1. The cash flows used in capital budgeting calculations are based on

   historical revenue.

   forecasts of future cash revenues, cash expenses, and cash investment outlays.

   forecasts of net income.

   forecasts of retained earnings available for financing projects.

5 points

QUESTION 2

1. The term ___________ refers to the fact that these cash flows reflect the amount by which the firm's total after-tax free cash flows will change if the project is adopted.

   periodic

   perpetuity

   incremental

   taxable

5 points

QUESTION 3

1. Which of the following should not be included in a schedule of cash flows from operations when evaluating a capital project?

   revenues

   sunk costs

   depreciation

   variable costs

5 points

QUESTION 4

1. Which of the following is the best example of a sunk cost?

   Future payments on a leased building.

   Future research and development costs.

   Historical research and development costs.

   Historical noncash expenses.

5 points

QUESTION 5

1. If a firm has the option of selling some raw land to another firm or utilizing it to build a new factory, then if the firm chose to build the factory how should it handle the lost opportunity to sell the real estate for capital budgeting purposes?

   Ignore it.

   Include it as an opportunity cost.

   Include half of it as additional revenue for the project.

   Onlyinclude therealestate taxes.

5 points

QUESTION 6

1. If a firm has the option of leasing some factory space to another firm or utilizing it for another product line, then if the firm chose the product line how should it handle the lost lease payments on the factory space for capital budgeting purposes?

   Ignore it.

   Include it as an opportunity cost.

   Include half of it as additional revenue for the project.

   Include the property taxes but nothing else.

5 points

QUESTION 7

1. Brown Mack,Inc.,currently has two large manufacturing divisions that share a single plant.Brown Mack owns the plant but has calculated that$6,000,000of overhead expenses should be allocated to the two equal-sized divisions.If Brown Mack starts a third manufacturing division,of equal size to the other two divisions,then what overhead cost should the new division take into account on its capital budgeting cash flow analysis?

   $0

   $2,000,000

   $3,000,000

   $6,000,000

5 points

QUESTION 8

1. Whenever a project has a negative impact on an existing project's cash flows, then that effect should:

   be ignored.

   be ignored if the project is evaluated using the correct cost of capital.

   be included as a negative revenue amount on the new project's cash flow analysis.

   be included if the impact is limited to noncash expenditures.

5 points

QUESTION 9

1. General Mills just is undertaking acapitalbudgetinganalysis on a new cereal.The firm realizes that if they come out with a new product it would affect sales of existing products?What is the best course of action for General Mills in this analysis?

   Treat the reduction of sales from existing cereals as a sunk cost.

   Account for the reduction of sales from existing cereals in the projection of cash flows on the new product.

   Include the allocated costs of the new cereal in the sales of the pre-existing products.

   Ignore the fact that sales of other products will be affected.

5 points

QUESTION 10

1. Which of the following statements is correct?

   Incremental net operating profits after-tax should include sunk costs associated with a project.

   Incremental net operating profits after-tax should include the effects of financing costs associated with a project.

   Incremental net operating profits after-tax should exclude the effects of depreciation costs associated with a project.

   Incremental net operating profits after-tax should exclude the effects of financing costs associated with a project.

5 points

QUESTION 11

1. When compared to the straight-line depreciation method,theMACRS has:

   a greater proportion of its depreciation early in the life of the asset.

   a lesser proportion of its depreciation early in the life of the asset.

   an equal proportion of its depreciation early in the life of the asset.

   double the total amount of depreciation for the asset.

5 points

QUESTION 12

1. A tax system in which corporationspay a progressively larger share of their income in taxes as their income rises is called:

   a flat tax system.

   a progressive tax system.

   a digressive tax system.

   a regressive tax system.

5 points

QUESTION 13

1. If you are deciding whether to take one project or another, where the projects have different useful lives, then you could utilize:

   anequivalentsamplepathanalysis.

   anequivalentannualtaxreturnanalysis.

   an equivalent annual cost analysis.

   an equivalent annual concussion analysis.

5 points

QUESTION 14

1. Provo,Inc.,had revenues of$10,000,000,cash operating expenses of$5,000,000,and depreciationof$1,000,000duringtheyear.Thefirmpurchased$500,000of equipment during the year while increasing its inventory by$300,000(with no corresponding increase in current liabilities).Themarginaltaxrate forProvo is40percent.What is Provo's cash flow fromoperations(CFFO)?

5 points

QUESTION 15

1. What is Provo's Free Cash Flow (FCF)?

5 points

QUESTION 16

1. Rocky Mountain LumberCompanyis considering purchasing a new wood saw that costs$50,000.The saw will generate revenues of$100,000per year for five years.The cost of materials and labor needed to generate these revenues will total$60,000per year,and other cash expenses will be$10,000per year.What is the NPV of the new wood saw if the required rate of return is10percent?

5 points

QUESTION 17

1. You are the CFO of SlimBody, Inc., a retailer of the exercise machine Slimbody6 and related accessories. Your firm is considering opening up a new store in Tempe. The store will have a life of 20 years. It will generate annual sales of 5,000 exercise machines, and the price of each machine is $2,500. The annual sales of accessories will be $600,000, and the operating expenses of running the store, including labor and rent, will amount to 50 percent of the revenues from the exercise machines. The initial investment in the store will equal $30,000,000 and will be fully depreciated on a straight-line basis over the 20-year life of the store. Your firm will need to invest $2,000,000 in additional working capital immediately, and recover it at the end of the investment. Your firms marginal tax rate is 30 percent. The cost of capital is 10 percent. What is the NPV for the new store opening?

5 points

QUESTION 18

1. Projects with different lives:Your firm is deciding whether to purchase a high-quality printer for your office or one of low-quality.The high-quality printer costs$40,000and should last four years.The low-quality printer costs$30,000and should last three years.If the cost of capital for the firm is13percent,then what is the equivalent annual cost for the lowest costchoice for the firm (please enter your answer as a positive number)?

5 points

QUESTION 19

1. Expected cash flows:FireRockWheel Company is evaluating a project in which there is a 40 percent probability of revenues totaling $3,000,000 and a 60 percent probability of revenues totaling $1,000,000 per year. Its cash expenses will be $1,000,000while depreciation expense will be $200,000; then what is the expected free cash flow from taking the project if the marginal tax rate for the firm is 30 percent?

5 points

QUESTION 20

1. Babaloo Nightclubs, purchased a disco mirror that currently has a book value of $10,000. If Babaloo sells the disco mirror for $500 today, then what is the amount of cash that it will net after taxes if the firm is subject to a 39 percent marginal tax rate?