Which one of the following is not an example of an incremental cash flow?

a.

The lost rent on a currently owned warehouse which would be used for a new project

b.

The property taxes on a newly purchased building needed for a new project

c.

The insurance on a company-owned building which will be utilized for a new project

d.

The rent on some new machinery that is required for an upcoming project

You are considering adding a microbrewery on to one of your firm's existing restaurants. This will entail an increase in Accounts Receivable of $12,000, raw materials inventory of $7,000, and an increase in Accounts payable of $3,500, and an increase in property, plant, and equipment of $40,000. All other accounts will remain unchanged. The change in net working capital resulting from the addition of the microbrewery is closest to:

a.

$40,500

b.

$55,500

c.

$15,500

d.

$16,500

Fiat is considering launching a new Plug-in Electric SUVs. With the heavy advertising expenses associated with the new SUV launch Fiat would generate pretax operating income of $45 million next year. Fiat pays a 20% tax rate. The amount that Fiat owes in taxes next year with the launch of the new SUV is closest to:

a.

$9 million

b.

$13 million

c.

$11 million

d.

$7 million

A bond that has a 6% APR coupon, makes semiannual payments, and has five years until maturity will have a price closest to what value, if the market interest rate on a bond of this risk is 7% APR?

a.

$960

b.

$940

c.

$1000

d.

$1200

e.

$980

An 8% coupon bond that pays interest semi-annually that is priced at par will have a value of _____ and semi-annual interest payments of _____.

a.

$1,040; $40

b.

$1,000; $40

c.

$1,000; $80

d.

$1,080; $80

City Housing (CH) wants to set up a temporary housing facility in an area recently damaged by a flood. During the first year, CH estimates that this project will generate $35 million in revenues $15 million in operating expenses and $5 million in depreciation. CH has a marginal tax rate of 20%. CH's free cash flow for the first year of operation is closest to what value?

a.

$12.0 million

b.

$8.0 million

c.

$16.0 million

d.

$4.0 million

KRA Inc. wants to purchase a parcel of wilderness land near a scenic beach. This land will cost $620,000 today, but by renting out wilderness campsites on this land, KRA expects to make $30,000 at the end of every year indefinitely. If the appropriate discount rate is 6%, then the NPV of this new wilderness campsite is closest to:

a.

$37,500

b.

-$37,500

c.

$20,000

d.

-$20,000

Which of the following statements is FALSE?

a.

The NPV investment rule is not the simples decision rule to use.

b.

By setting the NPV equal to zero and solving for n, we find the IRR.

c.

If you are unsure of your cost of capital estimate, it is important to determine how sensitive your analysis is to errors in this estimate.

d.

The IRR investment rule will not necessarily identify the correct decision in all situations.

Olson Auto is considering an opportunity that requires an investment of $980,000 today and will provide $250,000 one year from now, $450,000 two years from now, and $650,000 three years from now. If the appropriate interest rate is 10%, then the NPV of this opportunity is closest to:

a.

$300,000

b.

$1,300,000

c.

-$88,000

d.

$88,000

Archimodo Inc. currently produces 500,000 electric scooters a year and expects output levels to remain steady in the future. It buys subassemblies from an outside supplier at a price of $3.50 each. The plant manager believes that it would be cheaper to vertically integrate and make these subassemblies rather than buy them. Direct in-house production costs are estimated to be only $1.80 per subassembly. The necessary machinery would immediately cost $800,000 and would be obsolete in 10 years. This investment would be depreciated to zero for tax purposes using a 10-year straight line depreciation. The plant manager estimates that the operation would require additional working capital of $40,000 immediately but argues that this sum can be ignored since it is recoverable at the end of the ten years. The expected after tax proceeds from scrapping the machinery after 10 years is $10,000. Archimodo pays tax at a rate of 20% and has an opportunity cost of capital of 14%. The incremental cash flow that Archimodo will incur in year 1 if they elect to manufacture subassemblies in house is closest to:

a.

$600,000

b.

$650,000

c.

$800,000

d.

$750,000

e.

$700,000

Eugene Ward hopes to be the owner of a sole proprietor hamburger shop. He recently learned that he can purchase a hamburger grill that will cook hamburger twice as fast as the existing grills for $20,000. This grill would be depreciated straight line over 10 years to a salvage value of $2,000. Eugene expects that the new grill will produce sales of $30,000 per year for the next 10 years. Working capital is expected to increase by $5,000 immediately, mostly from additional hamburger patties. Eugene expects the new grill can be sold to another restaurant in 10 years for $5,000. Eugene's marginal tax rate is 24%. If the opportunity cost of capital is 12%, then the NPV for this venture is closest to:

a.

-$20,000

b.

$20,000

c.

$100,000

d.

$200,000

Which of the following statements is FALSE?

a.

Overhead expenses are associated with activities that are not directly attributable to a single business activity but instead affect many different areas of the corporation.

b.

Because value is given up when a resource is used by another project, we should include the opportunity cost as an incremental cost of the project.

c.

When computing the incremental earnings of an investment decision, we should include all changes between the firm's earnings with the project versus without the project.

d.

Interest expense is incremental with respect to the current decision regarding the project and should be included in its analysis.