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Multiple Choice Questions: II. CONCEPTS
PRO FORMA INCOME STATEMENT 12. The pro forma income statement for a cost reduction project: a. will reflect a reduction in the sales of the firm. b. will generally reflect no incremental sales. c. has to be prepared reflecting the total sales and expenses of a firm. d. cannot be prepared due to the lack of any project related sales. e. will always reflect a negative project operating cash flow. Difficulty level: Easy
INCREMENTAL CASH FLOW 13. One purpose of identifying all of the incremental cash flows related to a proposed project is to: a. isolate the total sunk costs so they can be evaluated to determine if the project will add value to the firm. b. eliminate any cost which has previously been incurred so that it can be omitted from the analysis of the project. c. make each project appear as profitable as possible for the firm. d. include both the proposed and the current operations of a firm in the analysis of the project. e. identify any and all changes in the cash flows of the firm for the past year so they can be included in the analysis Difficulty level: Medium SUNK COST 15. Sunk costs include any cost that: a. will change if a project is undertaken. b. will be incurred if a project is accepted. c. has previously been incurred and cannot be changed. d. is paid to a third party and cannot be refunded for any reason whatsoever. e. will occur if a project is accepted and once incurred, cannot be recouped. Difficulty level: Easy EROSION 17. Erosion can be explained as the: a. additional income generated from the sales of a newly added product. b. loss of current sales due to a new project being implemented.
II. a decrease in accounts payable of $2. and IV only e. and IV Difficulty level: Medium NET WORKING CAPITAL 23. I. sunk costs II. loss of cash due to the expenses required to fix a parking lot after a heavy rain storm. an inventory decrease of $5. erosion costs IV. All of the following are anticipated effects of a proposed project. an increase in fixed assets of $7. e. II.500 III. III. and IV only e.000 II. an increase in accounts receivable of $1. Which of the following should be included in the analysis of a project? I. I. II.100 a. I and II only b. loss of revenue due to employee theft.c. opportunity costs III. Which of these should be included in the initial project cash flow related to net working capital? I. Net working capital: 7-2 . loss of revenue due to customer theft.600 IV. III and IV only c. d. I and II only b. II and IV only d. III. Difficulty level: Easy TYPES OF COSTS 19. incremental costs a. and IV only Difficulty level: Medium NET WORKING CAPITAL 20. II and IV only d. I. I and III only c. II.
Difficulty level: Easy BOOK VALUE 27. d. amount of tax saved annually due to the depreciation expense. will expense the cost of nonresidential real estate over a period of 7 years. amount of tax due on the sale of an asset.a. if it so desires. Difficulty level: Easy 7-3 . a. e. annual depreciation tax shield. The book value of an asset is primarily used to compute the: a. but not always. b. e. create a cash inflow at the beginning of a project. Difficulty level: Easy MACRS 24. A company which uses the MACRS system of depreciation: will have equal depreciation costs each year of an asset’s life. d. expenditures commonly occur at the end of a project. requirements generally. can depreciate the cost of land. b. is the only expenditure where at least a partial recovery can be made at the end of a project. cannot expense any of the cost of a new asset during the first year of the asset’s life. will write off the entire cost of an asset over the asset’s class life. c. d. e. is frequently affected by the additional sales generated by a new project. can be ignored in project analysis because any expenditure is normally recouped by the end of the project. c. amount of cash received from the sale of an asset. change in depreciation needed to reflect the market value of the asset. c. b.
The cash flows of a project should: a. the depreciation expense increases. the interest expense is lowered. the interest expense is equal to zero. The salvage value of an asset creates an after-tax cash inflow to the firm in an amount equal to the: a. the sales projections are lowered. c. b. c. A project’s operating cash flow will increase when: a. c. d. the net working capital requirement increases. be computed on a pre-tax basis. sales price plus the tax due based on the book value minus the sales price. sales price of the asset. b. The bottom-up approach to computing the operating cash flow applies only when: a. the project is a cost-cutting project. sales price minus the tax due based on the sales price minus the book value. including opportunity costs. 7-4 . sales price plus the tax due based on the sales price minus the book value. Difficulty level: Easy PROJECT OCF 30. sales price minus the book value. Difficulty level: Easy PROJECT CASH FLOWS 31. be applied to the year when the related expense or income is recognized by GAAP.SALVAGE VALUE 28. d. b. both the depreciation expense and the interest expense are equal to zero. include all financing costs related to new debt acquired to finance the project. c. e. Difficulty level: Easy BOTTOM-UP OCF 33. b. d. include all sunk costs and opportunity costs. e. the earnings before interest and taxes decreases. e. include all incremental costs.
a. revenue-cutting e. cost-cutting d. both net present value and the internal rate of return. These machines should be compared using: a. office rent c. d. $1. net present value only. employee salaries b. taxes are ignored and the interest expense is equal to zero. The building cost is estimated at $1. Toni’s Tools is comparing machines to determine which one to purchase. the company spent $50. The machines sell for differing prices.000. e. building maintenance d. An increase in which one of the following will increase the operating cash flow? a. have differing operating costs.200. Difficulty level: Medium TAX SHIELD 35.000 to grade the lot and another $4. equipment rental Difficulty level: Easy COST-CUTTING 37.840. revenue-generating Difficulty level: Easy EQUIVALENT ANNUAL COST 38. A project which is designed to improve the manufacturing efficiency of a firm but will generate no additional sales is referred to as a(n) _____ project. the replacement parts approach. $1.2 million. $1. purchased a corner lot in Eglon City five years ago at a cost of $640.000 7-5 . differing machine lives. PROBLEMS RELEVANT CASH FLOWS 40. their effective annual costs. Difficulty level: Medium III.890. and will be replaced when worn out.d.000. e. Marshall’s & Co.000 to build a small building on the lot to house a parking lot attendant who has overseen the use of the lot for daily commuter parking. c. equipment depreciation e. no fixed assets are required for the project. What amount should be used as the initial cash flow for this building project? a. sunk cost b. The lot was recently appraised at $810. the depreciation tax shield approach. opportunity c. The company now wants to build a new retail store on the site.000 c. At the time of the purchase.000 b. b.
$0 b. Inc. $177. $245.d. $295. if any. $268.000 b.000 pairs of the lower-priced shoes but will sell 1.000 e.000 c. The warehouse has a current book value of $268. repairs were made to the building which cost $60.000 Difficulty level: Medium OPPORTUNITY COST 44. What is the amount of the sales that should be used when evaluating the addition of the lower-priced shoes? a.000. It is considering adding a lower-priced line of shoes which sell for $49 a pair.000 pairs of shoes annually at an average price of $68 a pair. should be included in the initial cash flow of the project for this building? a. $515. $789. it sells 10.000 Difficulty level: Easy 7-6 .000 $2. If the company decides to assign this warehouse to a new project.000 e. Currently. $395.000.000 less pairs of the higher-priced shoes by doing so.000 six years ago.000. Walks Softly estimates it can sell 5. The annual taxes on the property are $20.010. $2. sells customized shoes. The warehouse is totally paid for and solely owned by your firm.000 d.000 Difficulty level: Medium RELEVANT CASH FLOWS 43. Four years ago. what value.000 d. Your firm purchased a warehouse for $335. $313. Walks Softly. e.060. $857.000 and a market value of $295.000 c.
Jamie expects that her Class A sales will decline to 950 units while the Class C campers decline to 2.300 b. $93.000 c. The project will cost $150.750. Ernie’s Electrical is evaluating a project which will increase sales by $50. The sales of pop-ups will not be affected.000 each. $53. $118. $34.500 Class C motor homes.000 pop-up trailers each year.EROSION COST 47.150. $118. $5.000 e.000 Class A motor homes. What is the amount of the operating cash flow if the company has no long-term debt? a.000 and be depreciated straight-line to a zero book value over the 10 year life of the project. $8. $123. if the new camper is added. $3.900 7-7 .300 d. $120.000 d.000 c.300 Difficulty level: Medium BOTTOM-UP OCF 50. Class A motor homes sell for an average of $125.300 e.250. $86. However.400 e. $18.200.100. The applicable tax rate is 34%.000 d.900.500 of them.789. Jamie’s Motor Home Sales currently sells 1.500 and the pop-ups sell for $5. $13. Peter’s Boats has sales of $760. $6. 2.400 c. What is the operating cash flow for this project? a. $18.500 Difficulty level: Medium OCF 48. and 4. The new mid-range camper will sell for $47.000 each.000 b. Jamie is considering adding a mid-range camper and expects that if she does so she can sell 1.000 and a profit margin of 5%. The annual depreciation expense is $80. What is the erosion cost? a.000.000. Class C homes are priced at $39.000 b.000 and costs by $30.
taxes will increase from $23.500 d.000 e.00% 2 32.000. $8.750 Difficulty level: Medium MACRS DEPRECIATION 56. $37.500 Difficulty level: Medium TAX SHIELD OCF 54.850 b. What is the amount of the operating cash flow using the top-down approach? a.000.000 b.000 and cash expenses by $51. $8.350 Difficulty level: Medium DEPRECIATION TAX SHIELD 55. The project will cost $100.500 and depreciation will increase from $4. The company has a marginal tax rate of 34%. The company has a marginal tax rate of 35%. What is the amount of the depreciation expense for the third year? MACRS 5-year property Year Rate 1 20.000 to $24.000.20% 7-8 .00% 3 19.000. $4. The project will cost $40. $6. The assets cost $24. $10.350 d. $9.500. $5.700 e. $9.000 and be depreciated using the straight-line method to a zero book value over the 4year life of the project. $4.000 d.000 and increase cash expenses by $10. Ben’s Border Café is considering a project which will produce sales of $16.Difficulty level: Medium TOP-DOWN OCF 52. What is the value of the depreciation tax shield? a. If the project is implemented. $8. Sun Lee’s Furniture just purchased some fixed assets classified as 5-year property for MACRS.650 c. A project will increase sales by $60.500 c.000 and cash expenses by $95.000 c. $7. A project will increase sales by $140.500 e. What is the operating cash flow of the project using the tax shield approach? a.000 and be depreciated using straight-line depreciation to a zero book value over the 4year life of the project. $22. $17. $25.000 to $5.500 b.
219. e.608 $4. d. a.20 as a result of this sale.830. d.76% Difficulty level: Easy SALVAGE VALUE 60. You are considering selling the equipment today for $82. b. The book value today is $8.52% 6 5. b. The equipment is 5-year property for MACRS.4 5 6 a.00% 3 19.304 $2. Which one of the following statements is correct if your tax rate is 34%? MACRS 5-year property Year Rate 1 20.000.765 $4. c.52% 5.76% The tax due on the sale is $14.507 $2. $2.880.800 11. e.320.478. The book value today is $64.80. Difficulty level: Medium 7-9 . You own some equipment which you purchased three years ago at a cost of $135. You will receive a tax refund of $13.20% 4 11.52% 5 11. c.52% 11.00% 2 32. The taxable amount on the sale is $38.500.
$4. $5.000 a year to 7-10 . $1.09 d.954. $2. $20. Tool Makers.17 c.500 a year for three years.306.600 b.000 to purchase and install. What is the amount of the earnings before interest and taxes for this project? a. The initial cost of the fixed assets is $50.11 b. The initial cost of one customized tool and die machine is $850. uses tool and die machines to produce equipment for other firms.000.000 c. $11. These assets will be worthless at the end of the project. $2.000 of net working capital will be required throughout the life of the project. Matty’s Place is considering the installation of a new computer system that will cut annual operating costs by $11.000 e.000. A project is expected to create operating cash flows of $22.208. The system will cost $48. -$9.17 Difficulty level: Medium COST-CUTTING 66.PROJECT NPV 63. What is the project’s net present value if the required rate of return is 10%? a.11 e. $5. This machine costs $10.400 d.000. Inc. An additional $3. This system is expected to have a 5-year life and will be depreciated to zero using straight-line depreciation.208.954.600 Difficulty level: Medium EQUIVALENT ANNUAL COST 69. $1.
000 e. What is the equivalent annual cost of this machine if the required return is 9%? (Round your answer to whole dollars. $75.000 and long-term debt is expected to increase by $300. d. the fixed assets can be 7-11 . Short-term debt is expected to increase by $100. The project will require $325.a. operate.000.000 Difficulty level: Medium The following information should be used for problems #75 .648 $351. What is the initial project cash flow needed for net working capital? a.000 b. The fixed assets will be depreciated straight-line to a zero book value over the life of the project.000 and will also increase accounts payable by $45.) $325.000 and are expected to increase by 10% if this project is accepted.000 for additional accounts receivable. $160. e. b. Kay’s Nautique is considering a project which will require additional inventory of $128.000 for new fixed assets. Each machine has a life of 3 years before it is replaced.002 $345.000 d. $136.78: Margarite’s Enterprises is considering a new project. At the end of the project.619 Difficulty level: Challenge NET WORKING CAPITAL 72. The project has a 5-year life. $99. $181. $91.000 c.000 as suppliers are willing to finance part of these purchases. c. Accounts receivable are currently $80.797 $340.000 for additional inventory and $35.797 $347.
e. a. What is the amount of the after-tax cash flow from the sale of the fixed assets at the end of this project? (Round your answer to whole dollars. $60.438 b. The tax rate is 35% and the required rate of return is 15%.000.500 $59.000 and costs of $430. The net working capital returns to its original level at the end of the project.000 Difficulty level: Medium AFTER-TAX SALVAGE VALUE 77. $520. d. b. The project is expected to generate annual sales of $554.009 e. What is the amount of the earnings before interest and taxes for the first year of this project? $38.000 Difficulty level: Medium EBIT 76. $420. $37. $620.250 Difficulty level: Medium 7-12 .000 d.sold for 25% of their original cost. RELEVANT COSTS 75.813 d.500 $159.) a. $28. $52.000 $76. $425.000 e. $325.918 c.000 c. What is the initial cost of this project? a.000 $67.000 b. $81. c.