year. The annual depreciation on the project's fixed assets will be $4,700 and the tax rate is 34 percent. What is the amount of the change in the firm's operating cash flow resulting from this project? A. $21,582 B. $26,791 C. $25,805 D. $23,610 E. $26,282 Change in operating cash flow = [$37,400 x (1 -.34)] + [$4,700 x .34]

D. $126,700

A debt-free firm has net income of $107,400, taxes of $38,700, and depreciation of $19,300. What is the operating cash flow? A. $88,000 B. $123,500 C. $127,100 D. $126,700 E. $118,900 Operating cash flow = $107,400 + $19,300

B. -$41,190

A new project is expected to generate an operating cash flow of $38,728 and will initially free up $11,610 in net working capital. Purchases of fixed assets costing $52,800 will be required to start up the project. What is the total cash flow for this project at Time zero? A. -$64,410 B. -$41,190 C. -$52,800 D. $25,682 E. $50,338 CF0 = $11,610 - 52,800

E. $37,162

A nine-year project is expected to generate annual revenues of $137,800, variable costs of $82,600, and fixed costs of $11,000. The annual depreciation is $23,500 and the tax rate is 34 percent. What is the annual operating cash flow? A. $14,301 B. $13,662 C. $35,052 D. $36,506 E. $37,162 Operating cash flow = ($137,800 -82,600 -11,000) x (1 -.34) + ($23,500 x .34)

D. Projects future years' operating results

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

C. -$6,749.48

A project has an initial requirement of $318,000 for fixed assets and $29,500 for net working capital. The fixed assets will be depreciated to a zero book value over the four-year life of the project and have an estimated salvage value of $110,000. All of the net working capital will be recouped at the end of the project. The annual operating cash flow is $96,200 and the discount rate is 14 percent. What is the project's net present value if the tax rate is 34 percent? A. $14,265.87 B. $8,048.51 C. -$6,749.48 D. -$7,880.06 E. $17,919.19 NPV = -$318,000 - 29,500 + ($96,200 {1 - [1 / (1.14)4]} / .14) + [$29,500 + $110,000 (1 - .34)] / 1.144)

D. $42,183.70

A project has annual depreciation of $15,028, costs of $82,592, and sales of $138,765. The applicable tax rate is 34 percent. What is the operating cash flow according to the tax shield approach? A. $21,540.09 B. $27,666.67 C. $27,157.02 D. $42,183.70 E. $39,878.84 Operating cash flow = ($138,765-82,592) x (1 -.34) + ($15,028 x .34)

A. $7,690.80

A project has sales of $511,800, costs of $322,400, depreciation of $22,620, interest expense of $3,062, and a tax rate of 34 percent. What is the value of the depreciation tax shield? A. $7,690.80 B. $8,064.08 C. $6,652.40 D. $9,281.88 E. $10,805.39 Depreciation tax shield = $22,620 x .34

C. 2.74 years

A project has the following cash flows. What is the payback period? Year Cash Flow 0 -$28,00 1 11,600 2 11,600 3 6,500 4 6,500 A. 2.38 years B. 2.49 years C. 2.74 years D. 3.01 years E. 3.33 years Payback = 2 + ($28,000 -11,600 -11,600)/$6,500

D. $74,857.20

A project requires $428,000 of equipment that is classified as seven-year property. What is the depreciation expense in Year 3 given the following MACRS depreciation allowances, starting with Year 1: 14.29, 24.49, 17.49, 12.49, 8.93, 8.92, 8.93, and 4.46 percent? A. $89,038.42 B. $48,447.30 C. $56,038.15 D. $74,857.20 E. $104,817.20 Depreciation3 = $428,000 x .1749

E. $46,451.08

A project will reduce costs by $62,750 but increase depreciation by $14,812. What is the operating cash flow of this project based on the tax shield approach if the tax rate is 34 percent? A. $41,415.00 B. $31,639.08 C. $38,211.19 D. $42,006.20 E. $46,451.08 Operating cash flow = [$62,750 x (1 -.34)] + [$14,812 x .34]

A. $26,343.72

A proposed project requires an initial cash outlay of $49,000 for equipment and an additional cash outlay of $18,700 in Year 1 to cover operating costs. During Years 2 through 4, the project will generate cash inflows of $42,500 a year. What is the net present value of this project at a discount rate of 11.6 percent? A. $26,343.72 B. $26,391.08 C. $25,810.33 D. $24,399.99 E. $23,602.18 NPV = -$49,000 + (-$18,700 / 1.116) + $42,500 / 1.1162 + $42,500 / 1.1163 + $42,500 / 1.1164

D. $74,749.60

Better Chocolates has a new project that requires $838,000 of equipment. What is the depreciation in Year 6 of this project if the equipment is classified as seven-year property for MACRS purposes? The MACRS allowance percentages are as follows, commencing with year 1: 14.29, 24.49, 17.49, 12.49, 8.93, 8.92, 8.93, and 4.46 percent. A. $80,411.60 B. $74,833.40 C. $89,108.00 D. $74,749.60 E. $89,327.08 Depreciation6 = $838,000 x .0892

C. $48,000

British Metals is reviewing its current accounts to determine how a proposed project might affect the account balances. The firm estimates the project will initially require $81,000 in additional current assets and $57,000 in additional current liabilities. The firm also estimates the project will require an additional $8,000 a year in current assets in each of the first three of the four years of the project. How much net working capital will the firm recoup at the end of the project assuming that all net working capital can be recaptured? A. $105,000 B. $24,000 C. $48,000 D. $68,000 E. $81,000 Net working capital recovery = $81,000 -57,000 + (3 x $8,000)

C. $5,400; $1,045.91; -$2,641.47

Charles Henri is considering investing $37,800 in a project that is expected to provide him with cash inflows of $11,600 at the end of each of the first two years and $20,000 at the end of the third year. What is the project's NPV at a discount rate of 0 percent? At 5 percent? At 10 percent? A. $0; $1,045.91; -$2,641.47 B. $4,468.39; $38.29; -$2,784.08 C. $5,400; $1,045.91; -$2,641.47 D. $5,400; $417.92; -$3,406.10 E. $4,468.39; $38.29; -$2,641.47 NPV0% = -$37,800 + $11,600 / 1.0 + $11,600 / 1.02 + $20,000 / 1.03 NPV5% = -$37,800 + $11,600 / 1.05 + $11,600 / 1.052 + $20,000 / 1.053 NPV10% = -$37,800 + $11,600 / 1.10 + $11,600 / 1.102 + $20,000 / 1.103

E. -$16,670.67

Corner Restaurant is considering a project with an initial cost of $211,600. The project will not produce any cash flows for the first three years. Starting in Year 4, the project will produce cash inflows of $151,000 a year for three years. This project is risky, so the firm has assigned it a discount rate of 18.6 percent. What is the project's net present value? A. $113,585.57 B. -$4,591.11 C. $51,786.86 D. $2,255.56 E. -$16,670.67 NPV = -$211,600 + $151,000 / 1.1864 + $151,000 / 1.1865 + $151,000 / 1.1866

D. 5.99 years

EKG, Inc. is considering a new project that will require an initial cash investment of $419,000. The project will produce no cash flows for the first two years. The projected cash flows for Years 3 through 7 are $69,000, $98,000, $109,000, $145,000, and $165,000, respectively. How long will it take the firm to recover its initial investment in this project? A. 3.81 years B. 3.98 years C. 5.57 years D. 5.99 years E. The project never pays back. Payback = 5 + ($419,000 -0 -0 -69,000 -98,000 -109,000)/$145,000

C. -$21,000

Floral Shoppes has a new project in mind that will increase accounts receivable by $19,000, decrease accounts payable by $4,000, increase fixed assets by $27,000, and decrease inventory by $2,000. What is the amount the firm should use as the initial cash flow attributable to net working capital when it analyzes this project? A. -$25,000 B. -$17,000 C. -$21,000 D. -$12,000 E. -$52,000 Net working capital requirement = -$19,000 - 4,000 + 2,000

D. 5.62 years

Greenbriar Cotton Mill is spending $284,000 to update its facility. The company estimates that this investment will improve its cash inflows by $50,500 a year for 8 years. What is the payback period? A. 4.03 years B. 4.95 years C. 5.48 years D. 5.62 years E. The project never pays back. Payback = $284,000/$50,500

C. Zero

If an investment is producing a return that is equal to the required return, the investment's net present value will be: A. positive. B. greater than the project's initial investment. C. zero. D. equal to the project's net profit. E. less than, or equal to, zero.

C. Scenario analysis

Jamie is analyzing the estimated net present value of a project under various conditions by revising the sales quantity, sales price, and the cost estimates. The type of analysis that Jamie is doing is best described as: A. sensitivity analysis. B. erosion planning. C. scenario analysis. D. benefit planning. E. opportunity evaluation.

D. -$13,000

Jim's Hardware is adding a new product to its sales lineup. Initially, the firm will stock $36,000 of the new inventory, which will be purchased on 30 days' credit from a supplier. The firm will also invest $13,000 in accounts receivable and $11,000 in equipment. What amount should be included in the initial project costs for net working capital? A. -$49,000 B. -$47,000 C. -$3,000 D. -$13,000 E. -$24,000 Net working capital = -$36,000 + 36,000 -13,000

D. Both Joe and Rich

Joe and Rich are both considering investing in a project that costs $25,500 and is expected to produce cash inflows of $15,800 in Year 1 and $15,300 in Year 2. Joe has a required return of 8.5 percent but Rich demands a return of 12.5 percent. Who, if either, should accept this project? A. Joe, but not Rich B. Rich, but not Joe C. Neither Joe nor Rich D. Both Joe and Rich E. Joe, and possibly Rich, who will be neutral on this decision as his net present value will equal zero NPVJoe = - $25,500 + $15,800 / 1.085 + $15,300 / 1.0852 NPVRich = -$25,500 + $15,800 / 1.125 + $15,300 / 1.1252

A. Sensitivity analysis

Kate is analyzing a proposed project to determine how changes in the sales quantity would affect the project's net present value. What type of analysis is being conducted? A. Sensitivity analysis B. Erosion planning C. Scenario analysis D. Benefit-cost analysis E. Opportunity cost analysis

A. -$7,632.77

Lakeside Winery is considering expanding its winemaking operations. The expansion will require new equipment costing $708,000 that would be depreciated on a straight-line basis to a zero balance over the four-year life of the project. The equipment can be sold for $220,000 after the four years. The project requires $46,000 initially for net working capital, all of which will be recouped at the end of the project. The projected operating cash flow is $211,500 a year. What is the net present value of this project if the relevant discount rate is 13 percent and the tax rate is 34 percent? A. -$7,632.77 B. -$8,309.18 C. -$10,747.11 D. $7,008.14 E. $1,309.54 NPV = -$708,000 - 46,000 + ($211,500 {1 - [1 / (1 + .13)4]} / .13) + {$46,000 + [$220,000 (1 - .34)]} / (1 + .13)4

C. -$4,600

Mike's Fish Market is implementing a project that will initially increase accounts payable by $6,100, increase inventory by $2,800, and decrease accounts receivable by $1,300. All net working capital will be recouped when the project terminates. What is the cash flow related to the net working capital for the last year of the project? A. -$1,500 B. -$400 C. -$4,600 D. $1,500 E. $4,600 Net working capital recovery = -$6,100 + 2,800 -1,300

A. -$425.91

Molly is considering a project with cash inflows of $811, $924, $638, and $510 over the next four years, respectively. The relevant discount rate is 11.2 percent. What is the net present value of this project if it the start-up cost is $2,700? A. -$425.91 B. -$131.83 C. -$383.01 D. $10.45 E. $229.50 NPV = -$2,700 + $811 / 1.112 + $924 / 1.1122 + $638 / 1.1123 + $510 / 1.1124

E. Future cash flows

Net present value involves discounting an investment's: A. assets. B. future profits. C. liabilities. D. costs. E. future cash flows.

A. $3,168

Newton Industries is considering a project and has developed the following estimates: unit sales = 4,800, price per unit = $67, variable cost per unit = $42, annual fixed costs = $11,900. The depreciation is $14,700 a year and the tax rate is 34 percent. What effect would an increase of $1 in the selling price have on the operating cash flow? A. $3,168 B. $4,823 C. $1 D. $83,448 E. $82,368 Change in OCF = (4,800 x $1) x (1 - .34)

D. $14,438.78

Outdoor Sports is considering adding a miniature golf course to its facility. The course would cost $138,000, would be depreciated on a straight-line basis over its five-year life, and would have a zero salvage value. The estimated income from the golfing fees would be $72,000 a year with $24,000 of that amount being variable cost. The fixed cost would be $11,600. In addition, the firm anticipates an additional $14,000 in revenue from its existing facilities if the golf course is added. The project will require $3,000 of net working capital, which is recoverable at the end of the project. What is the net present value of this project at a discount rate of 12 percent and a tax rate of 34 percent? A. $11,309.11 B. $11,628.04 C. $12,737.26 D. $14,438.78 E. $14,900.41 OCF = ($72,000 -24,000 -11,600 + 14,000) (1 - .34) + ($138,000/5) .34 NPV = -$138,000 - 3,000 + ($42,648 {1 - [1 / (1.12)5]} / .12) + ($3,000 / 1.125)

A. $119,666.04

Professional Properties is considering remodeling the office building it leases to Heartland Insurance. The remodeling costs are estimated at $2.8 million. If the building is remodeled, Heartland Insurance has agreed to pay an additional $820,000 a year in rent for the next five years. The discount rate is 12.5 percent. What is the benefit of the remodeling project to Professional Properties? A. $119,666.04 B. -$89,072.00 C. $105,214.70 D. $108,399.15 E. -$111,417.03 NPV = -$2,800,000 + $820,000 {1 - [1 / (1 + .125)5]} / .125

B. 2.87 years

Services United is considering a new project that requires an initial cash investment of $26,000. The project will generate cash inflows of $2,500, $11,700, $13,500, and $10,000 over each of the next four years, respectively. How long will it take to recover the initial investment? A. 2.74 years B. 2.87 years C. 2.99 years D. 3.27 years E. 3.68 years Payback = 2 + ($26,000 -2,500 -11,700)/$13,500

D. $1,409.80

The Blue Lagoon is considering a project with a five-year life. The project requires $32,000 of fixed assets that are classified as five-year property for MACRS. Variable costs equal 67 percent of sales, fixed costs are $12,600, and the tax rate is 34 percent. What is the operating cash flow for Year 4 given the following sales estimates and MACRS depreciation allowance percentages? Year Sales MACRS rate 1 32,000 20.00 2 34,500 32.00 3 35,600 19.20 4 38,900 11.52 5 42,000 11.52 A. -$1,806.67 B. $640.89 C. $1,311.16 D. $1,409.80 E. -$2,276.60 OCF4 = [($38,900 (1 -.67) - $12,600] [1 -.34] + [$32,000 .1152 .34]

A. $303,900

The Book Store is considering a new four-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 four-year life, after which time it will be worthless. The project is estimated to generate $.98 million in annual sales, with costs of $.79 million. If the tax rate is 34 percent, what is the OCF for this project? A. $303,900 B. $650,400 C. $284,280 D. $325,400 E. $291,640 OCF = ($980,000-790,000)(1 - .34) + ($2,100,000/4)(.34)

D. The current market value of the land

The Corner Market has decided to expand its retail store by building on a vacant lot it currently owns. This lot was purchased four years ago at a cost of $299,000, which the firm paid in cash. To date, the firm has spent another $38,000 on land improvements, all of which was also paid in cash. Today, the lot has a market value of $329,000. What value should be included in the analysis of the expansion project for the cost of the land? A. The sum of the cash paid to date for both the lot and the improvements B. The original purchase price only C. The current market value of the land plus the cash paid for the improvements D. The current market value of the land E. Zero because the land and the improvements were previously purchased with cash

E. 4.23 years

The Golden Goose is considering a project with an initial cost of $46,700. The project will produce cash inflows of $10,000 a year for the first two years and $12,000 a year for the following three years. What is the payback period? A. 2.87 years B. 3.23 years C. 3.41 years D. 3.79 years E. 4.23 years Payback = 4 + ($46,700 -10,000 -10,000 -12,000 -12,000)/$12,000

A. $134,546

The Outpost currently sells short leather jackets for $369 each. The firm is considering selling long coats also. The long coats would sell for $719 each and the company expects to sell 820 a year. If the company decides to carry the long coat, management feels that the annual sales of the short jacket will decline from 1,120 to 1,040 units. Variable costs on the jacket are $228 and $435 on the long coat. The fixed costs for this project are $23,100, depreciation is $10,400 a year, and the tax rate is 34 percent. What is the projected operating cash flow for this project? A. $134,546 B. $131,264 C. $112,212 D. $131,062 E. $128,749 Operating cash flow = {[820 x ($719- 435)] + [(1,040 - 1,120) x ($369 -228)] - $23,100} x {1 -.34} + {$10,400 x .34}

A. $6,508.54

The Sausage Hut is looking at a new sausage system with an installed cost of $187,400. This cost will be depreciated straight-line to zero over the project's four-year life, at the end of which the sausage system can be scrapped for $25,000. The sausage system will save the firm $69,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $9,000, which will be recouped at project end. If the tax rate is 34 percent and the discount rate is 12 percent, what is the NPV of this project? A. $6,508.54 B. -$320.81 C. $560.24 D. $1,410.10 E. $8,211.15 OCF = $69,000 (1 - .34) + ($187,400 /4)(.34) NPV = -$187,400 -9,000 + ($61,469 {1 - [1 / (1 + .12)4]} / .12) + {$9,000 + [$25,000 (1 - .34)]} / (1 + .12)4

A. Tax shield

The amount by which a firm's tax bill is reduced as a result of the depreciation expense is referred to as the depreciation: A. tax shield. B. credit. C. erosion. D. opportunity cost. E. adjustment.

B. Discount rate that results in a zero net present value for the project

The internal rate of return is the: A. discount rate that causes a project's aftertax income to equal zero. B. discount rate that results in a zero net present value for the project. C. discount rate that results in a net present value equal to the project's initial cost. D. rate of return required by the project's investors. E. project's current market rate of return.

c. Cost and its market value

The net present value of an investment represents the difference between the investment's: A. cash inflows and outflows. B. cost and its net profit. C. cost and its market value. D. cash flows and its profits. E. assets and liabilities.

A. Decreases as the required rate of return increases

The net present value: A. decreases as the required rate of return increases. B. is equal to the initial investment when the internal rate of return is equal to the required return. C. method of analysis cannot be applied to mutually exclusive projects. D. ignores cash flows that are distant in the future. E. is unaffected by the timing of an investment's cash flows.

D. Recouped at the end of the project

The net working capital invested in a project is generally: A. a sunk cost. B. an opportunity cost. C. recouped in the first year of the project. D. recouped at the end of the project. E. depreciated to a zero balance over the life of the project.

D. Time value of money

The payback method of analysis ignores which one of the following? A. Initial cost of an investment B. Arbitrary cutoff point C. Cash flow direction D. Time value of money E. Timing of each cash inflow

E. Recoup its initial cost

The payback period is the length of time it takes an investment to generate sufficient cash flows to enable the project to: A. produce a positive annual cash flow. B. produce a positive cash flow from assets. C. offset its fixed expenses. D. offset its total expenses. E. recoup its initial cost.