1. Working capital needed for a new project is treated:

a. as a cash inflow now and as a cash outflow when the project ends.

b. as a cash outflow now and as a cash inflow when the project ends.

c. only as a cash outflow now.

2. Which of the following is not an example of a cash outflow for a proposed machine purchase?

a. Salvage value at the end of its useful life

b. Initial investment (cost) of the machine now

c. Annual operating costs of the machine

d. Repairs and maintenance to be made on the machine during its life

3. Freestone Company is considering buying Machine Y to replace Machine X. Both machines have the same remaining useful life and will perform the same tasks. However, it is expected that Y will waste less direct materials than does X. If Y is purchased, X will be sold on the open market. For this decision problem, which of the following factors is (are) relevant?

I. Original cost of Machine X

II. Current market value of Machine X

III. Cost to purchase Machine Y

IV. Cost of direct materials used by each machine

a. Only I, III, and IV

b. Only II, III, and IV

c. Only I and III

d. I, II, III, and IV are all relevant

4. Joe and his sister Patty are considering investing $6,000 to start a used book business. They expect to receive cash inflows of $1,000 each year for the next four years from the business. At the end of the fourth year, they expect to be able to sell the business for $10,000 cash. What is the net present value of the book business investment if Joe and Patty want to earn at least a 12% return from it? (Ignore taxes)

a. $3,037 c. $3,397

b. $6,360 d. $2,904

5. Kern Co. is planning to invest in a two-year project that is expected to yield cash flows from operations of $50,000 in the first year and $80,000 in the second year. Kern requires a return of 14 percent on all investment projects. The maximum that Kern should invest in this project is: (Ignore taxes)

a. $130,000. c. $120,160.

b. $105,370. d. $161,000.

6. If the internal rate of return is the same as the minimum required rate of return used to compute the net present value of a proposed machine purchase, then the net present value will be:

a. positive. c. zero.

b. negative. d. unknown.