Student name:__________

MULTIPLE CHOICE - Choose the one alternative that

best completes the statement or answers the question.
1) Any changes to a firm's projected future cash flows
that are caused by adding a new project are referred to as:

E) opportunity cash
A) eroded cash flows. flows.
B) deviated projections.
C) incremental cash flows.
D) directly impacted flows.

2) Which one of the following principles refers to the

assumption that a project will be evaluated based on its
incremental cash flows?

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

3) A cost that should be ignored when evaluating a be recouped is referred to

project because that cost has already been incurred and cannot as a(n):

D) opportunity
A) fixed cost. cost.
B) forgotten cost. E) sunk cost.
C) variable cost.

4) Which one of the following terms refers to the best

option that was foregone when a particular investment is
selected?

D) Opportunity
A) Side effect cost
B) Erosion E) Marginal cost
C) Sunk cost

Version 1 1
5) Which one of the following terms is most commonly
used to describe the cash flows of a new project that are
simply an offset of reduced cash flows for a current project?

D) Replicated
A) Opportunity cost flows
B) Sunk cost E) Pirated flows
C) Erosion

6) A pro forma financial statement is a financial

statement that:

E) values all assets

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

7) The amount by which a firm's tax bill is reduced as a

result of the depreciation expense is referred to as the
depreciation:

D) opportunity
A) tax shield. cost.
B) credit. E) adjustment.
C) erosion.

8) Which one of the following refers to a method of

increasing the rate at which an asset is depreciated?

E) Market-based
A) Noncash expense depreciation
B) Straight-line depreciation
C) Depreciation tax shield
D) Accelerated cost recovery system

Version 1 2
9) Forecasting risk is best defined as:

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

10) Jamie is analyzing the estimated net present value of a analysis that Jamie is doing
project under various conditions by revising the sales is best described as:
quantity, sales price, and the cost estimates. The type of

E) opportunity
A) sensitivity analysis. evaluation.
B) erosion planning.
C) scenario analysis.
D) benefit planning.

11) 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?

E) Opportunity cost
A) Sensitivity analysis analysis
B) Erosion planning
C) Scenario analysis
D) Benefit-cost analysis

12) The opportunities that a manager has to modify a

project once the project has started are called:

E) erosion control
A) sensitivity choices. measures.
B) managerial options.
C) scenario adjustments.
D) restructuring options.

Version 1 3
13) Contingency planning focuses on the:

E) optional capital
A) opportunity costs involved with a project. requirements of a project.
B) sunk costs related to a project.
C) economic effects on a project's profitability.
D) managerial options implicit in a project.

14) Which one of the following refers to the option to

expand into related businesses in the future?

D) Hard rationing
A) Strategic option E) Capital rationing
B) Contingency option option
C) Soft rationing

15) Kyle Electric has three positive net present value following terms best fits
opportunities. Unfortunately, the firm has not been able to the situation facing the
find financing for any of these projects. Which one of the firm?

D) Contingency
A) Sensitivity analysis planning
B) Capital rationing E) Sunk cost
C) Soft rationing

16) Northern Companies has three separate divisions.

Each year, the company determines the amount it can afford
to spend in total for capital expenditures and then allocates
one-third of that amount to each division. This allocation
process is called:

E) strategic
A) soft rationing. planning.
B) hard rationing.
C) opportunity cost allocation.
D) divisional separation.

Version 1 4
17) Dismal Outlook is unable to obtain financing for any
new projects under any circumstances. This company is faced
with:

D) real options.
A) contingency planning. E) sunk costs.
B) soft rationing.
C) hard rationing.

18) The Shoe Box is considering adding a new line of following in its analysis
winter footwear to its product lineup. When analyzing the with the exception of:
viability of this addition, the company should include all the

current winter footwear

A) any expected changes in the sales levels of current samples.
products caused by adding the new product line. E) the expected
B) the cost of new display counters for the additional revenue from winter
winter footwear. footwear sales.
C) increased taxes from winter footwear profits.
D) the research and development costs to produce the

19) Lake City Plastics currently produces plastic plates

and silverware. The company is considering expanding its
product offerings to include plastic serving trays. All the
following are relevant costs to this project with the exception
of:

required.
A) the cost of additional utilities required to operate E) the cost to
the serving tray production operation. acquire the forms needed
B) any change in the expected sales of plates and to mold the trays.
silverware gained from offering trays also.
C) a percentage of the current operating overhead.
D) the additional plastic raw materials that would be

20) The Corner Market

has decided to expand its
retail store by building on

Version 1 5
a vacant lot it currently owns. This lot was purchased four included in the analysis of
years ago at a cost of $299,000, which the firm paid in cash. the expansion project for
To date, the firm has spent another $38,000 on land the cost of the land?
improvements, all of which was also paid in cash. Today, the
lot has a market value of $329,000. What value should be

E) Zero because the

A) The sum of the cash paid to date for both the lot land and the improvements
and the improvements were previously purchased
B) The original purchase price only with cash
C) The current market value of the land plus the cash
paid for the improvements
D) The current market value of the land

21) Weston Steel purchased a new coal furnace six years purchase the furnace.
ago at a cost of $2.2 million. Last year, the government Given the current situation,
changed the emission requirements and this furnace cannot the furnace is best
meet those standards. Thus, the company can no longer use described as which type of
the furnace, nor has it been able to locate anyone willing to cost?

D) Market
A) Erosion E) Opportunity
B) Book
C) Sunk

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

E) Cost for a truck

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

23) CrossTown Builders is considering remodeling an old building it currently owns.

Version 1 6
The building was purchased ten years ago for $1.2 million. from these apartments is
Over the past ten years, the firm rented out the building and $4.1 million. Which one of
used the rent to pay off the mortgage. The building is now the following defines the
owned free and clear and has a current market value of $1.9 opportunity cost of the
million. The company is considering remodeling the building remodeling project?
into industrial-type apartments at an estimated cost of $1.6
million. The estimated present value of the future income

costs
A) Present value of the future income E) Current market
B) Cost of the remodeling value of the building plus
C) Current market value of the building the remodeling costs
D) Initial cost of the building plus the remodeling

24) Bruce Moneybags owns several restaurants and hotels estimated present value of
near a local interstate. One restaurant, Beef and More, the cash inflows from the
originally cost $1.8 million, is currently fully paid for, but renovated restaurant is
needs modernized. Bruce is trying to decide whether to accept $3.2 million. When
an offer and sell Beef and More, as is, for the offer price of analyzing the renovation
$1.1 million or renovate the restaurant himself. The projected project, what cost, if any,
renovation cost is $1.3 million. The restaurant would need to should be included for the
be shut down completely during the renovation which would current restaurant?
cause an aftertax net loss of $90,000 in today's dollars. The

E) $3.2 million −
A) $0 ($1.8 million + 1.3 million
B) $1.1 million + 90,000)
C) $1.1 million + $90,000
D) $1.8 million + 1.3 million + 90,000

25) Flo is considering three mutually exclusive options for

the additional space she plans to add to her specialty women's
store. The cost of the expansion will be $148,000. She can use
this additional space to add children’s clothing, an exclusive
gifts department, or a home decor section. She estimates the
present value of the cash inflows from these projects are
$121,000 for children’s clothing, $178,000 for exclusive gifts,
and $145,000 for decorator items. Which option(s), if any,
should she accept?

Version 1 7
 E) None of these
A) Children’s clothing only options
B) Exclusive gifts only
C) Exclusive gifts and decorator items only
D) All three options

26) Ed owns a store that caters primarily to men. Each of expansion analysis except
the answer options represents an item related to a planned the cost of the:
store expansion. Each of these items should be included in the

E) blueprints that
A) property insurance premium increase. have been drawn of the
B) exterior landscaping that will be required once the expansion area.
expansion is complete.
C) additional sales person that will be required.
D) inventory required to fill the additional retail space.

27) Thrill Rides is considering adding a new roller coaster

to its amusement park. The addition is expected to increase its
overall ticket sales. In particular, the company expects to sell
more tickets for its current roller coaster and experience
extremely high demand for its new coaster. Sales for its boat
ride are expected to decline but food and beverage sales are
expected to increase significantly. All the following are side
effects associated with the new roller coaster with the
exception of the:

E) ticket sales for

A) increased food sales. the new coaster.
B) additional sales for the existing coaster.
C) increased food costs.
D) reduced sales for the boat ride.

28) The analysis of a new project should exclude:

C) side effects.
A) tax effects.
B) erosion effects.

Version 1 8
 D) sunk costs.
E) opportunity costs.

Version 1 9
29) The net working capital invested in a project is
generally:

E) depreciated to a
A) a sunk cost. zero balance over the life
B) an opportunity cost. of the project.
C) recouped in the first year of the project.
D) recouped at the end of the project.

30) A proposed project will increase a firm's accounts

payable. This increase is generally:

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

31) Which of the following create cash inflows from net

working capital?

D) Increase in both
A) Decrease in accounts payable and increase in accounts receivable and
accounts receivable inventory
B) Decrease in both accounts receivable and accounts E) Increase in
payable inventory and decrease in
C) Increase in accounts payable and decrease in cash
inventory

32) The pro forma income statements for a proposed

investment should include all the following except:

D) taxes.
A) fixed costs. E) changes in net
B) forecasted sales. working capital.
C) depreciation expense.

Version 1 10
33) Firm A uses straight-line depreciation. Firm B uses
MACRS depreciation. Both firms bought $75,000 worth of
equipment last year that has a tax life of 5 years. The 5-year
MACRS percentage rates, starting with Year 1, are: 20, 32,
19.2, 11.52, 11.52, and 5.76 percent. Both firms have a
marginal tax rate of 21 percent and identical operating cash
flows except for the depreciation effects. Given this, you
know the:

E) market value of
A) depreciation expense for Firm A will be greater Firm B's equipment is
than Firm B's expense every year. greater than the market
B) equipment has a higher value on Firm B's books value of Firm A's
than on Firm A's at the end of Year 2. equipment at the end of
C) operating cash flow of Firm A is greater than that Year 2.
of Firm B for Year 3.
D) market value of Firm A's equipment is greater than
the market value of Firm B's at end the first year.

34) Assume an all-equity firm has positive net earnings.

The operating cash flow of this firm:

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

35) The operating cash flows of a project:

D) include any
A) are unaffected by the depreciation method selected. aftertax salvage values.
E) include erosion
B) are equal to the project's total projected net income. effects.
C) decrease when net working capital increases.

36) The tax shield approach to computing the operating cash flow, given a tax-

Version 1 11
paying firm:

E) recognizes that
A) ignores both interest expense and taxes. depreciation creates a cash
B) separates cash inflows from cash outflows. inflow.
C) considers the changes in net working capital
resulting from a new project.
D) ignores all noncash expenses and their effects.

37) Which one of the following will increase the operating

cash flow as computed using the tax shield approach?

E) Increase in the
A) Decrease in depreciation tax rate
B) Decrease in sales
C) Increase in variable costs
D) Decrease in fixed costs

38) Scenario analysis is best described as the

determination of the:

net present value.

A) most likely outcome for a project. E) change in a
B) reasonable range of project outcomes. project's net present value
C) variable that has the greatest effect on a project's given a stated change in
outcome. projected sales.
D) effect that a project's initial cost has on the project's

39) Which one of the following is a correct value to use if

you are conducting a best-case scenario analysis?

E) Lowest expected
A) Sales price that is most likely to occur value for fixed costs
B) Lowest expected level of sales quantity
C) Lowest expected salvage value
D) Highest expected need for net working capital

Version 1 12
40) Scenario analysis asks questions such as:

the quantity sold increases

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

41) Scenario analysis:

sensitivity analysis
A) determines the impact a $1 change in sales has on a evaluates a project's
project’s internal rate of return. internal rate of return.
B) determines which variable has the greatest impact E) determines the
on a project's net present value. absolute worst and
C) helps determine the reasonable range of absolute best outcome that
expectations for a project's anticipated outcome. could ever occur.
D) evaluates a project's net present value while

42) Sensitivity analysis:

E) illustrates how
A) looks at the most reasonably optimistic and an increase in operating
pessimistic results for a project. cash flow caused by
B) helps identify the variable within a project that changing both the revenue
presents the greatest forecasting risk. and the costs
C) is used for projects that cannot be analyzed by simultaneously will change
scenario analysis because the cash flows are unconventional. the net present value for a
D) is generally conducted prior to scenario analysis project.
just to determine if the range of potential outcomes is
acceptable.

43) Turner Industries

started a new project three
months ago. Sales arising

Version 1 13
from this project are significantly less than anticipated. Given
this, which one of the following is management most apt to
implement?

E) Option to
A) Option to wait abandon
B) Soft rationing
C) Option to delay
D) Option to expand

44) Ignoring the option to wait:

D) is the same as
A) may overestimate the internal rate of return on a ignoring all strategic
project. options.
B) may underestimate the net present value of a E) ignores the
project. value of discontinuing a
C) ignores the ability of a manager to increase output project early.
after a project has been implemented.

45) Which one of these has the least potential to increase

the net present value of a proposed investment? Assume the
project has a positive net present value in at least one set of
circumstances.

favorable discount rate

A) Ability to wait until the economy improves before becomes available
making the investment E) Option to
B) Ability to immediately shut down a project should discontinue a project at the
the project become unprofitable end of its intended life
C) Option to increase production beyond that initially
projected
D) Option to place the investment on hold until a more

46) The ability to delay an investment:

A) is commonly referred to as the best-case scenario. B) is valuable

Version 1 14
provided there are conditions under which the investment will E) is referred to as
have a positive net present value. the option to abandon.
C) ensures that the investment will have an expected
net present value that is positive.
D) offsets the need to conduct sensitivity analysis.

47) Nu Tek is comprised of four separate operating the following applies to

divisions. For this year, the firm has decided to allocate this situation?
capital funds using a soft rationing approach. Which one of

new projects but will be

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

48) When a firm faces hard rationing,

value for its shareholders.

A) all positive net present value projects will be E) the firm will
accepted. finance only the projects
B) each division within a firm will be allocated an that have the highest
amount for capital expenditures that will be less than the total profitability index values.
value of its positive net present value projects.
C) there will be no available funds for capital
expenditures.
D) the firm will fund only those projects that create

49) The Tattle Teller

has a printing press sitting
idly in its back room. The
press has no market value
to another printer because
the machine utilizes old
technology. The firm could

Version 1 15
get $480 for the press as scrap metal. The press is six years any, should be assigned to
old and originally cost $174,000. The current book value is the press as an initial cost
$3,570. The president of the firm is considering a new project of the new project?
and feels he can use this press for that project. What value, if

D) $3,090
A) $0 E) $4,050
B) $480
C) $3,570

50) Left Eye Promotions is a specialty retailer offering T- of Polo shirts, and $3,000
shirts, sweatshirts, and caps. Its most recent annual sales of caps. What sales amount
consisted of $27,000 of T-shirts, $21,000 of sweatshirts, and should be used when
$3,500 of caps. The company is adding polo shirts to the evaluating the Polo shirt
lineup and projects that this addition will result in sales next project?
year of $25,000 of T-shirts, $17,000 of sweatshirts, $14,000

D) $6,800
A) $13,300 E) $7,900
B) $7,500
C) $6,700

51) Sherpa Outfitters sells specialty equipment for

mountain climbers. Its sales for last year included $488,500 of
tents and $800,000 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
$537,350 of tents, $880,000 of climbing gear, and $150,000
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?

D) $278,850
A) $0 E) $256,850
B) $145,650
C) $128,850

52) Floral Shoppes has a new project in mind that will increase accounts

Version 1 16
receivable by $19,000, increase accounts payable by $4,000, cash flow attributable to
increase fixed assets by $27,000, and decrease inventory by net working capital when it
$2,000. What is the amount the firm should use as the initial analyzes this project?

D) −$13,000
A) −$25,000 E) −$52,000
B) −$17,000
C) −$21,000

53) British Metals is reviewing its current accounts to working capital will the
determine how a proposed project might affect the account firm recoup at the end of
balances. The firm estimates the project will initially require the project assuming that
$81,000 in additional current assets and $57,000 in additional all net working capital can
current liabilities. The firm also estimates the project will be recaptured?
require an additional $9,000 a year in current assets in each of
the first three of the four years of the project. How much net

D) $68,000
A) $105,000 E) $51,000
B) $24,000
C) $48,000

54) Shannon’s Irish Cookware is implementing a project

that will initially increase accounts payable by $5,000,
increase inventory by $3,200, and decrease accounts
receivable by $1,800. 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?

D) $2,500
A) $500,00 E) $5,600
B) $600
C) −$3,600

55) Jim's Hardware is

adding a new product to its
sales lineup. Initially, the

Version 1 17
firm will stock $36,000 of the new inventory, which will be project costs for net
purchased on 30 days' credit from a supplier. The firm will working capital?
also invest $24,000 in accounts receivable and $11,000 in
equipment. What amount should be included in the initial

D) −$13,000
A) −$49,000 E) −$24,000
B) −$47,000
C) −$3,000

56) A five-year project is expected to generate annual tax rate is 21 percent. What
revenues of $159,000, variable costs of $72,500, and fixed is the annual operating
costs of $15,000. The annual depreciation is $19,500 and the cash flow?

D) $41,080
A) $71,500 E) $60,580
B) $117,855
C) $72,430

57) A debt-free firm has net income of $142,658, taxes of

$37,921.75, and depreciation of $27,500. What is the
operating cash flow?

D) $170,158
A) $131,458 E) $162,358
B) $142,658
C) $166,958

58) Logan Hunting has a proposed project that will

generate sales of 2,200 units annually at a selling price of
$29.95 each. The fixed costs are $15,000 and the variable
costs per unit are $6.95. The project requires $42,000 of fixed
assets that will be depreciated on a straight-line basis to a zero
book value over the four-year life of the project. The salvage
value of the fixed assets is $5,500 and the tax rate is 21
percent. What is the operating cash flow for Year 4?

A) $30,329

Version 1 18
 B) $19,829 E) $22,564
C) $21,124
D) $42,179

59) Your local athletic center is planning a $1.2 million costs are $140,000, and the
expansion to its current facility. This cost will be depreciated tax rate is 21 percent. What
on a straight-line basis over a 20-year period. The expanded is the operating cash flow
area is expected to generate $745,000 in additional annual for the first year of this
sales. Variable costs are 39* percent of sales, the annual fixed project?

D) $371,615.50
A) $218,336.00 E) $314,450.00
B) $201,015.00
C) $261,015.50

60) A cost-cutting project will decrease costs by $52,000 a of the change in the firm's
year. The annual depreciation on the project's fixed assets will operating cash flow
be $5,000 and the tax rate is 21 percent. What is the amount resulting from this project?

D) $46,080
A) $37,130 E) $42,130
B) $52,000
C) $41,080

61) An all-equity firm has net income of $78,500,

depreciation of $6,250, and taxes of $20,867. What is the
firm's operating cash flow?

D) $84,750
A) $50,965 E) $78,500
B) $72,250
C) $46,250

62) A new project is

expected to generate an
operating cash flow of
$75,560 and will initially

Version 1 19
free up $12,250 in net working capital. Purchases of fixed
assets costing $75,000 will be required to start up the project.
What is the total cash flow for this project at Time zero?

D) −$87,250
A) −$64,410 E) $62,250
B) −$62,750
C) −$75,000

63) The Outpost, a sole proprietorship currently sells short the long coat. The fixed
leather jackets for $369 each. The firm is considering selling costs for this project are
long coats also. The long coats would sell for $719 each and $23,100, depreciation is
the company expects to sell 820 a year. If the company $10,400 a year, and the tax
decides to carry the long coat, management feels that the rate is 21 percent. What is
annual sales of the short jacket will decline from 1,120 to the projected operating
1,040 units. Variable costs on the jacket are $228 and $435 on cash flow for this project?

D) $131,062
A) $158,999 E) $128,749
B) $131,264
C) $112,212

64) A project has sales of $600,000, costs of $366,500,

depreciation of $34,500, interest expense of $5,500, and a tax
rate of 21 percent. What is the value of the depreciation tax
shield?

D) $98,800.00
A) $7,245.00 E) $10,810,200.00
B) $7,645.00
C) $6,200.00

65) A project has annual depreciation of $15,028, costs of

$92,582, and sales of $138,765. The applicable tax rate is 21
percent. What is the operating cash flow according to the tax
shield approach?

A) $21,540.09

Version 1 20
 B) $27,666.67 E) $39,640.45
C) $27,157.02
D) $42,183.70

66) A project requires $428,000 of equipment that is 8.93, 8.92, 8.93, and 4.46
classified as seven-year property. What is the depreciation percent?
expense in Year 3 given the following MACRS depreciation
allowances, starting with Year 1: 14.29, 24.49, 17.49, 12.49,

D) $74,857.20
A) $89,038.42 E) $104,817.20
B) $48,447.30
C) $56,038.15

67) Woodland Lake Manufacturing has a new project that 24.49, 17.49, 12.49, 8.93,
requires $652,000 of equipment. What is the depreciation in 8.92, 8.93, and 4.46
Year 5 of this project if the equipment is classified as seven- percent.
year property for MACRS purposes? The MACRS allowance
percentages are as follows, commencing with year 1: 14.29,

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

68) What is the Year 2 depreciation on equipment costing commencing with Year 1:
$148,315 if it is classified as five-year property for MACRS 20.00, 32.00, 19.20, 11.52,
purposes? The MACRS allowance percentages are as follows, 11.52, and 5.76 percent.

D) $48,398.80
A) $37,968.64 E) $47,460.80
B) $38,201.50
C) $41,984.30

69) Classic Cars is

considering a project that
requires $311,250 of fixed

Version 1 21
assets that are classified as five-year property for MACRS. commencing with Year 1:
What is the book value of these assets at the end of Year 3? 20.00, 32.00, 19.20, 11.52,
The MACRS allowance percentages are as follows, 11.52, and 5.76 percent.

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

70) Northern Lighting purchased some three-year commencing with Year 1:

MACRS property three years ago. What is the current book 33.33, 44.45, 14.81, and
value of this equipment if the original cost was $385,000? 7.41 percent.
The MACRS allowance percentages are as follows,

D) $85,547.00
A) $0 E) $96,250.00
B) $57,037.75
C) $28,528.50

71) Sandy Bottom, Incorporated, purchased some seven- as follows, commencing

year MACRS welding equipment six years ago at a cost of with Year 1: 14.29, 24.49,
$60,000. Today, the company is selling this equipment for 17.49, 12.49, 8.93, 8.92,
$10,000. The tax rate is 21 percent. What is the after-tax cash 8.93, and 4.46 percent.
flow from this sale? The MACRS allowance percentages are

D) $10,711.06
A) $6,212.86 E) $11,824.41
B) $8.461.96
C) $9,587.14

72) Phil's Diner, a sole proprietorship purchased some

new equipment two years ago for $32,600. Today, it is selling
this equipment for $22,000. What is the aftertax cash flow
from this sale if the tax rate is 21 percent? The applicable
MACRS allowance percentages are as follows, commencing
with Year 1: 20.00, 32.00, 19.20, 11.52, 11.52, and 5.76
percent.

Version 1 22
 D) $20,408.20
A) $20,666.08 E) $25,153.33
B) $18,846.67
C) $24,223.20

73) Three years ago, Stock Tek purchased some five-year 1: 20.00, 32.00, 19.20,
MACRS property for $82,600. Today, it is selling this 11.52, 11.52, and 5.76
property for $31,500. How much tax will the company owe percent.
on this sale if the tax rate is 21 percent? The MACRS
allowance percentages are as follows, commencing with Year

D) $5,857.08
A) −$2,451.81 E) $1,619.35
B) −$5,857.08
C) $0

74) You are analyzing a project and have developed the

following estimates. The depreciation is $13,600 a year and
the tax rate is 21 percent. What is the base-case operating cash
flow?

Base- Lower Upper

Case Bound Bound A) $8,770
Unit sales 2,100 1,850 2,350 B) $6,204
Sales price per unit $ 55 $ 53 $ 57 C) $11,433
Variable cost per $ 37 $ 36 $ 38 D) $21,026
unit E) $20,410
Fixed costs $ $ $
14,800 13,800 15,800

75) You are analyzing a project and have developed the

following estimates. The depreciation is $5,800 a year and the
tax rate is 21 percent. What is the best-case operating cash
flow?

Version 1 23
 Base- Lower Upper
Case Bound Bound A) $7,473.00
Unit sales 800 750 850 B) $4,196.80
Sales price per unit $ 29 $ 28 $ 30 C) $5,377.50
Variable cost per $ 13 $ 11 $ 15 D) $6,701.40
unit E) $9,236.50
Fixed costs $ $ $
6,800 6,000 7,600

76) You are analyzing a project and have developed the

following estimates. The depreciation is $1,020 a year and the
tax rate is 21 percent. What is the worst-case operating cash
flow?

Base- Lower Upper

Case Bound Bound A) $885.70
Unit sales 1,300 1,150 1,450 B) −$110.50
Sales price per unit $ 19 $ 16 $ 22 C) $209.00
Variable cost per $ 12 $ 10 $ 14 D) −$64.10
unit E) $660.50
Fixed costs $ $ $
1,400 1,350 1,450

77) You are analyzing a project and have developed the

following estimates. The depreciation is $17,340 a year and
the tax rate is 21 percent. What is the best-case operating cash
flow?

Base- Lower Upper

Case Bound Bound A) $166,240.00
Unit sales 5,200 4,500 5,900
Sales price per unit $ 109 $ 99 $ 119 B) $224,051.40
Variable cost per $ 71 $ 69 $ 73 C) $172,695.60
unit D) $167,904.00
Fixed costs $ $ $ E) $173,799.60
16,500 16,000 17,000

78) You are analyzing a project and have developed the following estimates. The

Version 1 24
depreciation is $47,900 a year and the tax rate is 21 percent.
What is the worst-case operating cash flow?

Base- Lower Upper

Case Bound Bound A) −$2,545
Unit sales 11,300 9,800 12,800 B) $11,145
Sales price per unit $ 39 $ 34 $ 44 C) $88,855
Variable cost per $ 25 $ 24 $ 26 D) $27,556
unit E) $63,937
Fixed costs $ $ $
9,700 9,200 10,200

79) You are analyzing a project and have developed the

following estimates: unit sales = 2,600, price per unit = $109,
variable cost per unit = $67, fixed costs per year = $38,000.
The depreciation is $12,000 a year and the tax rate is 21
percent. What effect would the sale of one more unit have on
the operating cash flow?

D) $33.18
A) $24.18 E) $15.70
B) $16.66
C) $13.10

80) You are analyzing a project and have developed the percent. What effect would
following estimates: unit sales = 2,150, price per unit = $84, an increase of $1 in the
variable cost per unit = $57, fixed costs per year = $13,900. selling price have on the
The depreciation is $8,300 a year and the tax rate is 21 operating cash flow?

D) $3,773.25
A) $1,698.50 E) $1,430.35
B) $1,249.65
C) $1,320.65

81) A project has

projected values of: unit
sales = 1,650, price per
unit = $19, variable cost

Version 1 25
per unit = $7, fixed costs per year = $4,700. The depreciation
is $1,100 a year and the tax rate is 21 percent. What effect
would a decrease of $1 in the variable cost per unit have on
the operating cash flow?

D) $1,303.50
A) −$8.58 E) $912
B) −$1,089
C) −$912

82) Newton Industries is considering a project and has is 21 percent. What effect
developed the following estimates: unit sales = 4,800, price would an increase of $1 in
per unit = $67, variable cost per unit = $42, annual fixed costs the selling price have on
= $11,900. The depreciation is $14,700 a year and the tax rate the operating cash flow?

D) $83,448
A) $3,792 E) $82,368
B) $4,823
C) $1

83) Lakeside Winery is considering expanding its year. What is the net
winemaking operations. The expansion will require new present value of this
equipment costing $708,000 that would be depreciated on a project if the relevant
straight-line basis to a zero balance over the four-year life of discount rate is 13 percent
the project. The equipment can be sold for $220,000 after the and the tax rate is 21
four years. The project requires $46,000 initially for net percent?
working capital, all of which will be recouped at the end of
the project. The projected operating cash flow is $211,500 a

D) $7,008.14
A) −$9,908.14 E) $1,309.54
B) −$8,309.18
C) −$10,747.11

84) Outdoor Sports is

considering adding a
miniature golf course to its
facility. The course would

Version 1 26
cost $138,000, would be depreciated on a straight-line basis net working capital, which
over its five-year life, and would have a zero salvage value. is recoverable at the end of
The estimated income from the golfing fees would be $72,000 the project. What is the net
a year with $24,000 of that amount being variable cost. The present value of this
fixed cost would be $11,600. In addition, the firm anticipates project at a discount rate of
an additional $14,000 in revenue from its existing facilities if 12 percent and a tax rate of
the golf course is added. The project will require $3,000 of 21 percent?

D) $25,123.33
A) $11,309.11 E) $14,900.41
B) $11,628.04
C) $12,737.26

85) A project has an initial requirement of $260,000 for and the discount rate is 12
fixed assets and $16,500 for net working capital. The fixed percent. What is the
assets will be depreciated to a zero book value over the four- project's net present value
year life of the project and have an estimated salvage value of if the tax rate is 21
$50,000. All the net working capital will be recouped at the percent?
end of the project. The annual operating cash flow is $82,500

D) −$15,432.63
A) $15,684.29 E) $16,343.27
B) $12,345.34
C) $9,670.33

86) Global Water Treatment, Incorporated is analyzing a projected operating cash

proposed investment that would initially require $750,000 of flow is $ 265,000 a year.
new equipment. This equipment would be depreciated on a What is the internal rate of
straight-line basis to a zero balance over the four-year life of return on this project if the
the project. The estimated salvage value is $150,000. The relevant tax rate is 21
project requires $50,000 initially for net working capital, all percent?
of which will be recouped at the end of the project. The

D) 17.64%
A) 15.51% E) 17.99%
B) 15.98%
C) 20.12%

Version 1 27
87) The Golf Range is considering adding an additional net working capital, which
driving range to its facility. The range would cost $229,000, is recoverable at the end of
would be depreciated on a straight-line basis over its seven- the project. What is the
year life, and would have a zero salvage value. The internal rate of return on
anticipated revenue from the project is $62,500 a year with this project at a tax rate of
$18,400 of that amount being variable cost. The fixed cost 21 percent?
would be $15,700. The firm believes that it will earn an
additional $22,500 a year from its current operations should
the driving range be added. The project will require $3,000 of

D) 11.09%
A) 9.84% E) 12.14%
B) 8.68%
C) 7.47%

88) A project has an initial requirement of $311,700 for What is the project's
fixed assets and $47,600 for net working capital. The fixed internal rate of return if the
assets will be depreciated to a zero book value over the four- tax rate is 21 percent?
year life of the project and will be worthless at the end of the
project. All the net working capital will be recouped after four
years. The expected annual operating cash flow is $108,315.

D) 12.15%
A) 12.06% E) 10.87%
B) 11.99%
C) 10.69%

89) Lee’s currently sells 13,800 motor homes per year at

$87,900 each, and 1,100 luxury motor coaches per year at
$139,900 each. The company wants to introduce a low-range
camper to fill out its product line; it hopes to sell 7,200 of
these campers per year at $17,500 each. An independent
consultant has determined that if the company introduces the
new campers, it should boost the sales of its existing motor
homes by 1,100 units per year and reduce the sales of its
luxury motor coaches by 610 units per year. What amount
should be used as the annual sales figure when evaluating this
project?

Version 1 28
 D) $106,542,000
A) $128,309,000 E) $128,787,000
B) $97,480,000
C) $137,351,000

90) Consider an asset that costs $311,000 and is rate is 21 percent, what is
depreciated straight-line to zero over its six-year tax life. The the aftertax cash flow from
asset is to be used in a four-year project; at the end of the the sale of this asset?
project, the asset can be sold for $58,000. If the relevant tax

D) $40,466.67
A) $67,590.00 E) $42,473.33
B) $68,411.19
C) $70,103.33

91) An asset used in a three-year project falls in the three- 21 percent, what is the
year MACRS class for tax purposes. The MACRS percentage aftertax salvage value of
rates starting with Year 1 are: 33.33, 44.45, 14.81, and 7.41. the asset?
The asset has an acquisition cost of $2.6 million and will be
sold for $1.1 million at the end of the project. If the tax rate is

D) $909,458.60
A) $742,519.10 E) $887,560.15
B) $726,000.00
C) $832,056.60

92) The Corner Shop is considering a new four-year $48,000 in annual sales,
expansion project that requires an initial fixed asset with costs of $31,000. If
investment of $210,000. The fixed asset will be depreciated the tax rate is 21 percent,
straight-line to zero over its four-year life, after which time it what is the OCF for this
will be worthless. The project is estimated to generate project?

D) $17,850
A) $24,455 E) $29,640
B) $63,270
C) $69,250

Version 1 29
93) The Sausage Hut is looking at a new sausage system be recouped at project end.
with an installed cost of $187,400. This cost will be If the tax rate is 21 percent
depreciated straight-line to zero over the project's four-year and the discount rate is 12
life, at the end of which the sausage system can be scrapped percent, what is the NPV
for $25,000. The sausage system will save the firm $69,000 of this project?
per year in pretax operating costs, and the system requires an
initial investment in net working capital of $9,000, which will

D) $11,410.10
A) $17,320.02 E) $18,211.15
B) −$13,320.81
C) $15,560.24

94) JL & Company is contemplating the purchase of a back to normal at the end
new $428,000 computer-based order entry system. The of the project. If the tax
system will be depreciated straight-line to zero over the rate is 21 percent, what is
project’s six-year life. The pretax resale value is $215,000. the IRR for this project?
The system will save $148,000 before taxes per year in order
processing costs and will reduce working capital by $46,000
at the beginning of the project. Working capital will revert

D) 31.08%
A) 15.51% E) 14.20%
B) 22.79%
C) 29.11%

95) Cinram Machines has the following estimates for its company use for its total
new gear assembly project: price = $1,870 per unit; variable variable costs when
costs = $949 per unit; fixed costs = $1.4 million; quantity = performing its best-case
42,000 units. Suppose the company believes all its estimates scenario analysis?
are accurate only to within ± 3 percent. What value should the

D) $41,802,137
A) $38,578,064 E) $40,864,538
B) $39,822,128
C) $38,216,051

96) A project costs $2.43 million and has no salvage value. Depreciation is

Version 1 30
straight-line to zero over the five-year life of the project. Sales return is 11 percent. What
are projected at 64,000 units per year, price per unit is $73.29, is the sensitivity of NPV to
variable cost per unit is $42.93, and fixed costs are $623,000 a 100-unit increase in the
per year. The tax rate is 21 percent, and the required rate of sales figure?

D) $8,864.39
A) $9,198.40 E) $7,557.12
B) $8,609.18
C) $8,097.40

97) Consider a three-year project with the following year = 65,500 units; tax
information: initial fixed asset investment = $347,600; rate = 21 percent. How
straight-line depreciation to zero over the three-year life; zero sensitive is OCF to an
salvage value; price per unit = $49.99; variable costs per unit increase of one unit in the
= $30.82; fixed costs per year = $187,000; quantity sold per quantity sold?

D) $9.08
A) $15.14 E) $13.40
B) $11.67
C) $8.67

98) Herschbach Ad Pros is a specialty retailer offering T- Polo shirts, and $2,500 of
shirts, sweatshirts, and caps. Its most recent annual sales caps. What sales amount
consisted of $15,000 of T-shirts, $11,000 of sweatshirts, and should be used when
$1,800 of caps. The company is adding polo shirts to the evaluating the Polo shirt
lineup and projects that this addition will result in sales next project?
year of $14,000 of T-shirts, $9,800 of sweatshirts, $15,000 of

D) $12,800
A) $19,300 E) $13,900
B) $13,500
C) $12,700

99) Outdoors Essentials

sells specialty equipment
for mountain climbers. Its
sales for last year included
$255,000 of tents and $

Version 1 31
550,000 of climbing gear. For next year, management has effects of adding the new
decided to sell specialty sleeping bags also. As a result of this product to its sales
change, sales projections for next year are $300,000 of tents, offerings?
$600,000 of climbing gear, and $110,000 of sleeping bags.
How much of next year's sales are derived from the side

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

100) Scrapping Products is implementing a project that will project terminates. What is
initially increase accounts payable by $3,000, increase the cash flow related to the
inventory by $1,800, and decrease accounts receivable by net working capital for the
$1,200. All net working capital will be recouped when the last year of the project?

D) −$2,100
A) $2,400 E) $3,300
B) $2,100
C) −$2.400

101) A five-year project is expected to generate annual tax rate is 21 percent. What
revenues of $210,000, variable costs of $90,000, and fixed is the annual operating
costs of $22,000. The annual depreciation is $24,000 and the cash flow?

D) $41,080
A) $71,500 E) $82,460
B) $117,855
C) $72.430

102) A debt-free firm has net income of $210,000, taxes of

$55,822.78, and depreciation of $42,000. What is the
operating cash flow?

D) $252,000
A) $213,300 E) $244,200
B) $248,800
C) $202,400

Version 1 32
103) Shay Hand Outfitters has a proposed project that will salvage value of the fixed
generate sales of 3,100 units annually at a selling price of assets is $9,700 and the tax
$37.00 each. The fixed costs are $25,000 and the variable rate is 21 percent. What is
costs per unit are $11.95. The project requires $72,000 of the operating cash flow for
fixed assets that will be depreciated on a straight-line basis to Year 4?
a zero book value over the four-year life of the project. The

D) $52,655.00
A) $45,377.45 E) $22,564.00
B) $27,377.45
C) $41,597.45

104) Your local athletic center is planning a $500,000 costs are $40,000, and the
expansion to its current facility. This cost will be depreciated tax rate is 21 percent. What
on a straight-line basis over a 20-year period. The expanded is the operating cash flow
area is expected to generate $175,000 in additional annual for the first year of this
sales. Variable costs are 32 percent of sales, the annual fixed project?

D) $42,660.00
A) $62,410.00 E) $31,450.00
B) $99,260.00
C) $67,660.00

105) A cost-cutting project will decrease costs by $37,000 a of the change in the firm's
year. The annual depreciation on the project's fixed assets will operating cash flow
be $2,750 and the tax rate is 21 percent. What is the amount resulting from this project?

D) $26,080.00
A) $27,057.50 E) $29,807.50
B) $31,980.00
C) $29,230.50

106) 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?

A) $150,965

Version 1 33
 B) $142,760 E) $151,510
C) $91,550
D) $121,530

107) A new project is expected to generate an operating flow for this project at
cash flow of $85,560 and will initially free up $10,475 in net Time zero?
working capital. Purchases of fixed assets costing $85,000
will be required to start up the project. What is the total cash

D) −$87,250
A) −$75,085 E) $62,250
B) −$74,525
C) −$85,000

Version 1 34
Answer Key

Test name: Chapter 09 Test Bank - Static

1) C
2) E
3) E
4) D
5) C
6) D
7) A
8) D
9) E
10) C
11) A
12) B
13) D
14) A
15) B
16) A
17) C
18) D
19) C

Version 1 35
20) D
21) C
22) C
23) C
24) B
25) B
26) E
27) E
28) D
29) D
30) E
31) C
32) E
33) C
34) D
35) E
36) E
37) D
38) B
39) E
40) B

Version 1 36
41) C
42) B
43) E
44) B
45) E
46) B
47) C
48) C
49) B
The relevant cost is the opportunity cost of
$480. The previous book value is not relative
to the new project, as the amount depreciated
is a sunk cost.
50) B
Sales = ($25,000 + 17,000 + 14,000 + 3,000)
− ($27,000 + 21,000 + 3,500) = $7,500
51) C
Side effects = ($537,350 + 880,000) −
($488,500 + 800,000) = $128,850
52) D
Net working capital requirement = −$19,000 +
4,000 + 2,000 = −$13,000
53) E

Version 1 37
Net working capital recovery = $81,000 −
57,000 + (3 × $9,000) = $51,000
54) C
Net working capital recovery = −$5,000 +
3,200 − 1,800 = −$3,600
55) E
Net working capital = −$36,000 + 36,000 −
24,000 = −$24,000
56) E
Revenue $ 159,000.00 Depreciat 19,500.
Variable Costs −72,500.00 ion 00
Fixed Costs −15,000.00 OCF $
Depreciation −19,500.00 60,580.
EBT $ 52,000.00 00
Taxes (21%) −10,920.00 57) D
Net Income $ 41,080.00

Net Income $ 142,658.00

Depreciation 27,500.00
OCF $ 170,158.00
58) A

Revenue $ 2,200 units × Net $

65,890.00 $29.95/unit Inco 19,
Variable −15,290.0 2,200 units × me 829
Costs 0 $6.95/unit .00
Fixed Costs −15,000.0 Depr 10,
0 ecia 500
Depreciation −10,500.0 42,000/4 years tion .00
0 OCF $
EBT $ 30,
25,100.00 329
Taxes (21%) −5,271.00 .00

59) C

Version 1 38
 Sales $ Net $
745,000.00 inco 201,
Variable −290,550.0 Sales × 0.39 me 015.
costs 0 50
Fixed costs −140,000.0 Depr 60,0
0 ecia 00.0
Depreciation −60,000.00 1,200,000/20 Years tion 0
EBT $ OCF $
254,450.00 261,
Taxes (21%) −53,434.50 015.
50

60) E
EBT $ 47,000.00 ($52,000 − OCF $
5,000) 42,1
Taxes (21%) −9,870.00 30.0
0
Net income $ 37,130.00
61) D
Depreciation 5,000.00

Operating cash flow = $78,500 + 6,250 =

$84,750
62) B
CF0 = $12,250 − 75,000 = −$62,750
63) A
Operating cash flow = {[820 × ($719 − 435)] $23,100} × {1
+ [(1,040 − 1,120) × ($369 − 228)] − − .21} + {$10,400 ×
.21} = $158,999
64) A
Depreciation tax shield = $34,500 × .21 =
$7,245.00
65) E

Version 1 39
Operating cash flow = ($138,765 − 92,582) ×
(1 − .21) + ($15,028 × .21) = $39,640.45
66) D
Depreciation3 = $428,000 × .1749 =
$74,857.20
67) D
Depreciation5 = $652,000 × .0893 =
$58,223.60
68) E
Depreciation2 = $148,315 × .32 = $47,460.80
69) C
Book value3 = $311,250 × (1 − .20 − .32
− .192) = $89,640
70) C
Book value3 = $385,000 × (1 − .3333 − .4445
− .1481) = $28,528.50
71) C
Asset Value at Acquisition $ Depreciatio 8 5,3
(Book Value) 60,000.0 n Year 5 . 58.
0 9 00
Depreciation Year 1 14.2 8,574.00 3
9% %
Depreciation Year 2 24.4 14,694.0 Depreciatio 8 5,3
9% 0 n Year 6 . 52.
Depreciation Year 3 17.4 10,494.0 9 00
9% 0 2
Depreciation Year 4 12.4 7,494.00 %
9% Total 8 $

Version 1 40
 Depreciation after 6 years 6.61 51,966.0 Depreciatio
% 0 n Tax
Unused Depreciation Shield
Gain/Loss $
Year 7 8.93 $ on sale 1,966
% 5,358.00 .00
Year 8 4.46 2,676.00 Tax Rate 21%
%
Tax Impact $
Unused Depreciation 117. 8,034.00
412.8
85%
6
$
After Tax
60,000.0
Cashflow from
0
Sale of Asset
Book Value in year Six Cashflow from $
Sale of Asset 10,
Acquisition Book Value $ 60,000.00
000
Less Accumulated 51,966.00 .00
Depreciation
Tax Impact 412
Book Value in year Six $ 8,034.00 .86
Gain/Loss on Sale After Tax $
Cashflow from 9,5
Market Value $ 10,000.00 Sale of Asset 87.
Less Book Value 8,034.00 14
Gain/Loss on sale $ 1,966.00
72) A
Aftertax cash flow = $22,000 − {[$22,000 −
32,600 × (1 − .20 − .32)] × .21} = $20,666.08
73) E
Tax on salvage value = [$31,500 − $82,600 ×
(1 − .20 − .32 − .192)] × .21 = $1,619.35
74) D
Base case operating cash flow = [2,100 × ($55 − 37) −
$14,800] × [1 − .21] + [$13,600 × .21] = $21,026

75) E
Best-case operating cash flow = [850 × ($30 − 11) − $6,000] × [1 − .21] + [$5,800

Version 1 41
× .21] = $9,236.50

76) A
Worst-case OCF = [1,150 × ($16 − 14) − $1,450] × [1 − .21]
+ [$1,020 × .21] = $885.70

77) B
Best-case OCF = [5,900 × ($119 − 69) − $16,000] × [1 − .21]
+ [$17,340 × .21] = $224,051.40

78) E
Worst-case OCF = [9,800 × ($34 − 26) − $10,200] × [1 − .21]
+ [$47,900 × .21] = $63,937

79) D
Change in OCF = ($109 − 67) × (1 − .21) =
$33.18
80) A
Change in OCF = (2,150 × $1) × (1 − .21) =
$1,698.50
81) D
Change in OCF = (1,650 × $1) × (1 − .21) =
$1,303.50
A decrease in variable costs will increase the
operating cash flow.
82) A
Change in OCF = (4,800 × $1) × (1 − .21) =
$3,792
83) A

Version 1 42
NPV = −$708,000 − 46,000 + ($211,500 × {1 × (1 − .21)]}/(1
− [1/(1 + .13)4]}/.13) + {$46,000 + [$220,000 + .13)4
NPV = −$9,908.14
84) D
OCF = ($72,000 − 24,000 − 11,600 + 14,000) [1/1.125]}/.12) +
× (1 − .21) + ($138,000/5) × .21 = $45,612 ($3,000/1.125) =
NPV = −$138,000 − 3,000 + ($45,612 × {1 − $25,123.33
85) C
NPV = −$260,000 − 16,500 + ($82,500 × {1 − − .21)]/1.124)
[1/(1.12)4]}/.12) + [$16,500 + $50,000 × (1 NPV = $9,670.33
86) E
NPV = 0 = −$750,000 − 50,000 + ($265,000 × [$150,000 × (1
{ 1 − [1/(1 + IRR)4]}/IRR) + {$50,000 + − .21)]}/(1 + IRR)4
IRR = 17.99%
87) A
OCF = ($62,500 − 18,400 − 15,700 + 22,500) $47,081(PVIFA7,IRR)
× (1 − .21) + ($229,000/7) × .21 = $47,081 + $3,000/(1 + IRR)7
NPV = 0 = −$229,000 − 3,000 + IRR = 9.84%
88) B
NPV = 0 = −$311,700 − 47,600 +
$108,315(PVIFA4, IRR) + $47,600/(1 + IRR)4
IRR = 11.99%
89) C
Sales = (1,100 × $87,900) + (−610 × $139,900) + (7,200

Version 1 43
× $17,500) = $137,351,000
90) A
Aftertax salvage value = $58,000 − [$58,000
− ($311,000 × 2/6)] × .21 = $67,590.00
91) D
Aftertax salvage value = $1,100,000 − Aftertax salvage
[$1,100,000 − ($2,600,000 × .0741)] × .21 value = $909,458.60
92) A
OCF = ($48,000 − 31,000)(1 − .21) +
($210,000/4)(.21) = $24,455
93) A
OCF = $69,000 (1 − .21) + ($187,400/4)(.21) (1 − .21)]}/(1
= $64,348.50 + .12)4
NPV = −$187,400 − 9,000 + ($64,348.50 × {1 NPV = $17,320.02
− [1/(1 + .12)4]}/.12) + {$9,000 + [$25,000 ×
94) C
OCF = $148,000(1 − .21) + ($428,000/6)(.21) {−$46,000 +
= $131,900.00 [$215,000 × (1
NPV = 0 = −$428,000 + 46,000 + − .21)]}/(1 + IRR)6
($131,900.00 × {1 − [1/(1 + IRR)6]}/IRR) + IRR = 29.11%
95) B
Total variable costs = (42,000 × 1.03) × ($949
× .97) = $39,822,128
96) D

Version 1 44
Change in OCF = (100)($73.29 − 42.93)(1 Change in NPV =
− .21) = $2,398.44 $2,398.44(PVIFA11
%, 5) = $8,864.39

97) A
Change in OCF = 1 × ($49.99 − 30.82) × (1
− .21) = $15.14
98) B
Sales = ($14,000 + 9,800 + 14,000 + 2,500) −
($15,000 + 11,000 + 1,800) = $13,500
99) C
Side effects = ($300,000 + 600,000) −
($255,000 + 550,000) = $95,000
100) C
Net working capital recovery = −$3,000 +
1,800 − 1,200 = −$2,400
101) E
Revenue $ 210,000.00 Depreciat 24,000.
Variable Costs −90,000.00 ion 00
Fixed Costs −22,000.00 OCF $
Depreciation −24,000.00 82,460.
EBT $ 74,000.00 00
Taxes (21%) −15,540.00 102) D
Net Income $ 58,460.00

Net Income $ 210,000.00

Depreciation 42,000.00
OCF $ 252,000.00
103) A

Revenue $ 3,100 units × 114 $37.00/u

Version 1 45
 ,700.00 nit Net $
Variable −37,045.0 3,100 units × Inco 27,
Cost 0 $11.95/unit me 377
Fixed Costs −25,000.0 .45
0 Depr 18,
Depreciation −18,000.0 72,000/4 years ecia 000
0 tion .00
EBT $ OCF $
34,655.00 45,
Taxes (21%) −7,277.55 377
.45

104) C
Sales $ 42,6
175,000.00 60.0
Variable Cost −56,000.00 Sales × .32 0
Fixed Costs −40,000.00 Depr 25,0
ecia 00.0
Depreciation −25,000.00 500,000/20 Years tion 0
EBT $ OCF $
54,000.00 67,6
Taxes (21%) −11,340.00 60.0
0
Net Income $
105) E
EBT $ 34,250.00 ($37,000 − OCF $
2,750) 29,8
Taxes (21%) −7,192.50 07.5
0
Net Income $ 27,057.50
106) D
Depreciation 2,750.00

Operating cash flow = $112,780 + 8,750 =

$121,530
107) B
CF0 = $10,475 − 85,000 = −$74,525

Version 1 46