Question 1 The Buck Store is considering a project that will require additional inventory of $216,000 and will increase accounts payable by $181,000. Accounts receivable are currently $525,000 and are expected to increase by 9 percent if this project is accepted. What is the project’s initial cash flow for net working capital? $82,250 $12,250 $12,250 $36,250 $44,250 Question 2 Keyser Mining is considering a project that will require the purchase of $980,000 in new equipment. The equipment will be depreciated straight-line to a zero book value over the 7-year life of the project. The equipment can be scraped at the end of the project for 5 percent of its original cost. Annual sales from this project are estimated at $420,000. Net working capital equal to 20 percent of sales will be required to support the project. All of the net working capital will be recouped. The required return is 16 percent and the tax rate is 35 percent. What is the amount of the aftertax salvage value of the equipment? $17,150 $31,850 $118,80 0 $237,60 0 $343,00 0 Question 3 Jefferson & Sons is evaluating a project that will increase annual sales by $145,000 and annual cash costs by $94,000. The project will initially require $110,000 in fixed assets that will be depreciated straight-line to a zero book value over the 4-year life of the project. The applicable tax rate is 32 percent. What is the operating cash flow for this project? $11,22 0 $29,92 0 $43,48 0 $46,48 0 $46,62 0 Question 4 Keyser Petroleum just purchased some equipment at a cost of $67,000. What is the proper methodology for computing the depreciation expense for year 2 if the equipment is classified as 5-year property for MACRS? $67,000 × (1 – 0.20) × 0.32 $67,000/(1 – 0.20 0.32) $67,000 × (1 + 0.32) $67,000 × (1 – 0.32) $67,000 × 0.32 Question 5 A company that utilizes the MACRS system of depreciation: will have equal depreciation costs each year of an asset’s life. will have a greater tax shield in year two of a project than it would have if the firm had opted for straight-line depreciation, given the same depreciation life. can depreciate the cost of land, if it so desires. will expense less than the entire cost of an asset. cannot expense any of the cost of a new asset during the first year of the asset’s life. Question 6 Day Interiors is considering a project with the following cash flows. What is the IRR of this project? 6.42 percent 7.03 percent 7.48 percent 8.22 percent 8.56 percent Question 7 Which one of the following is an example of a sunk cost? $1,500 of lost sales because an item was out of stock $1,200 paid to repair a machine last year $20,000 project that must be forfeited if another project is accepted $4,500 reduction in current shoe sales if a store commences selling sandals $1,800 increase in comic book sales if a store commences selling puzzles Question 8 Kelly’s Corner Bakery purchased a lot in Oil City 6 years ago at a cost of $302,000. Today, that lot has a market value of $340,000. At the time of the purchase, the company spent $15,000 to level the lot and another $20,000 to install storm drains. The company now wants to build a new facility on that site. The building cost is estimated at $1.51 million. What amount should be used as the initial cash flow for this project? $1,470,00 0 $1,850,00 0 $1,875,00 0 $1,925,00 0 $1,945,00 0 Question 9 The length of time a firm must wait to recoup the money it has invested in a project is called the: internal return period. payback period. profitability period. discounted cash period. valuation period. Question 10 Tedder Mining has analyzed a proposed expansion project and determined that the internal rate of return is lower than the firm desires. Which one of the following changes to the project would be most expected to increase the project’s internal rate of return? decreasing the required discount rate increasing the initial investment in fixed assets condensing the firm’s cash inflows into fewer years with…
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