The Buck Store is considering a project that will require additional inventory of $216,000 and
will increase accounts payable by $181,000. Accounts receivable are currently $525,000 and are
expected to increase by 9 percent if this project is accepted. What is the project’s initial cash flow
for net working capital?
Keyser Mining is considering a project that will require the purchase of $980,000 in new
equipment. The equipment will be depreciated straight-line to a zero book value over the 7-year
life of the project. The equipment can be scraped at the end of the project for 5 percent of its
original cost. Annual sales from this project are estimated at $420,000. Net working capital equal
to 20 percent of sales will be required to support the project. All of the net working capital will
be recouped. The required return is 16 percent and the tax rate is 35 percent. What is the amount
of the aftertax salvage value of the equipment?
Jefferson & Sons is evaluating a project that will increase annual sales by $145,000 and annual
cash costs by $94,000. The project will initially require $110,000 in fixed assets that will be
depreciated straight-line to a zero book value over the 4-year life of the project. The applicable
tax rate is 32 percent. What is the operating cash flow for this project?
Keyser Petroleum just purchased some equipment at a cost of $67,000. What is the proper
methodology for computing the depreciation expense for year 2 if the equipment is classified as
5-year property for MACRS?
$67,000 × (1 – 0.20) ×
$67,000/(1 – 0.20 0.32)
$67,000 × (1 + 0.32)
$67,000 × (1 – 0.32)
$67,000 × 0.32
A company that utilizes the MACRS system of depreciation:
will have equal depreciation costs each year of an asset’s life.
will have a greater tax shield in year two of a project than it would have if the firm had
opted for straight-line depreciation, given the same depreciation life.
can depreciate the cost of land, if it so desires.
will expense less than the entire cost of an asset.
cannot expense any of the cost of a new asset during the first year of the asset’s life.
Day Interiors is considering a project with the following cash flows. What is the IRR of this
Which one of the following is an example of a sunk cost?
$1,500 of lost sales because an item was out of stock
$1,200 paid to repair a machine last year
$20,000 project that must be forfeited if another project is accepted
$4,500 reduction in current shoe sales if a store commences selling
$1,800 increase in comic book sales if a store commences selling
Kelly’s Corner Bakery purchased a lot in Oil City 6 years ago at a cost of $302,000. Today, that
lot has a market value of $340,000. At the time of the purchase, the company spent $15,000 to
level the lot and another $20,000 to install storm drains. The company now wants to build a new
facility on that site. The building cost is estimated at $1.51 million. What amount should be used
as the initial cash flow for this project?
The length of time a firm must wait to recoup the money it has invested in a project is called the:
internal return period.
Tedder Mining has analyzed a proposed expansion project and determined that the internal rate
of return is lower than the firm desires. Which one of the following changes to the project would
be most expected to increase the project’s internal rate of return?
decreasing the required discount rate
increasing the initial investment in fixed assets
condensing the firm’s cash inflows into fewer years without lowering the total amount of
eliminating the salvage value
decreasing the amount of the final cash inflow
What is the profitability index for an investment with the following cash flows given a 14.5
percent required return?
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:
Which one of the following best describes the concept of erosion?
expenses that have already been incurred and cannot be recovered
change in net working capital related to implementing a new project
the cash flows of a new project that come at the expense of a firm’s existing cash
the alternative that is forfeited when a fixed asset is utilized by a project
the differences in a firm’s cash flows with and without a particular project
What is the net present value of a project that has an initial cash outflow of $34,900 and the
following cash inflows? The required return is 15.35 percent.
You are considering the following two mutually exclusive projects. The required rate of return is
14.6 percent for project A and 13.8 percent for project B. Which project should you accept and
project A; because it has the higher required rate of return
project A; because its NPV is about $4,900 more than the NPV of
project B; because it has the largest total cash inflow
project B; because it has the largest cash inflow in year one
project B; because it has the lower required return
A project has an initial cost of $6,500. The cash inflows are $900, $2,200, $3,600, and $4,100
over the next four years, respectively. What is the payback period?
The internal rate of return is defined as the:
maximum rate of return a firm expects to earn on a project.
rate of return a project will generate if the project in financed solely with internal
discount rate that equates the net cash inflows of a project to zero.
discount rate which causes the net present value of a project to equal zero.
discount rate that causes the profitability index for a project to equal zero.
If a project has a net present value equal to zero, then:
the total of the cash inflows must equal the initial cost of the project.
the project earns a return exactly equal to the discount rate.
a decrease in the project’s initial cost will cause the project to have a negative NPV.
any delay in receiving the projected cash inflows will cause the project to have a
the project’s PI must be also be equal to zero.
Which one of the following is a project cash inflow? Ignore any tax effects.
decrease in accounts payable
increase in inventory
decrease in accounts receivable
depreciation expense based on
Gateway Communications is considering a project with an initial fixed asset cost of $2.46
million which will be depreciated straight-line to a zero book value over the 10-year life of the
project. At the end of the project the equipment will be sold for an estimated $300,000. The
project will not directly produce any sales but will reduce operating costs by $725,000 a year.
The tax rate is 35 percent. The project will require $45,000 of inventory which will be recouped
when the project ends. Should this project be implemented if the firm requires a 14 percent rate
of return? Why or why not?
No; The NPV is $172,937.49.
No; The NPV is $87,820.48.
Yes; The NPV is
Yes; The NPV is
Yes; The NPV is
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