Question 1

Assume an all-equity firm has positive net earnings.The operating cash flow of this firm:

Accepted Answer

A)  ignores both depreciation and taxes.
B)  is unaffected by the depreciation expense.
C)  must be negative.
D)  increases when the tax rate decreases.
E)  is equal to net income minus depreciation.F) B) and D)
G) A) and E)

Question 2

A cost that should be ignored when evaluating a project because that cost has already been incurred and cannot be recouped is referred to as a(n) :

Accepted Answer

A)  fixed cost.
B)  forgotten cost.
C)  variable cost.
D)  opportunity cost.
E)  sunk cost.F) C) and E)
G) None of the above

Question 3

Scenario analysis asks questions such as:

Accepted Answer

A)  How will changing the number of units sold affect the outcome of this project?
B)  What is the best outcome that should reasonably be expected?
C)  How much will a $1 increase in the variable cost per unit change the net present value?
D)  Will the net present value increase or decrease if the quantity sold increases by 100 units?
E)  How will the operating cash flow change if the depreciation method is changed?F) B) and D)
G) C) and D)

Question 4

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?

Accepted Answer

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 cashF) A) and E)
G) C) and D)

Question 5

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?

Accepted Answer

A)  -$25,000
B)  -$17,000
C)  -$21,000
D)  -$12,000
E)  -$52,000F) A) and B)
G) A) and C)

Question 6

Valley Forge and Metal purchased a truck five years ago for local deliveries.Which one of the following costs related to this truck is the best example of a sunk cost? Assume the truck has a usable life of five years.

Accepted Answer

A)  New tires that will be purchased this winter
B)  Costs of repairs needed so the truck can pass inspection next month
C)  Money spent last month repairing a damaged front fender
D)  Engine tune-up that is scheduled for this afternoon
E)  Cost for a truck driver for the remainder of the truck's useful lifeF) A) and D)
G) D) and E) C

Question 7

The analysis of a new project should exclude:

Accepted Answer

A)  tax effects.
B)  erosion effects.
C)  side effects.
D)  sunk costs.
E)  opportunity costs.F) B) and E)
G) B) and D)

Question 8

Woodland Lake Manufacturing has a new project that requires $652,000 of equipment.What is the depreciation in Year 5 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.

Accepted Answer

A)  $81,434.80
B)  $58,158.40
C)  $93,170.80
D)  $58,223.60
E)  $74,749.60F) A) and B)
G) A) and E)

Question 9

Nu Tek is comprised of four separate operating divisions.For this year, the firm has decided to allocate capital funds using a soft rationing approach.Which one of the following applies to this situation?

Accepted Answer

A)  Division managers will be limited to accepting a single new project each.
B)  Division managers are being given blanket approval to accept all positive net present value projects.
C)  Division managers should expect to be treated equally, at least initially, in the capital distribution process.
D)  Division managers will not receive any funding for new projects but will be allowed to expand current operations.
E)  Division managers will not receive capital funding for any project.F) A) and D)
G) B) and D) C

Question 10

Forecasting risk is best defined as:

Accepted Answer

A)  reality risk.
B)  value risk.
C)  potential risk.
D)  management risk.
E)  estimation risk.F) A) and B)
G) A) and D)

Question 11

A pro forma financial statement is a financial statement that:

Accepted Answer

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.F) B) and E)
G) A) and B)

Question 12

The Corner Shop is considering a new four-year expansion project that requires an initial fixed asset investment of $210,000.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 $48,000 in annual sales, with costs of $31,000.If the tax rate is 34 percent, what is the OCF for this project?

Accepted Answer

A)  $29,070
B)  $63,270
C)  $69,250
D)  $17,850
E)  $29,640F) C) and D)
G) C) and E)

Question 13

Classic Cars is considering a project that requires $311,250 of fixed assets that are classified as five-year property for MACRS.What is the book value of these assets at the end of Year 3? The MACRS allowance percentages are as follows, commencing with Year 1: 20.00, 32.00, 19.20, 11.52, 11.52, and 5.76 percent.

Accepted Answer

A)  $153,742
B)  $136,811
C)  $89,640
D)  $93,450
E)  $144,504F) C) and D)
G) A) and B)

Question 14

Three years ago, Stock Tek purchased some five-year MACRS property for $82,600.Today, it is selling this property for $31,500.How much tax will the company owe on this sale if the tax rate is 34 percent? The MACRS allowance percentages are as follows, commencing with Year 1: 20.00, 32.00, 19.20, 11.52, 11.52, and 5.76 percent.

Accepted Answer

A)  -$2,451.81
B)  -$5,857.08
C)  $0
D)  $5,857.08
E)  $2,621.81F) A) and C)
G) A) and B)

Question 15

Which one of the following principles refers to the assumption that a project will be evaluated based on its incremental cash flows?

Accepted Answer

A)  Forecast assumption principle
B)  Base assumption principle
C)  Fallacy principle
D)  Erosion principle
E)  Stand-alone principleF) B) and E)
G) A) and B)

Question 16

A project has projected values of: unit sales = 1,650, price per unit = $19, variable cost per unit = $7, fixed costs per year = $4,700.The depreciation is $1,100 a year and the tax rate is 34 percent.What effect would a decrease of $1 in the variable cost per unit have on the operating cash flow?

Accepted Answer

A)  -$8.58
B)  -$1,089
C)  -$912
D)  $1,089
E)  $912F) C) and D)
G) B) and E) D

Question 17

A proposed project will increase a firm's accounts payables.This increase is generally:

Accepted Answer

A)  treated as an erosion cost.
B)  treated as an opportunity cost.
C)  a sunk cost and should be ignored.
D)  a cash outflow at Time zero and a cash inflow at the end of the project.
E)  a cash inflow at Time zero and a cash outflow at the end of the project.F) C) and D)
G) C) and E)

Question 18

The Outpost, a sole proprietorship 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?

Accepted Answer

A)  $134,546
B)  $131,264
C)  $112,212
D)  $131,062
E)  $128,749F) A) and E)
G) A) and C)

Question 19

An all-equity firm has net income of $112,780, depreciation of $8,750, and taxes of $29,980.What is the firm's operating cash flow?

Accepted Answer

A)  $150,965
B)  $142,760
C)  $91,550
D)  $121,530
E)  $151,510F) C) and D)
G) D) and E)

Question 20

Outdoors Essentials sells specialty equipment for mountain climbers.Its sales for last year included $255,000 of tents and $ 550,000 of climbing gear.For next year, management has decided to sell specialty sleeping bags also.As a result of this change, sales projections for next year are $300,000 of tents, $600,000 of climbing gear, and $110,000 of sleeping bags.How much of next year's sales are derived from the side effects of adding the new product to its sales offerings?

Accepted Answer

A)  $0
B)  $205,000
C)  $95,000
D)  $145,000
E)  $110,000F) B) and D)
G) A) and C)

Exam 9: Making Capital Investment Decisions

Assume an all-equity firm has positive net earnings.The operating cash flow of this firm:

Correct Answer
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A cost that should be ignored when evaluating a project because that cost has already been incurred and cannot be recouped is referred to as a(n) :

Correct Answer
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Scenario analysis asks questions such as:

Correct Answer
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Valley Forge and Metal purchased a truck five years ago for local deliveries.Which one of the following costs related to this truck is the best example of a sunk cost? Assume the truck has a usable life of five years.

Correct Answer
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C

The analysis of a new project should exclude:

Correct Answer
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Nu Tek is comprised of four separate operating divisions.For this year, the firm has decided to allocate capital funds using a soft rationing approach.Which one of the following applies to this situation?

Correct Answer
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C

Forecasting risk is best defined as:

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A pro forma financial statement is a financial statement that:

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Which one of the following principles refers to the assumption that a project will be evaluated based on its incremental cash flows?

Correct Answer
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A project has projected values of: unit sales = 1,650, price per unit = $19, variable cost per unit = $7, fixed costs per year = $4,700.The depreciation is $1,100 a year and the tax rate is 34 percent.What effect would a decrease of $1 in the variable cost per unit have on the operating cash flow?

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D

A proposed project will increase a firm's accounts payables.This increase is generally:

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An all-equity firm has net income of $112,780, depreciation of $8,750, and taxes of $29,980.What is the firm's operating cash flow?

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Exam 9: Making Capital Investment Decisions

Assume an all-equity firm has positive net earnings.The operating cash flow of this firm:

Correct AnswerverifiedShow Answer

A cost that should be ignored when evaluating a project because that cost has already been incurred and cannot be recouped is referred to as a(n) :

Correct AnswerverifiedShow Answer

Scenario analysis asks questions such as:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Valley Forge and Metal purchased a truck five years ago for local deliveries.Which one of the following costs related to this truck is the best example of a sunk cost? Assume the truck has a usable life of five years.

Correct AnswerverifiedC

The analysis of a new project should exclude:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Nu Tek is comprised of four separate operating divisions.For this year, the firm has decided to allocate capital funds using a soft rationing approach.Which one of the following applies to this situation?

Correct AnswerverifiedC

Forecasting risk is best defined as:

Correct AnswerverifiedShow Answer

A pro forma financial statement is a financial statement that:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which one of the following principles refers to the assumption that a project will be evaluated based on its incremental cash flows?

Correct AnswerverifiedShow Answer

A project has projected values of: unit sales = 1,650, price per unit = $19, variable cost per unit = $7, fixed costs per year = $4,700.The depreciation is $1,100 a year and the tax rate is 34 percent.What effect would a decrease of $1 in the variable cost per unit have on the operating cash flow?

Correct AnswerverifiedD

A proposed project will increase a firm's accounts payables.This increase is generally:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

An all-equity firm has net income of $112,780, depreciation of $8,750, and taxes of $29,980.What is the firm's operating cash flow?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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C

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C

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D

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