Question 1

The Windom Co. has sales of $845,960, costs of $578,402, interest expense of $42,750, and a marginal tax rate of 35%. The company also has $1,299,998 in fixed assets that are being depreciated in a 15% CCA class (you may assume that the ½ year rule has been applied to all of the assets in the pool in the past) . What is the operating cash flow for the current year?

Accepted Answer

A)   $210,911
B)   $211,125
C)   $224,808
D)   $255,125
E)   $267,558F) B) and C)
G) A) and E)

Question 2

Explain how the statement of comprehensive income for a cost-cutting project differs from that of an income-producing project.

Accepted Answer

A cost-cutting project produces no reven...

Question 3

The bottom-up approach to computing the operating cash flow applies only when:

Accepted Answer

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 the project.
E)   Taxes are ignored and the interest expense is equal to zero.F) A) and B)
G) All of the above

Question 4

You own a house that you rent for $1,600 a month. The maintenance expenses on the house average $300 a month. The house cost $110,000 when you purchased it six years ago. A recent appraisal on the house valued it at $295,000. If you sell the house you will incur $15,000 in real estate fees. The annual property taxes are $25,000. You are deciding whether to sell the house or convert it for your own use as a professional office. What value should you place on this house when analyzing the option of using it as a professional office?

Accepted Answer

A)   $150,000
B)   $255,000
C)   $280,000
D)   $293,100
E)   $310,000F) B) and E)
G) A) and D)

Question 5

A pro forma financial statement is one that __________________________.

Accepted Answer

A)   projects future years' operations.
B)   Is expressed as a percentage of the total assets of the firm.
C)   Is expressed as a percentage of the total sales of the firm.
D)   Is expressed relative to a chosen base year's financial statement.
E)   Reflects the past and current operations of the firm.F) D) and E)
G) A) and B) A

Question 6

Which one of the following is an example of an incremental cash flow?

Accepted Answer

A)   The annual salary of the company president which is a contractual obligation.
B)   The rent on a warehouse which is currently being utilized.
C)   The rent on some new machinery that is required for an upcoming project.
D)   The property taxes on the currently owned warehouse which has been sitting idle but is going to be utilized for a new project.
E)   The insurance on a company-owned building which will be utilized for a new project.F) D) and E)
G) A) and E)

Question 7

A project is expected to create operating cash flows of $35,000 a year for four years. The initial cost of the fixed assets is $100,000. These assets will be worthless at the end of the project. An additional $5,000 of net working capital will be required throughout the life of the project. What is the project's net present value if the required rate of return is 11%?

Accepted Answer

A)   $1,879.25
B)   $3,585.60
C)   $6,879.25
D)   $8,585.60
E)   $11,879.25F) A) and C)
G) B) and E)

Question 8

The top-down approach to computing the operating cash flow:

Accepted Answer

A)   Ignores all noncash items.
B)   Applies only if a project produces sales.
C)   Can only be used if the entire cash flows of a firm are included.
D)   Is equal to sales - costs - taxes + depreciation.
E)   Includes the interest expense related to a project.F) B) and C)
G) A) and D)

Question 9

The proper formula of project cash flow is operating cash flow - additions to net working capital + recoveries of net working capital

Accepted Answer

A) True 
 B)False

Question 10

A company has projected sales of $542,000, costs of $389,300, depreciation of $82,400, and a tax rate of 31%. What is the operating cash flow?

Accepted Answer

A)   $104,193
B)   $126,518
C)   $128,798
D)   $130,907
E)   $152,700F) D) and E)
G) C) and E)

Question 11

Big Land Development Co. purchased a tract of land last year for $1.2 million. At that time, the company spent $50,000 in legal fees to have the land rezoned for commercial use and another $175,000 to have the land graded so that it is usable. The company is now trying to decide if they want to build one large retail store on the property or a strip mall consisting of smaller stores. Which of the costs identified above should be included in the project analysis to determine the best use of the property?

Accepted Answer

A)   All of the identified costs.
B)   Only the cost of the land and the grading.
C)   Only the legal fees and the grading costs.
D)   Only the cost of the grading.
E)   None of the identified costs.F) D) and E)
G) None of the above

Question 12

You are considering investing in a piece of equipment to implement a cost-cutting proposal. The pre-tax cost reduction is expected to equal $41.67 for each of the three years of the project's life. The equipment has an initial cost of $125 and belongs in a 20% CCA class. Assume a 34% tax bracket, a discount rate of 15%, and a salvage value of zero.

What is the annual after-tax cost reduction for the project?

Accepted Answer

A)   $14.17
B)   $27.50
C)   $41.67
D)   $63.14
E)   $69.17F) A) and B)
G) B) and D) B

Question 13

Sunk costs can be defined as:

Accepted Answer

A)   The costs that have already been incurred and will not change whether or not a project is accepted.
B)   The initial, or start-up, costs of a project that cannot be recouped should the new project be implemented.
C)   Any and all fixed costs that are incurred as the result of accepting a new project or activity.
D)   The costs resulting from losses in current projects due to the implementation of a new project.
E)   Any and all costs necessary to implement a new project or activity.F) C) and D)
G) A) and B) A

Question 14

Sunk costs should be included in the analysis of a project.

Accepted Answer

A) True 
 B)False

Question 15

The depreciation tax shield is defined as the cash flow created by:

Accepted Answer

A)   Any reduction in the marginal tax rate as a result of an increase in the depreciation expense.
B)   The sale of a depreciated fixed asset.
C)   The tax savings which result from the depreciation expense.
D)   The initial purchase of a depreciable fixed asset.
E)   The use of MACRS depreciation instead of straight-line depreciation.F) B) and E)
G) B) and D)

Question 16

A project will produce operating cash flows of $45,000 a year for four years. During the life of the project, inventory will be lowered by $30,000 and accounts receivable will increase by $15,001. Accounts payable will decrease by $10,001. The project requires the purchase of equipment at an initial cost of $120,001. The equipment will be depreciated straight-line to a zero book value over the life of the project. The equipment will be salvaged at the end of the project creating a $25,000 after-tax cash flow. At the end of the project, net working capital will return to its normal level. What is the net present value of this project given a required return of 14%?

Accepted Answer

A)   $3,483.48
B)   $16,117.05
C)   $27,958.66
D)   $32,037.86
E)   $49,876.02F) A) and E)
G) A) and D)

Question 17

Which one of the following statements is correct?

Accepted Answer

A)   Project analysis should only include the cash flows which affect the statement of comprehensive income.
B)   A project can create a positive cash flow from operations without affecting the sales level of a firm.
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.F) B) and C)
G) All of the above

Question 18

The correct formula of project cash flow is sales - costs - taxes - project capital spending.

Accepted Answer

A) True 
 B)False

Question 19

Which of the following is true about net working capital?

Accepted Answer

A)   Projects in which a firm expands its operations and sales will generally not lead to changes in net working capital.
B)   Changes in net working capital account for differences between accounting sales and costs and actual cash receipts and payments.
C)   Net working capital is typically an expense at the beginning of a project and an equal revenue source at the end of a project; thus, there is no impact on project NPV.
D)   Dollar changes in the cash account are generally equal to changes in net working capital.
E)   Net working capital is not considered an investment of the firm.F) C) and D)
G) A) and C)

Question 20

Tori just purchased some equipment that belongs in a 35% CCA class. The equipment cost $167,401. What will be the book value of the equipment at the end of year three?

Accepted Answer

A)   $58,349
B)   $61,203
C)   $72,670
D)   $94,730
E)   $119,189F) C) and D)
G) B) and D)

Exam 10: Making Capital Investment Decisions

Correct Answer
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Explain how the statement of comprehensive income for a cost-cutting project differs from that of an income-producing project.

Correct Answer
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A cost-cutting project produces no reven...
View Answer

The bottom-up approach to computing the operating cash flow applies only when:

Correct Answer
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Correct Answer
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A pro forma financial statement is one that __________________________.

Correct Answer
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A

Which one of the following is an example of an incremental cash flow?

Correct Answer
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Correct Answer
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The top-down approach to computing the operating cash flow:

Correct Answer
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The proper formula of project cash flow is operating cash flow - additions to net working capital + recoveries of net working capital

Correct Answer
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A company has projected sales of $542,000, costs of $389,300, depreciation of $82,400, and a tax rate of 31%. What is the operating cash flow?

Correct Answer
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Correct Answer
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Correct Answer
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B

Sunk costs can be defined as:

Correct Answer
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A

Sunk costs should be included in the analysis of a project.

Correct Answer
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The depreciation tax shield is defined as the cash flow created by:

Correct Answer
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Correct Answer
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Which one of the following statements is correct?

Correct Answer
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The correct formula of project cash flow is sales - costs - taxes - project capital spending.

Correct Answer
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Which of the following is true about net working capital?

Correct Answer
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Tori just purchased some equipment that belongs in a 35% CCA class. The equipment cost $167,401. What will be the book value of the equipment at the end of year three?

Correct Answer
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Exam 10: Making Capital Investment Decisions

Correct AnswerverifiedShow Answer

Explain how the statement of comprehensive income for a cost-cutting project differs from that of an income-producing project.

Correct AnswerverifiedA cost-cutting project produces no reven...View AnswerShow Answer

The bottom-up approach to computing the operating cash flow applies only when:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

A pro forma financial statement is one that __________________________.

Correct AnswerverifiedA

Which one of the following is an example of an incremental cash flow?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

The top-down approach to computing the operating cash flow:

Correct AnswerverifiedShow Answer

The proper formula of project cash flow is operating cash flow - additions to net working capital + recoveries of net working capital

Correct AnswerverifiedShow Answer

A company has projected sales of $542,000, costs of $389,300, depreciation of $82,400, and a tax rate of 31%. What is the operating cash flow?

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Correct AnswerverifiedB

Sunk costs can be defined as:

Correct AnswerverifiedA

Sunk costs should be included in the analysis of a project.

Correct AnswerverifiedShow Answer

The depreciation tax shield is defined as the cash flow created by:

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

Which one of the following statements is correct?

Correct AnswerverifiedShow Answer

The correct formula of project cash flow is sales - costs - taxes - project capital spending.

Correct AnswerverifiedShow Answer

Which of the following is true about net working capital?

Correct AnswerverifiedShow Answer

Tori just purchased some equipment that belongs in a 35% CCA class. The equipment cost $167,401. What will be the book value of the equipment at the end of year three?

Correct AnswerverifiedShow Answer

Correct Answer
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Correct Answer
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A cost-cutting project produces no reven...
View Answer

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A

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B

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A

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