I have a toturial credit , I need some one tell teach me from question 85 to 140

5.The changes in the firm's future cash flows that are a direct consequence of accepting a project are called: A) Incremental cash flows. B) Stand-alone cash flows. C) Aftertax cash flows. D) Net present value cash flows. E) Erosion cash flows. Ans:A Level:Basic Subject:IncrementalCashFlows Type:Definitions 6. The evaluation of a project based solely on its incremental cash flows is the basis of the: A) Incremental cash flow method. B) Stand-alone principle. C) Dividend growth model. D) Aftertax salvage value analysis. E) Discounted payback method. Ans:B Level:Basic Subject:Stand-AlonePrinciple Type:Definitions 7. A cost that has already been paid, or the liability to pay has already been incurred, is a(n): A) Salvage value expense. B) Net working capital expense. C) Sunk cost. D) Opportunity cost. E) Erosion cost. Ans:C Level:Basic Subject:SunkCosts Type:Definitions 8. The most valuable investment given up if an alternative investment is chosen is a(n): A) Salvage value expense. B) Net working capital expense. C) Sunk cost. D) Opportunity cost. E) Erosion cost. Ans:D Level:Basic Subject:OpportunityCosts Type:Definitions 9. The cash flows of a new project that come at the expense of a firm's existing projects are: A) Salvage value expenses. B) Net working capital expenses. C) Sunk costs. D) Opportunity costs. E) Erosion costs. Ans:E Level:Basic Subject:ErosionCosts Type:Definitions 10. A pro forma financial statement is one that __________________________. 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 Ans:A Level:Basic Subject:ProFormaFinancialStatements Type:Definitions 11. The cash flow from projects for a company is (what would be included in The cash flow from projects for a company) A) The net operating cash flow generated by the project, less any sunk costs and erosion costs. B) The sum of the incremental operating cash flow and aftertax salvage value of the project. C) The bottomline net income generated by the project, plus the annual depreciation expense. D) The sum of the incremental operating cash flow, capital spending, and net working capital expenses incurred by the project. E) The sum of the sunk costs, opportunity costs, and erosion costs of the project. Ans:D Level:Basic Subject:CashFlowFromProjects Type:Definitions 12. The cash flow tax savings generated as a result of a firm's tax-deductible depreciation expense is called (the) _______________________. A) aftertax depreciation savings B) depreciable basis C) depreciation tax shield D) operating cash flow E) aftertax salvage value Ans:C Level:Basic Subject:DepreciationTaxShield Type:Definitions 13. The annual annuity stream of payments with the same present value as a project's costs is called the project's: A) Incremental cost. B) Sunk cost. C) Opportunity cost. D) Erosion cost. E) Equivalent annual cost. Ans:E Level:Basic Subject:EquivalentAnnualCost Type:Definitions 14. Incremental cash flows are defined as: A) The total cash flows of a firm from the point at which a project is implemented until the point at which the project ends. B) Any change in the future net income of a firm that results from a new project being implemented. C) The cash flows that are foregone when a new project or activity is accepted. D) Those cash flows that have already occurred and will not change whether or not a new project is accepted. E) The changes in the firm's future cash flows that are a direct consequence of accepting a project. Ans:E Level:Basic Subject:IncrementalCashFlows Type:Definitions 15. Sunk costs can be defined as: 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. Ans:A Level:Basic Subject:SunkCosts Type:Definitions 16. The future rental income that could have been earned if a building had not been sold is called a(n) ______ cost. A) Sunk B) Incremental C) Opportunity D) Side E) Stand-alone Ans:C Level:Basic Subject:OpportunityCost Type:Definitions 17. Erosion, in a financial sense, is defined as: A) The expense created on an annual basis from reducing the book value of fixed assets. B) The deterioration of the book value of new assets obtained when a new project is implemented. C) The diminishing cash flows created by a new project over time. D) The negative impact on the current cash flows from an existing product when a new product is introduced. E) The effect of taxation on the additional cash flows created when a new project or activity is implemented. Ans:D Level:Basic Subject:Erosion Type:Definitions 18. The financial statements that reflect the projected results of future years' operations are called _______ statements. A) Incremental B) Pro-forma C) Cash flow D) Net working capital E) Stand-alone Ans:B Level:Basic Subject:ProformaFinancialStatements Type:Definitions 19. Operating cash flow is defined as: A) Earnings before interest and taxes minus depreciation plus taxes. B) The change in net working capital plus depreciation minus taxes. C) Earnings before interest and taxes plus depreciation minus taxes. D) Sales minus costs minus depreciation plus taxes. E) Sales minus variable costs minus fixed costs minus depreciation minus taxes. Ans:C Level:Basic Subject:OperatingCashFlow Type:Definitions 20. Total cash flow from a project is defined as: A) Operating cash flow minus capital spending minus the change in net working capital. (Example) B) Earnings before interest and taxes minus taxes plus depreciation. C) Earnings before interest and taxes plus taxes minus depreciation. D) Operating cash flow minus the change in net working capital plus capital spending. E) Operating cash flow plus depreciation minus capital spending. Ans:A Level:Basic Subject:TotalCashFlow Type:Definitions 21. The equivalent annual cost can be defined as: A) The yearly costs, which are standard in two mutually exclusive projects that have equal lives. B) The net present value of a project divided by the number of years that the project is expected to last. C) The amount of the yearly fixed costs of a project, which remains constant over the life of the project. D) The amount paid each year over the life of a project that has the same net present value as the project. E) The net present value of the yearly fixed costs of a project that is constant over the life of the project. Ans:D Level:Basic Subject:EquivalentAnnualCost Type:Definitions 22. The depreciation tax shield is defined as: A) [(Sales - costs)(1 - Tc)][(depreciation)(Tc)]. B) Depreciation - taxes. C) (Depreciation)(Tc). D) Net income + depreciation - taxes. E) (Depreciation)(1-Tc) Ans:C Level:Basic Subject:DepreciationTaxShield Type:Definitions 23. The reduction in the sale of hamburgers when hot dogs are added to a menu is called the_____ cost. A) Sunk B) Opportunity C) Incremental D) Stand-alone E) Erosion Ans:E Level:Basic Subject:Erosion Type:Definitions 24. Your company is considering three different methods of producing its product: purchase production equipment, lease production equipment, or contract with a supplier to build the product for them. The methods have differing lives and cash flow streams. You should: A) Choose the method that will least affect the balance sheet of the company. B) Choose the method that maximizes future cash inflows. C) Choose the method that will result in the highest net income. D) Choose the method that minimizes initial cash outflows. E) Choose the method that maximizes firm value. Ans:E Level:Basic Subject:ProjectInvestmentGoals Type:Concepts 25. It is important to identify and use only incremental cash flows in capital investment decisions: A) Because they are the simplest to identify. B) Only when the stand-alone principle fails to hold. C) Because ultimately it is the change in a firm's overall future cash flows that matter. D) To accommodate unforeseen changes that might occur. E) Whenever sunk costs are involved. Ans:C Level:Basic Subject:IncrementalCashFlows Type:Concepts 26. When we employ ________________ we are evaluating a project on the basis of its incremental cash flows, thereby ignoring the other cash flows of the firm. A) the stand-alone principle B) C) D) E) the equivalence theorem the law of one price Bell's theorem the equivalent annual cost procedure Ans:A Level:Basic Subject:Stand-AlonePrinciple Type:Concepts 27. Which of the following is true regarding project evaluation? A) Financing costs must be included in the statement of cash flows because they are not accounted for elsewhere. B) The stand-alone principle calls for evaluation of a project based on its incremental cash flows. C) Changes in NWC are not considered incremental cash flows. D) When fixed assets are sold at the project end, there are usually no tax consequences of the sale. E) Whether straight-line depreciation or CCA is used will have no impact on project NPV. Ans:B Level:Basic Subject:ProjectEvaluation Type:Concepts 28. Your company currently sells oversized golf clubs. The Board of Directors wants you to look at replacing them with a line of supersized clubs. Which of the following is NOT relevant? A) A reduction in revenues of $300,000 from terminating the oversized line of clubs. B) Land you own with a market value of $750,000 that may be used for the project. C) $200,000 spent on research and development last year on oversized clubs. D) $350,000 you will pay to Fred Singles to promote your new clubs. E) $125,000 you will receive by selling the existing production equipment which must be upgraded if you produce the new supersized clubs. Ans:C Level:Basic Subject:ProjectCosts Type:Concepts 29. Which of the following is NOT considered a relevant, incremental cash flow in capital budgeting analysis? A) Opportunity costs B) Erosion costs C) Additions to net working capital D) Sunk costs E) Fixed asset salvage values Ans:D Level:Basic Subject:RelevantProjectCashFlows Type:Concepts 30. Which of the following describe(s) relevant cash flows for the purpose of performing capital budgeting analysis? I. Cash flows must be incremental II. Cash flows must be after-tax III. NI + D IV. Additions to net working capital A) I and III only B) I, II, and III only C) I and IV only D) II, III, and IV only E) I, II, III, and IV Ans:E Level:Basic Subject:RelevantCashFlows Type:Concepts 31. The government has been trying to decide whether or not to purchase any of the new, advanced missiles it has developed. One of the arguments in favour of purchasing the missiles is that since so much money has been spent on their development it would be a waste of money not to buy them now. What is the major problem with this argument? A) It includes erosion costs in the decision-making process. B) It includes sunk costs in the decision-making process. C) It includes opportunity costs in the decision-making process. D) It includes net working capital changes in the decision-making process. E) It includes financing costs in the decision-making process. Ans:B Level:Basic Subject:SunkCosts Type:Concepts 32. You discover the engine-oil additive your scientists developed three years ago makes a great men's aftershave once diluted properly using certain chemicals. How should you treat the original $125,000 of R&D expenditures that went into developing the engine-oil additive for your present decision regarding whether or not to begin production of the after-shave? A) Treat it as a cash outflow three years ago for the current project; that is, find the future value today of the $125,000 spent three years ago. B) The full $125,000 should be treated as an initial investment today. C) As a cash inflow since the formula has obviously increased in value over the years. D) As an opportunity cost if the formula cannot presently be sold to another manufacturer. E) As a sunk cost since the R&D expenditure has no bearing on today's decision. Ans:E Level:Basic Subject:SunkCosts Type:Concepts 33. You are advising a friend who is attempting to decide whether or not to drop one of the courses they are currently enrolled in. If they drop, they will forfeit the money spent on tuition. Which of the following regarding the drop decision is consistent with capital budgeting principles? I. Remaining in the class means you must give up your part-time job. II. The tuition cost for the class was outrageous, $1,000 per credit hour. III. If you drop the class, you can sell the textbook now for $30 at the bookstore. A) I only B) I and II only C) I and III only D) II and III only E) I, II, and III Ans:C Level:Basic Subject:SunkCosts Type:Concepts 34. Your company purchased a piece of land five years ago for $150,000 and subsequently added $175,000 in improvements. The current book value of the property is $225,000. There are two options for future use of the land: 1) the land can be sold today for $375,000 on an aftertax basis; 2) your company can destroy the past improvements and build a factory on the land. In consideration of the factory project, what amount (if any) should the land be valued at? A) The present book value of $225,000. B) The aftertax salvage value of $375,000. C) The sales price of $375,000 less the book value of the improvements. D) The original $150,000 purchase price of the land itself. E) The property should be valued at zero since it is a sunk cost. Ans:B Level:Basic Subject:OpportunityCosts Type:Concepts 35. Which of the following would likely NOT cause erosion? I. A gas station owner expands floor space to make room for a convenience store. II. You begin selling coffee in new, small-sized pouches alongside your regular-sized coffee cans. A) B) C) D) E) III. You build a Taco Bell just down the street from your McDonalds franchise. I only I and II only III only I and III only II and III only Ans:A Level:Basic Subject:Erosion Type:Concepts 36. There may be a bias against accepting capital budgeting projects if A) Cash outflows are underestimated. B) The discount rate is underestimated. C) Opportunity costs are not accounted for. D) Inflation in cash inflow estimation is ignored. E) Sunk costs are excluded. Ans:D Level:Basic Subject:Inflation Type:Concepts 37. Which of the following statements regarding cash flow is correct? A) Cash flow measures changes in the firm's cash account. B) Cash flow should be recognized only when it has accrued according to GAAP practices. C) In evaluating capital budgeting decisions, cash flows should be valued on a pretax basis for consistency's sake. D) Aftertax cash flow is usually identical to accounting profits when accrual accounting is used for financial statement purposes. E) Incremental cash flows should include opportunity costs but ignore sunk costs. Ans:E Level:Basic Subject:CashFlows Type:Concepts 38. Which of the following statements is NOT accurate regarding pro forma financial statements? A) In order to construct pro forma statements you generally forecast unit sales first. B) Pro forma statements are generally prepared for more than one year in advance. C) Pro forma statements merely represent the best current estimate of the future. D) Pro forma statements need only be prepared when applying for a bank loan. E) It is important that pro forma statements be as accurate as possible. Ans:D Level:Basic Subject:ProFormaStatements Type:Concepts 39. Which of the following is a proper definition of project cash flow? I. EBIT + D - Taxes - additions to net working capital II. Operating cash flow - additions to net working capital - capital spending III. Operating cash flow - additions to net working capital + recoveries of net working capital IV. Sales - costs - taxes - project capital spending A) I only B) I, II, and III only C) II only D) II and III only E) I, II, III, and IV Ans:C Level:Basic Subject:ProjectCashFlow Type:Concepts 40. Which of the following statements regarding operating cash flows is accurate? A) To evaluate changes in OCF you need to look at both the balance sheet and income statement. B) C) D) E) Changes in OCF will occur when cost of goods sold changes, all else the same. Changes in OCF result directly from changes in financing OCF for a project can be found by subtracting depreciation from project net income. An increase in depreciation will cause a decrease in OCF, all else the same. Ans:B Level:Basic Subject:OperatingCashFlow Type:Concepts 41. By using the tax shield approach for calculating operating cash flows we can: A) Obtain more accurate results than with the customary methods. B) More readily verify what cash flows would be without interest expenses. C) More readily identify the tax benefits of debt financing. D) More readily identify the tax benefits of depreciation. E) Start with the bottom line, net income, and work backwards. Ans:D Level:Basic Subject:OperatingCashFlow Type:Concepts 42.A firm is considering a project which would increase accounts receivable by $10,000, accounts payable by $35,000, and inventory by $30,000. Which of the following is true? A) Net working capital has increased. (How to calculate net working capital) B) Sales will increase. C) Payments to creditors will slow. D) Net working capital has decreased. E) This is a net source of cash. Ans:A Level:Basic Subject:NetWorkingCapital Type:Concepts 43. Which of the following projects would increase net working capital the most? A) Financing a land purchase for a new manufacturing plant via a sale of new stock. B) Decreasing the amount of sales your firm makes on credit. C) Decreasing the number of product lines your firm carries. D) Changing your production schedule so that you produce goods only after a customer order. E) Using long-term bank credit to reduce payables. Ans:E Level:Basic Subject:NetWorkingCapital Type:Concepts 44. Which of the following is true about net working capital? 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. Ans:B Level:Basic Subject:NetWorkingCapital Type:Concepts 45. _________________ would usually represent a net cash inflow at the beginning of a project and an equal net cash outflow upon completion of the project. A) An increase in payables B) An increase in inventory C) D) E) An increase in receivables An increase in fixed assets An increase in receivables, coupled with an identical increase in payables Ans:A Level:Basic Subject:Payables Type:Concepts 46. If a company making only cash sales is considering allowing customer credit, then __________. A) sales will likely decrease B) the change will result in a source of funds C) receivables will likely increase D) net working capital will decrease if funding needs are met with long-term liabilities E) expenses will fall due to monthly billings and collection efforts Ans:C Level:Basic Subject:Receivables Type:Concepts 47. Which of the following would be considered a use of funds? I. An increase in receivables II. An increase in payables III. An increase in inventory IV. An increase in sales A) I and III only (how) B) I and IV only C) II and III only D) II and IV only E) I, III, and IV only Ans:A Level:Basic Subject:UseOfFunds Type:Concepts 48. If a firm moves into a higher tax bracket, one would expect its depreciation tax shield to be which of the following, all else the same? A) More valuable. B) Less valuable. C) Unchanged, since depreciation doesn't change. D) Unchanged, because changes in tax rates don't matter once a project is in place. E) It is impossible to tell how it will change, if at all, without more information. Ans:A Level:Basic Subject:DepreciationTaxShield Type:Concepts 49. Which of the following can be depreciated for tax purposes? I. Machinery and equipment II. Land III. Buildings A) I only B) I and II only C) I and III only D) II and III only E) I, II, and III Ans:C Level:Basic Subject:Depreciation Type:Concepts 50. A taxable gain occurs when an asset is sold for more than its book value. For capital budgeting purposes, the taxes on the sale ____________________________. A) are treated as a reduction in cash and added to operating cash flow B) C) D) E) are treated as a noncash event similar to depreciation are treated as a reduction in cash and deducted from the book value of the asset are treated as a reduction in cash and deducted from the taxable gain are treated as a reduction in cash and are deducted from the sale price Ans:E Level:Basic Subject:SalvageValue Type:Concepts 51. Your firm sells a machine it purchased two years ago. The selling price was approximately 50% less than the book value of the machinE) As a result of this transaction, your firm has a tax benefit: A) in the amount of the tax rate multiplied by the difference between the selling price and the original purchase price B) in the amount of the tax rate multiplied by the difference between the selling price and the book value C) that is available in the current year only D) that is only available for certain types of assets as defined by the CCRA E) that depends on the composition of the CCA pool to which the asset belongs Ans:E Level:Basic Subject:Taxes Type:Concepts 52. Which of the following describes the "bottom-up" approach to defining operating cash flow? A) EBIT + D - Taxes B) NI + D C) (S-C) (1 - TC) + DTc D) S - C - Taxes E) NI + D - taxes Ans:B Level:Basic Subject:OperatingCashFlow Type:Concepts 53. Which of the following describes the "top-down" approach to defining operating cash flow? A) EBIT + D - Taxes B) S - C - Taxes + D C) (S - C) (1 - TC) + DTc D) S - C - Taxes E) NI + D Ans:D Level:Basic Subject:OperatingCashFlow Type:Concepts 54. Which of the following describes the "tax shield" approach to defining operating cash flow? A) EBIT + D - Taxes B) NI + D C) (S - C) (1 - TC) + DTc D) S - C - Taxes E) EBIT + DTc Ans:C Level:Basic Subject:OperatingCashFlow Type:Concepts 55. You are to calculate operating cash flow using the following information: sales, net income, depreciation, and net initial investment. If interest expenses are zero, then it would likely be easiest for you to use the _______________________ approach. A) conventional B) C) D) E) tax shield bottom-up top-down depreciation first Ans:C Level:Basic Subject:OperatingCashFlow Type:Concepts 56. The __________________ approach for calculating project operating cash flow explicitly measures the depreciation-related tax benefit associated with the investment. A) stand-alone B) bottom-up C) top-down D) tax shield E) traditional Ans:D Level:Basic Subject:OperatingCashFlow Type:Concepts 57. If the only project income statement items known to you are net income and depreciation, which of the following methods for calculating project OCF would you use? I. Bottom-up approach II. Top-down approach III. Tax-shield approach A) I only B) II only C) III only D) I and II only E) I and III only Ans:A Level:Basic Subject:OperatingCashFlow Type:Concepts 58. Which of the following methods for calculating project operating cash flow do (does) NOT require you to add back noncash deductions such as depreciation? I. Bottom-up approach II. Top-down approach III. Tax-shield approach A) I only B) II only C) III only D) II and III only E) I, II, and III Ans:B Level:Basic Subject:OperatingCashFlow Type:Concepts 59. You are considering a new project which will require an initial build up of raw materials inventory. The expected life of the project's equipment is seven years. If all goes as you expect, you will replace the equipment at the end of the seven years. If not, you will terminate the project. You currently believe there is a 50-50 chance of either occurrence. How should you treat the raw material inventory in year seven of your present analysis and why? A) Treat half of it as a cash inflow because there is a 50% chance the project will terminate then B) Treat it as a cash outflow because it is expected that the machines will be replaced C) Treat it as a cash inflow because the replacement of the machines becomes a new capital budgeting decision at that point D) Treat it as both a cash inflow and outflow, net effect zero E) Treat half as a cash inflow in year seven, but also treat only half as a cash outflow at the beginning of the project Ans:C Level:Basic Subject:Inventory Type:Concepts 60. When considering mutually exclusive investment projects with different lives that will be replaced once they terminate, it is best to evaluate them using _________________________. A) the discounted payback rule B) the profitability index rule C) the equivalent annual cost rule D) the internal rate of return rule E) the net present value rule Ans:C Level:Basic Subject:EquivalentAnnualCost Type:Concepts 61. The EAC method for evaluating projects applies when which of the following project characteristics exist? I. The projects are mutually exclusive. II. The projects have different economic lives. III. The projects will be replaced more or less indefinitely. A) III only B) I and II only C) I and III only D) II and III only E) I, II, and III Ans:E Level:Basic Subject:EquivalentAnnualCost Type:Concepts 62. Two types of batteries are being considered for use in electric golf carts. Burnout brand has a three year life, while Longlasting brand has a five year life. You must choose between the two batteries and you expect to continually replace the brand you ultimately choose. You should: A) Take the option with the greater NPV. B) Take the option with the lower NPV. C) Take the option with the greater EAC. D) Take the option with the smaller EAC. E) Take the option with the lowest accounting break-even. Ans:D Level:Basic Subject:EquivalentAnnualCosts Type:Concepts 63. When you set the project NPV equal to zero in calculating a bid price you are: A) Going to earn zero net income on the project. B) Appropriately including opportunity costs in your analysis. C) Certain to be the low bidder since, if any firm does bid lower, they will be bidding based on a negative NPV project. D) Assured of earning your firm's highest possible IRR. E) Finding the price at which you expect to create zero wealth for your shareholders. Ans:E Level:Basic Subject:BidPrice Type:Concepts 64. In setting the bid price, the firm seeks the price that will cause the project to "breakeven" in a financial sense. The lowest acceptable bid price results in all of the following EXCEPT: A) AAR = required return B) NPV = 0 C) Discounted payback = the life of the project D) E) IRR = required return PI = 1 Ans:A Level:Basic Subject:FinancialBreakeven Type:Concepts 65. Which of the following is true? I. Setting the bid price requires finding the point at which project NPV is zero. II. In a cost-cutting proposal the reduction in costs has the same effect as an increase in sales. III. EAC is used to evaluate mutually exclusive projects with different lives if the projects are expected to be continuously replicated. A) III only B) I and II only C) I and III only D) II and III only E) I, II, and III Ans:E Level:Basic Subject:SpecialCasesInCapitalBudgeting Type:Concepts 66. Billie Jo sent a letter inquiring about the cost of a piece of equipment for a project she is considering. The cost of the stamp to mail this letter is an example of a(n) _____ cost. A) Opportunity B) Relevant C) Erosion D) Sunk E) Incremental Ans:D Level:Basic Subject:SunkCost Type:Concepts 67. 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? 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 Ans:E Level:Intermediate Subject:SunkCost Type:Concepts 68. A new project will cause accounts payable to increase by $35,000, accounts receivable to increase by $40,000 and inventory to decrease by $5,000. Which one of the following statements is true? A) The project will not affect net working capital. B) The change in accounts payable is a use of cash. C) The change in inventory is a use of cash. D) The project will decrease the amount of cash provided to customers. E) Net working capital will decrease. Ans:A Level:Intermediate Subject:NetWorkingCapital Type:Concepts 69. Adaptomatic Corp. has just issued their latest financial statements. The balance sheet contains the following information. Which one of the following statements is true? Accounts receivable Inventory Accounts payable A) B) C) D) E) Beginning $1,300 $2,000 $1,700 Ending $1,400 $1,800 $1,600 Inventory required a use of cash during the period. Accounts receivable was a source of cash during the period. Net working capital decreased by $200 during the period. Net working capital increased by $200 during the period. There was no change in net working capital. Ans:E Level:Intermediate Subject:NetWorkingCapital Type:Concepts 70. Which of the following actions would create a source of cash? I. Easing the credit policy on accounts receivable II. Reducing the days sales in inventory III. Slowing the payments made to suppliers IV. Selling existing equipment at 10% less than book value A) I and III only B) II and III only C) II and IV only D) I, III, and IV only E) II, III, and IV only Ans:E Level:Intermediate Subject:SourceOfCash Type:Concepts 71. Project cash flows will increase when: A) Capital spending for the project increases. B) The inventory requirements for a project increase. C) The depreciation associated with a project decreases. D) The projected sales resulting from the project increase. E) The incremental change in accounts payable decreases. Ans:D Level:Basic Subject:ProjectCashFlow Type:Concepts 72. Which one of the following is the correct method for computing the net cash flow on the sale of a piece of equipment? (Assume that the equipment was the only asset in its CCA pool) A) (Book value - selling price)(1-T) B) (Book value - selling price)(T) C) (Selling price)(T) D) (Selling price - book value)(1-T) E) (Selling price - book value)(T) Ans:D Level:Basic Subject:CashFlowOnSaleOfAsset Type:Concepts 73. A company owns a building that is totally paid for. This building has been sitting idle for the past three years. Now the company is trying to analyze a project that would include the use of this building. Which of the following costs should be included in that analysis? I. The property taxes paid on the building over the past three years II. The insurance paid on the building over the past three years III. The current market value of the building IV. The cost to survey the lot to construct a drainage pond required for the project A) B) C) D) E) I and II only III and IV only I, II, and III only I, II, and IV only I, II, III, and IV Ans:B Level:Intermediate Subject:RelevantCost Type:Concepts 74. Which one of the following would be considered a use of cash? A) Sale of fully depreciated equipment B) A decrease in accounts receivable C) Sale of inventory at cost D) Reduction in accounts payable E) Product sale at a price in excess of cost Ans:D Level:Basic Subject:UseOfCash Type:Concepts 75. Which of the following are considered cash flows of a project? I. Taxes II. Financing costs III. Sunk costs IV. Opportunity costs A) I and II only B) I and IV only C) III and IV only D) II and IV only E) I, II, and IV only Ans:B Level:Basic Subject:RelevantCosts Type:Concepts 76. For a new project, a company plans to invest $15,000 in inventory, $8,000 in accounts receivable and $150,000 in fixed assets with a salvage value of $44,000. Accounts payable will increase by $13,000 when the project starts. Assets are depreciated straight line to zero over the 4-year life of the project. Taxes are 35%. Which one of the following statements is correct concerning the cash flow in year 4? A) $15,000 is a cash outflow from inventory. B) The cash flow from the salvage value is equal to $44,000 multiplied by 35%. C) $13,000 is a cash inflow from accounts payable. D) The net salvage value is a cash outflow. E) $8,000 is a cash inflow from accounts receivable. Ans:E Level:Intermediate Subject:CashFlows Type:Concepts 77. Which of the following cause operating cash flow to differ from net income? I. Interest expense II. Taxes III. Depreciation ((how)) IV. Fixed Costs A) I and II only B) I and III only C) II and III only D) I, II, and IV only E) I, III, and IV only Ans:B Level:Basic Subject:OperatingCashFlow Type:Concepts 78. A company is evaluating the replacement of the office copier. Which of the following should be considered in that evaluation? I. The balance due on the current lease, which will be payable even if the copier is returned. II. The cost of the maintenance contract on the new copier. III. The costs of repairs made today on the existing copier. IV. The selling price of the existing copier. A) I and II only B) II and III only C) II and IV only D) I, II, and IV only E) II, III, and IV only Ans:C Level:Basic Subject:RelevantCost Type:Concepts 79. The Best Company is reviewing two options for replacing a piece of machinery. The first machine costs $86,500 and has a four-year life. The second machine costs $123,000 and has a six-year life. Neither machine will have a salvage value. The machines will be replaced at the end of their life. What method should be used to determine which machine to purchase? A) Net present value B) Internal rate of return C) Accounting rate of return D) Total cash flows E) Equivalent annual cost Ans:E Level:Intermediate Subject:MutuallyExclusiveProjects Type:Concepts 80. A company has sales of $80,000, costs of $48,000, depreciation of $20,000, and a 34% tax rate. Which one of the following is the correct method of computing the operating cash flow using the tax shield approach? A) ($80,000 - $48,000)(1 - .34) + ($20,000)(.34) B) ($80,000 - $48,000)(.34) + ($20,000)(1 - .34) C) ($80,000 - $48,000 - $20,000) - ($80,000 - $48,000 - $20,000)(1-.35) D) ($80,000 - $48,000 - $20,000) - ($80,000 - $48,000 - $20,000)(.35) E) $80,000 - $48,000 - ($80,000 - $48,000 - $20,000)(.35) Ans:A Level:Intermediate Subject:TaxShieldApproach Type:Concepts 81. When computing a bid price, the net present value should be set equal to zero because: A) The goal is to just break even from an accounting perspective. B) The required return is used as the discount rate. C) The internal rate of return must exceed the required rate of return. D) The internal rate of return will be unreliable. E) The company does not require a profit but does want to cover their production costs. Ans:B Level:Intermediate Subject:BidPrice Type:Concepts 82. Which one of the following statements is most likely true? A) Accounts payable is normally a cash inflow at the beginning of a project. B) Net working capital is the same as current assets. C) The inventory required for a project is normally sold at a huge discount at the end of the project. D) The net working capital required by a project is normally constant over the life of the project in actual business circumstances. E) Any increase in accounts receivable by a project should be counted as a cash inflow. Ans:A Level:Intermediate Subject:NetWorkingCapital Type:Concepts 83. Which of the following would normally be included in the final cash flow of a project that entailed the development and sale of a new product? I. The money spent to advertise the new product II. The money spent to obtain a patent on the new product design III. The recovery of the money spent for inventory related to the project IV. An offer to purchase the patent rights A) I and III only B) II and IV only C) III and IV only D) I and IV only E) II, III, and IV only Ans:C Level:Intermediate Subject:CashFlows Type:Concepts 84. Which one of the following statements is true concerning project analysis? A) Net present value is the best method to use when analyzing cost saving projects involving equipment that will be replaced at the end of the project and the options available have different project lives. B) The internal rate of return is the best method of analysis when the projects under consideration are cost cutting projects with negative cash flows for all time periods. C) The internal rate of return is the best method of analysis when two or more cost cutting projects, with differing initial costs, are being compared because the method incorporates the time value of money concept. D) No matter the circumstances, net present value is always considered to be the best method of analysis as it considers all relevant cash flows and incorporates the time value of money theory. E) For cost cutting proposals where a decision is being made between two or more pieces of equipment with differing lives, the equivalent annual cost method is considered superior to the net present value method if the equipment is to be replaced at the end of its life. Ans:E Level:Intermediate Subject:ProjectAnalysis Type:Concepts 85. Your company may introduce a new line of tennis shoes. You have been given the following projections: sales = 35,000 units @ $40 per unit; variable costs = $25 per unit; fixed costs = $125,000 per year; initial investment = $1,000,000; interest expense = $50,000 per year; project life = 10 years. What is the net income for this project in the third year if the corporate tax rate is 34%? You may assume that the CCA rate on the initial investment is 30%, the half-year rule applies, and the appropriate discount rate of 12%. A) $62,700 B) $113,190 C) $198,070 D) $264,310 E) $297,420 Ans:B Level:Basic Subject:NetIncome Type:Problems 86. A project requires the purchase of machinery for $40,000. The machinery belongs in a 20% CCA class and will have a salvage value of $4,000 at the end of the 4 year project. It will require a net working capital investment of $5,000 up-front. The The firm has a tax rate of 34% and a required return of 10%. The project generates after-tax operating income of $10,000. What is the project's NPV? A) -$2,724 B) $881 C) $1,393 D) $2,394 E) $2,942 Ans:B Level:Basic Subject:NetPresentValue Type:Problems 87. You purchase a machine for $22,000 which belongs in a 30% CCA class. What is the present value of the CCA tax shield on the machine if it is sold at the end of the third year for $6,000, your tax rate is 34%, and the appropriate discount rate is 15%? A) $1,014 B) $3,510 C) $5,011 D) $5,623 E) $6,994 Ans:D Level:Basic Subject:PVCCATS Type:Problems 88. The equipment required for a four year project costs $60,000 and belongs in a 20% CCA class. The project generates after-tax operating income of $13,750 and the fixed assets will be sold for $7,000 at the termination of the project. If the firm has a tax rate of 34% and a required return of 10%, what is the NPV? A) $265 B) $1,133 C) $1,839 D) $2,261 E) $2,842 Ans:A Level:Basic Subject:NetPresentValue Type:Problems 89. The machinery required for a three year project costs $20,000, belongs in a 15% CCA class, and will require a net working capital investment of $5,000 up-front. The project generates after-tax operating income of $11,500. The fixed assets will be sold for $2,000 at the end of the project. If the firm has a tax rate of 34% and a required return of 10%, what is the project NPV? A) $10,724 B) $11,033 C) $12,446 D) $13,426 E) $15,942 Ans:C Level:Basic Subject:NetPresentValue Type:Problems 90. A firm purchases Class 8 equipment for $1,000,000 (CCA Rate 20%) for a 10 year project. What will be the CCA tax shield in year 3? The tax rate is 35%. A) $144,000 B) $50,400 C) $201,600 D) $63,000 E) $35,000 Ans:B Level:Basic Subject:CCATaxShield Type:Problems 91. Consider a $12,000 machine that will reduce after-tax operating costs by $2,500 per year over a five-year period. Assume no changes in net working capital and a salvage value of zero. Further assume that the machine belongs in a 20% CCA class, a marginal tax rate of 34%, and a required return of 10%. The project NPV is: A) $73 B) $449 C) $689 D) $827 E) $1,235 Ans:A Level:Basic Subject:CostCuttingProposal Type:Problems 92. Given the following information and assuming a CCA rate of 20%, what is the NPV of this project? Initial investment = $400,000; life = five years; before-tax cost savings = $150,000 per year; salvage value = $30,000 in year 5; tax rate = 34%; discount rate = 14%. A) -$149,841 B) -$33,117 C) $0 D) $19,800 E) $27,428 Ans:E Level:Basic Subject:NetPresentValue Type:Problems 93. Given the following information and assuming straight-line depreciation to zero, what is the IRR of this project? Initial investment = $400,000; life = four years; cost savings = $125,000 per year; salvage value = $20,000 in year 5; tax rate = 34%; discount rate = 12%. A) 6.25% B) 7.51% C) 8.15% D) 9.43% E) 10.24% Ans:B Level:Basic Subject:InternalRateOfReturn Type:Problems 94. Given the following project information and assuming straight-line depreciation to zero, what is the discounted payback period? Initial investment = $500,000; life = five years; cost savings = $160,000 per year; salvage value = $30,000 in year 5; tax rate = 34%; discount rate = 13%. A) two years B) three years C) four years D) five years E) The discounted payback period is greater than the project's life. Ans:D Level:Basic Subject:DiscountedPayback Type:Problems 95. Given the following information and assuming straight-line depreciation to zero, what is the payback period for this project? Initial investment = $500,000; life = five years; cost savings = $160,000 per year; salvage value = $30,000 in year 5; tax rate = 34%; discount rate = 13%. A) 2.5 years B) 3.6 years C) 3.9 years D) 4.4 years E) The payback period is greater than the project's life. Ans:B Level:Basic Subject:PaybackPeriod Type:Problems 96. Given the following information and assuming a CCA rate of 20%, what is the profitability index of this project? Initial investment = $400,000; life = five years; before-tax cost savings = $150,000 per year; salvage value = $30,000 in year 5; tax rate = 34%; discount rate = 14%. A) 0.45 B) 0.74 C) 1.07 D) 1.65 E) 1.98 Ans:C Level:Basic Subject:ProfitabilityIndex Type:Problems 97. Given the following information and assuming a CCA rate of 30% (Class 10), what is the NPV for this project? Initial investment in fixed assets = $800,000; initial investment in net working capital = $200,000; life = four years; pre-tax cost savings = $400,000 per year; salvage = $10,000 in year 4; tax rate = 35%; discount rate = 12%. A) $50,000 B) $0 C) -$37,059 D) $110,866.55 E) $400,000 Ans:D Level:Basic Subject:NetPresentValue Type:Problems 98. Given the following information and assuming a 20% CCA class, what is the NPV for this project? Initial investment in fixed assets = $800,000; initial investment in net working capital = $200,000; life = four years; after-tax cost savings = $250,000 per year; salvage value = $30,000; tax rate = 35%; discount rate = 16%. A) $95,101 B) $105,967 C) $147,261 D) $187,098 E) $418,198 Ans:C Level:Basic Subject:NetPresentValue Type:Problems 99. You are considering the purchase of one of two machines used in your manufacturing plant. Machine A has a life of two years, costs $40 initially, and then $60 per year in maintenance costs. Machine B costs $70 initially, and requires $45 in annual maintenance costs. Either machine must be replaced at the end of its life. Which is the better machine for the firm? The discount rate is 15% and the tax rate is zero. A) Machine A is better because its NPV is higher than the NPV of machine B. B) Machine A is better because its EAC is -$60.24, which is less than the EAC of -$84.60 for B. C) Machine B is better because its EAC is -$75.66, which is less than the EAC of -$90.12 for A. D) Machine B is better because its EAC is -$75.66, which is less than the EAC of -$84.60 for A. E) Neither machine should be chosen since both have a negative NPV. Ans:D Level:Intermediate Subject:EquivalentAnnualCost Type:Problems 100. A machine costs $60 and requires $35 in maintenance for each year of its three year life. After three years, this machine will be replaced. If the machine belongs in a 30% CCA class and has no salvage value, what is the EAC? Assume a tax rate of 34% and a discount rate of 14%. A) B) C) D) E) -$39.48 -$43.32 -$48.33 -$59.13 -$97.84 Ans:B Level:Intermediate Subject:EquivalentAnnualCost Type:Problems 101. You will bid to supply three jets per year for each of the next three years to the Navy. To get set up, you will need $10 million in equipment, which belongs in a 30% CCA class and will have no salvage value. Total fixed costs per year are $5 million, and variable costs are $7 million per jet. Assuming a tax rate of 30% and a required return of 10%, what is the minimum price at which you should offer to supply the jets? A) $5 million each B) $6 million each C) $9 million each D) $11 million each E) $32 million each Ans:D Level:Intermediate Subject:BidPrice Type:Problems Use the following to answer questions 102-106: The managers of PonchoParts, Inc. plan to manufacture engine blocks for classic cars from the 1960s era. They expect to sell 250 blocks annually for the next five years. The necessary foundry and machining equipment will cost a total of $800,000 and belongs in a 30% CCA class for tax purposes. The firm expects to be able to dispose of the manufacturing equipment for $150,000 at the end of the project. Labour and materials costs total $500 per engine block, fixed costs are $125,000 per year. Assume a 35% tax rate and a 12% discount rate. 102. What is the depreciation tax shield in the third year for this project? A) $21,240 B) $49,980 C) $100,420 D) $104,340 E) $121,040 Ans:B Level:Basic Subject:DepreciationTaxShield Type:Problems 103. What is the present value of the CCA tax shield? A) $65,031 B) $97,540 C) $168,007 D) $175,329 E) $220,125 Ans:C Level:Basic Subject:PVCCATS Type:Problems 104. What is the minimum bid price the firm should set as a sale price for the blocks if the firm were in a bidding situation? A) $1,692 B) $1,934 C) $2,382 D) $2,564 E) $2,821 Ans:B Level:Intermediate Subject:BidPrice Type:Problems 105. Assume that management believes that auto restorers will pay $3,000 retail per engine block. What is the NPV of this project? A) $260,769 B) $401,187 C) $521,309 D) $624,674 E) $644,678 Ans:D Level:Intermediate Subject:NetPresentValue Type:Problems 106. If auto restorers will pay $3,000 retail per engine block, what is the project profitability index? A) 0.79 B) 1.33 C) 1.65 D) 1.78 E) 1.81 Ans:D Level:Intermediate Subject:ProfitabilityIndex Type:Problems Use the following to answer questions 107-110: Your firm needs a computerized line-boring machine which costs $80,000, and requires $20,000 in maintenance for each year of its three year life. After three years, the salvage value will be zero. The machine falls into the Class 10 equipment category (CCA rate 30%). Assume a tax rate of 34% and a discount rate of 10%. 107. Compute the depreciation tax shield for year 3. A) $2,016 B) $3,399 C) $4,855 D) $5,222 E) $5,719 Ans:C Level:Basic Subject:CCADepreciation Type:Problems 108. Compute the annual after-tax maintenance cost. A) $10,000 B) $12,250 C) $13,200 D) $15,250 E) $27,200 Ans:C Level:Basic 109. What is the project's EAC? A) -$2,374 B) -$32,905 C) -$37,539 D) -$53,667 E) -$61,964 Subject:MaintenanceCost Type:Problems Ans:C Level:Intermediate Subject:EquivalentAnnualCost Type:Problems 110. Assume the machine can be sold for $10,000 at the end of year 3. Compute the present value of the pre-tax salvage value at the end of year 3. A) $10,000 B) $7,513 C) $6,600 D) $8,616 E) $9,678 Ans:B Level:Basic Subject:SalvageValue Type:Problems Use the following to answer questions 111-115: You are evaluating a project for The Ultimate recreational tennis racket, guaranteed to correct that wimpy backhand. You estimate the sales price of The Ultimate to be $400 and sales volume to be 1,000 units in year 1, 1,250 units in year 2, and 1,325 units in year 3. The project has a three year life. Variable costs amount to $225 per unit and fixed costs are $100,000 per year. The project requires an initial investment of $165,000 which is depreciated straight-line to zero over the three year project life. The actual market value of the initial investment at the end of year 3 is $35,000. Initial net working capital investment is $75,000 and NWC will maintain a level equal to 20% of sales each year thereafter. The tax rate is 34% and the required return on the project is 10%. 111. What is EBIT for the project in the first year? A) $13,200 B) $15,000 C) $20,000 D) $44,000 E) $52,000 Ans:C Level:Intermediate Subject:EarningsBeforeInterest&Taxes Type:Problems 112. Given the $75,000 initial investment in NWC, what change occurs for NWC during year 1? A) There is no change in NWC. B) There is a $5,000 increase in NWC. C) There is a $5,000 decrease in NWC. D) There is an $80,000 increase in NWC. E) There is an $80,000 decrease in NWC. Ans:B Level:Basic Subject:AdditionsToNetWorkingCapital Type:Problems 113. What is the operating cash flow for the project in year 2? A) $26,400 B) $68,200 C) $97,075 D) $101,210 E) $105,738 Ans:C Level:Basic Subject:OperatingCashFlow Type:Problems 114. What is the effect of the $35,000 salvage value on year 2 cash flows? A) There is no effect; the salvage value is a noncash event. B) C) D) E) Cash flows are increased $11,900. Cash flows are increased $23,100. Cash flows are increased $35,000. Salvage value does not affect incremental cash flow until year 3. Ans:E Level:Intermediate Subject:SalvageValue Type:Problems 115. What is the total cash flow for the project in year 3? A) $126,461 B) $178,156 C) $194,945 D) $234,838 E) $239,100 Ans:D Level:Intermediate Subject:CashFlowFromAssets Type:Problems Use the following to answer questions 116-119: 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. 116. What is the value of the annual depreciation tax shield for year 2 of the project? A) $6.80 B) $7.65 C) $14.17 D) $27.50 E) $41.67 Ans:C Level:Basic Subject:DepreciationTaxShield Type:Problems 117. What is the annual after-tax cost reduction for the project? A) $14.17 B) $27.50 C) $41.67 D) $63.14 E) $69.17 Ans:B Level:Basic Subject:OperatingCashFlow Type:Problems 118. If the equipment is sold to another company at the end of year 3 for $20, what is the NPV? A) $-33.56 B) $-28.91 C) $0 D) $28.91 E) $33.56 Ans:B Level:Intermediate Subject:NetPresentValue Type:Problems 119. If the equipment is sold to another company at the end of year 3 for $20, what is the PI? A) 0.31 B) C) D) E) 0.46 0.77 1.09 1.31 Ans:C Level:Intermediate Subject:ProfitabilityIndex Type:Problems Use the following to answer questions 120-122: A project requires an initial fixed asset investment of $600,000, which will be depreciated straight-line to zero over the six-year life of the project. The pretax salvage value of the fixed assets at the end of the project is estimated to be $50,000. Projected sales volume for each year of the project is shown below. The sale price is $50 per unit for the first three years, and $45 per unit for years 4 through 6. A $30,000 initial investment in net working capital is required, with additional investments equal to 7.5% of annual sales for each year of the project. Variable costs are $35 per unit, and fixed costs are $50,000 per year. The firm has a tax rate of 34% and a required return on investment of 12%. Year Sales 1 10,000 2 12,500 3 15,625 4 19,531 5 24,414 6 30,518 120. What is the additions to NWC during year 4 of the project? A) Use $4,125 B) Use $7,323 C) Use $65,917 D) Recover $5,123 E) Recover $16,342 Ans:B Level:Intermediate Subject:AdditionsToNetWorkingCapital Type:Problems 121. What is the operating cash flow during year 5 of the project? A) $66,429 B) $107,426 C) $117,406 D) $162,132 E) $189,025 Ans:D Level:Intermediate Subject:OperatingCashFlow Type:Problems 122. What is the NPV of the project? A) -$31,396 B) -$6,980 C) $86,980 D) $97,516 E) $133,255 Ans:A Level:Intermediate Subject:NetPresentValue Type:Problems Use the following to answer questions 123-125: The equipment below is required for your business. Assume each will be replaced as it wears out. The required return is 15%. Ignore taxes. Machine A Initial cost Operating Cost/year Life Machine B $200,000 15,000 8 yrs $300,000 17,500 10 yrs 123. What is the EAC of machine A? A) -$301,664 B) -$201,676 C) -$48,163 D) -$59,570 E) -$22,437 Ans:D Level:Intermediate Subject:EquivalentAnnualCost Type:Problems Subject:EquivalentAnnualCost Type:Problems 124. What is the EAC of machine B? A) -$61,664 B) -$77,276 C) -$85,776 D) -$90,163 E) -$94,113 Ans:B Level:Intermediate 125. Which machine should you buy and why? A) Machine A because it has a higher NPV. B) Machine A because it effectively costs less to operate each year. C) Machine B because it has a higher NPV. D) Machine B because it effectively costs less to operate each year. E) Neither, since the NPV for both is negative. Ans:B Level:Intermediate Subject:ProjectDecisionRules Type:Problems 126. 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 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? A) $210,911 B) $211,125 C) $224,808 D) $255,125 E) $267,558 Ans:D Level:Intermediate Subject:OperatingCashFlow Type:Problems 127. KLS, Inc. is considering a four-year project that requires the purchase of $2,435,700 worth of equipment. The equipment is in a 30% CCA class. The company will incur $112,500 in annual interest and taxes at the 34% marginal rate for this project. Sales are estimated at $1.5 million a year with costs averaging $939,500 annually over the life of the project. What is the operating cash flow in year 4 of the project? A) $399,114 B) $473,364 C) $473,406 D) $511,656 E) $624,114 Ans:D Level:Intermediate Subject:OperatingCashFlow Type:Problems 128. 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? A) $104,193 B) $126,518 C) $128,798 D) $130,907 E) $152,700 Ans:D Level:Basic Subject:OperatingCashFlow Type:Problems 129. The Monumental Co. is considering purchasing a piece of equipment costing $642,000. The equipment belongs in a 30% CCA class. What is the anticipated tax shield in year three on this equipment if the company is in the 34% marginal tax bracket? A) $22,799 B) $23,469 C) $32,087 D) $33,438 E) $38,963 Ans:E Level:Intermediate Subject:DepreciationTaxShield Type:Problems 130. The Wise Co. purchased a new truck two years ago for $129,500. The truck belongs in CCA class 10, a 30% class. The company is in the 34% marginal tax bracket. Today the company received an offer of $74,900 for the truck. What will be the net cash flow from the sale if the company decides to sell the truck today and if the CCA pool is terminated as a result of the sale? A) $24,615 B) $50,285 C) $62,160 D) $66,492 E) $75,632 Ans:E Level:Intermediate Subject:CashFlowFromSaleOfAsset Type:Problems 131. Nathan's is considering offering boots for sale along with their current lines of shoes and slippers. The projected annual sales for the company, with and without boots, are as follows: Product Shoes Slippers Boots Without boots $289,400 $54,950 $0 With boots $271,850 $53,900 $46,800 What amount should be used as the annual sales figure when evaluating the addition of boots to the product line? A) $28,200 B) $46,800 C) $344,350 D) $372,550 E) $400,750 Ans:A Level:Intermediate Subject:RelevantCashFlow Type:Problems 132. TreeTop Ltd. currently sells $189,000 of trees, $286,400 of evergreen shrubbery, and $62,800 of flowers. They are considering adding flowering shrubs to their product line. Given this change only, sales are estimated at $168,000 for trees, $239,700 for evergreen shrubbery, $59,900 for flowers, and $136,800 for the flowering shrubs. What is the amount of the erosion? A) $66,200 B) $68,900 C) $70,600 D) $73,300 E) $136,800 Ans:C Level:Intermediate Subject:Erosion Type:Problems 133. Witherspoon, Inc. is considering purchasing a piece of equipment for $43,700. The company has a 35% marginal tax rate and the equipment belongs in a 30% CCA class. At the end of seven years, the company intends to sell the equipment. The estimated market value of the equipment at that time is $7,500. What after-tax salvage value should be placed on the equipment as the company does its capital budgeting analysis on this potential purchase? (for simplicity, you may assume that the CCA pool will terminate when the asset is sold.) A) $0 B) $4,370 C) $6,405 D) $7,500 E) Cannot be determined from the information provided. Ans:C Level:Intermediate Subject:After-TaxSalvageValue Type:Problems 134. Wong Exporters purchased an $89,000 truck that belongs in CCA class 10 (a 30% class). The company has a marginal tax rate of 33% and a discount rate of 12%. After 3 years, the company expects to sell the truck for $36,500. What is the after-tax salvage value at the time of the intended sale? (assume that Wong owns several other vehicles.) A) $35,006 B) $35,600 C) $36,203 D) $36,634 E) $37,697 Ans:D Level:Intermediate Subject:After-TaxSalvageValue Type:Problems 135. A company is considering a new venture. This venture will require the purchase of $321,000 of equipment (which belongs in a 20% CCA class), $45,000 in inventory, and will increase accounts payable by $73,000. Expected sales are $625,000 with costs of $480,000. The project will last for five years, be taxed at 35% and have a required rate of return of 14%. The equipment will have no salvage value at the end of the project. What is the net present value of this project? A) $22,995 B) $38,291 C) $66,316 D) $78,056 E) $107,709 Ans:D Level:Intermediate Subject:NetPresentValue Type:Problems 136. The Frank Ernst Co. wants to add an additional production line. To do this, the company must spend $100,000 to expand its current building and purchase $1.2 million in new equipment. The building expansion has a salvage value of $80,000 and the equipment has a salvage value of $390,000. This new line is expected to produce 200,000 units with a projected sales price of $4.65 per unit and a variable cost of $2.90 a unit. Gross profit from existing products is expected to decline by $29,000 a year as a result of this addition. Fixed costs are $42,000 annually. The net working capital requirement is $36,000. The company uses straight-line depreciation over the life of the product and requires a 15% rate of return. Taxes are incurred at a rate of 34%. The life of the project is five years. What is the total cash flow in year 5? A) $553,080 B) $582,080 C) $589,080 D) $618,740 E) $748,880 Ans:D Level:Challenge Subject:ProjectedCashFlows Type:Problems 137. The Whilst Co. is analyzing a project that has projected sales of $189,400 and costs of $102,300. The project requires an investment in inventory of $15,000 plus another $28,000 in accounts receivable. Fixed assets of $80,000 are needed and belong in a 30% CCA class. Accounts payable will increase by $36,000. An interest expense of $11,000 will be incurred annually. The project has a life of 3 years. At the end of the three years, the equipment has an estimated market value of $26,000. The company requires a 14% rate of return and is in the 34% marginal tax bracket. What is the net present value of this project? A) $65,887 B) $68,023 C) $81,921 D) $91,425 E) $93,608 Ans:D Level:Challenge Subject:NetPresentValue Type:Problems 138. A furniture manufacturer is planning on buying a new industrial sander costing $118,000 and belonging in a 30% CCA class. The sander has projected maintenance costs of $16,000 annually over the three-year life of the sander. At the end of the three years, the sander will be worthless and will be scrapped. The company has a 34% tax rate, a 16% discount rate. What is the equivalent annual cost? A) $36,520 B) $47,892 C) $52,254 D) $55,333 E) $68,540 Ans:C Level:Intermediate Subject:EquivalentAnnualCost Type:Problems 139. A four-year project requires an initial investment of $165,000 in fixed assets plus $25,000 in net working capital. The project has after-tax costs of $14,500. The assets belong in a 20% CCA class and will have no salvage value. What is the project's equivalent annual cost if the required return is 14% and the firm's tax rate is 34%? A) $63,998 B) $159,418 C) $186,474 D) $201,011 E) $232,249 Ans:A Level:Intermediate Subject:EquivalentAnnualCost Type:Problems 140. Your company wants to bid on the sale of 10 customized machines per year for five years. The initial costs for the project are $1.6 million with a salvage value of $800,000 after five years. The manufacturing equipment belongs in a 30% CCA class. Annual fixed costs are estimated at $700,000. Variable cost per machine is $81,500. The project requires net working capital of $120,000. The company has a 34% tax rate and desires a 15% return on the project. What is the minimum price that the company should bid per single machine? A) $197,320 B) $212,028 C) $219,887 D) $221,009 E) $223,619 Ans:A Level:Challenge Subject:BidPrice Type:Problems 141. ABC, Inc. is considering a project that requires $21,000 in net working capital and $121,000 in fixed assets, which belong in a 30% CCA class. The fixed assets have a salvage value of 28,500 at the end of the 3 year project. The after-tax operating income of the project is $61,300 per year. The tax rate is 35% and the required rate of return is 16%. What is the NPV of this project? A) $21,887 B) $34,226 C) $48,933 D) $54,289 E) $67,386 Ans:C Level:Intermediate Subject:NetPresentValue Type:Problems 142. A company is trying to ascertain the selling price per unit for their product. They know the OCF is $170,654, interest expense is $21,300, and fixed costs are $116,900. Variable costs are $25.89 per unit with 20,000 units expected to be sold. The tax rate is 34%. Fixed assets total $759,500 and are being depreciated straight-line to zero over seven years. What is the selling price per unit given this information? A) $40.26 B) $40.67 C) $41.32 D) $42.78 E) $42.93 Ans:C Level:Challenge Subject:IncomeStatementAndOCF Type:Problems 143. Jackson Enterprises is preparing a pro-forma statement for next year. They estimate sales at 12,840 units with a selling price of $43.00. Variable costs are estimated at $21 a unit. $868,000 of fixed assets is being depreciated straight-line to zero over seven years. Annual fixed costs are $104,660 and annual interest payments are $11,050. The tax rate is 35%. The net income is _____ and the operating cash flow is ______. A) $27,800; $132,460 B) $27,800; $162,850 C) $27,800; $209,320 D) $34,983; $132,460 E) $34,983; $209,320 Ans:B Level:Intermediate Subject:NetIncome Type:Problems 144. The Triton Company just purchased a $132,650 piece of equipment that belongs in a 20% CCA class. The company has a marginal tax rate of 34% and a discount rate of 16%. What are the after-tax proceeds from the sale of this equipment if the company sells it after four years at a selling price of $61,125? (assume that Triton has additional pieces of similar equipment.) A) $39,650 B) $55,968 C) $59,589 D) $61,125 E) $66,032 Ans:D Level:Intermediate Subject:After-TaxProceeds Type:Problems 145. A company is considering a new four-year project with an initial investment requirement of $72,000. The equipment belongs in a 30% CCA class and will be worthless at the end of the project. Sales are estimated at $136,800 with costs of $87,900. The tax rate is 3