FIN 370T Wk 5 – Practice: Ch. 12 and 13 Knowledge Check

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FIN 370T Wk 5 – Practice: Ch. 12 and 13 Knowledge Check
FIN 370T Wk 5 – Practice: Ch. 12 and 13 Knowledge Check
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FIN 370T Wk 5 – Practice: Ch. 12 and 13 Knowledge Check

Which of the following is NOT included when calculating the depreciable basis for real property?

Multiple Choice

  • Freight charges for item

  • Sales tax paid for item

  • Financing fees

  • Installation and testing fees

 

 

A new project would require an immediate increase in raw materials in the amount $6,000. The firm expects that accounts payable will automatically increase $2,000. How much must the firm expect its investment in net working capital to increase if they accept this project?

Multiple Choice

  • −$6,000

  • −$4,000

  • +$4,000

  • +$6,000

 

 

Suppose you sell a fixed asset for $99,000 when its book value is $129,000. If your company’s marginal tax rate is 39 percent, what will be the effect on cash flows of this sale (i.e., what will be the after-tax cash flow of this sale)?

Multiple Choice

  • $80,700

  • $110,700

  • $77,300

  • $84,800

 

 

Concerning incremental project cash flow, which of these is a cost one would never count as an expense of the project?

Multiple Choice

  • Initial investment

  • Taxes paid

  • Operating expenses of the project

  • Financing costs

 

 

If a firm has already paid an expense or is obligated to pay one in the future, regardless of whether a particular project is undertaken, that expense is a(n):

Multiple Choice

  • incremental cash outflow.

  • opportunity cost.

  • sunk cost.

  • expensible item.

 

 

Effects that arise from a new product or service that decrease sales of the firm’s existing products or services are referred to as:

Multiple Choice

  • complementary effects.

  • substitutionary effects.

  • sunk effects.

  • marginal effects.

 

 

Your company is considering a new project that will require $2,000,000 of new equipment at the start of the project. The equipment will have a depreciable life of 10 years and will be depreciated to a book value of $250,000 using straight-line depreciation. The cost of capital is 12 percent, and the firm’s tax rate is 39 percent. Estimate the present value of the tax benefits from depreciation.

Multiple Choice

  • $68,250

  • $106,750

  • $175,000

  • $385,628

 

 

Your company is considering a new project that will require $100,000 of new equipment at the start of the project. The equipment will have a depreciable life of 10 years and will be depreciated to a book value of $5,000 using straight-line depreciation. The cost of capital is 14 percent, and the firm’s tax rate is 30 percent. Estimate the present value of the tax benefits from depreciation.

Multiple Choice

  • $14,865.93

  • $14,030.79

  • $15,017.25

  • $15,997.13

 

 

Your company is considering a new project that will require $10,000 of new equipment at the start of the project. The equipment will have a depreciable life of five years and will be depreciated to a book value of $3,000 using straight-line depreciation. The cost of capital is 9 percent, and the firm’s tax rate is 34 percent. Estimate the present value of the tax benefits from depreciation.

Multiple Choice

  • $476

  • $924

  • $1,400

  • $1,851

 

 

You are trying to pick the least expensive car for your new delivery service. You have two choices: the Scion xA, which will cost $13,000 to purchase and which will have OCF of −$1,200 annually throughout the vehicle’s expected life of three years as a delivery vehicle; and the Toyota Prius, which will cost $23,000 to purchase and which will have OCF of −$550 annually throughout that vehicle’s expected five-year life. Both cars will be worthless at the end of their life. If you intend to replace whichever type of car you choose with the same thing when its life runs out, again and again out into the foreseeable future, and if your business has a cost of capital of 12 percent, what is the difference in the EAC of the two cars?

Multiple Choice

  • $317.88

  • $310.38

  • $413.25

  • $361.13

 

 

A capital budgeting technique that generates a decision rule and associated metric for choosing projects based on the total discounted value of their cash flows is referred to as:

Multiple Choice

  • PI.

  • IRR.

  • NPV.

  • MIRR.

 

 

All of the following are strengths of payback EXCEPT:

Multiple Choice

  • its benchmark is not determined by a relevant external constraint.

  • it incorporates the time value of money.

  • it uses a conservative reinvestment rate.

  • none of the options.

 

 

Compute the NPV statistic for Project Y given the following cash flows and if the appropriate cost of capital is 12 percent.

Project Y

 

Time       0          1          2          3          4          5

Cash Flow      –$    10,000               $     3,000                 $     4,000                 $     1,000                 $     2,000                   $     500

________________________________________

Multiple Choice

  • $18,133,88

  • −$1,366.99

  • −$1,539.14

  • −$1,866.12

 

 

Which of these are sets of cash flows where all the initial cash flows are negative and all the subsequent ones are either zero or positive?

Multiple Choice

  • Expected cash flows

  • Time line cash flows

  • Non-normal cash flows

  • Normal cash flows

 

 

Compute the NPV statistic for Project U given the following cash flows if the appropriate cost of capital is 9 percent.

Project U

 

Time       0          1          2          3          4          5

Cash Flow      –$    1,000                 $     350             $     1,480                 –$    520             $     400             –$       100

________________________________________

Multiple Choice

  • $201.69

  • $273.82

  • $383.63

 

 

The net present value decision technique uses a statistic denominated in:

Multiple Choice

  • years.

  • currency.

  • a percentage.

  • time lines

 

 

Which of these is a capital budgeting technique that generates decision rules and associated metrics for choosing projects based upon the implicit expected geometric average of a project’s rate of return?

Multiple Choice

  • Discounted payback

  • Net present value

  • Internal rate of return

  • Profitability index

 

 

Which of the following best describes the NPV profile?

Multiple Choice

  • A graph of a project’s NPV as a function of possible IRRs.

  • A graph of a project’s NPV over time.

  • A graph of a project’s NPV as a function of possible capital costs.

  • None of the statements are correct.

 

 

Compute the IRR statistic for Project X and note whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent.

 

Time:      0     1     2     3     4     5

Cash flow:      −75  −75  0     100  75    50

Multiple Choice

  • 10 percent, accept

  • 10 percent, reject

  • 13.26 percent, accept

  • 13.26 percent, reject

 

 

Compute the PI statistic for Project Z and advise the firm whether to accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent.

 

Project Z

 

Time       0          1          2          3          4          5

Cash Flow      –$    1,000                 $     350             $     380             $     420             $     300             $     100

________________________________________

Multiple Choice

  • The project’s PI is 8.48 percent and the project should be accepted.

  • The project’s PI is 8.48 percent and the project should be rejected.

  • The project’s PI is 16.48 percent and the project should be accepted.

  • The project’s PI is 21.48 percent and the project should be accepted.