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Multiple Choice Quiz
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1
Preferably, cash flows for a project are estimated as:
A)Cash flows before taxes
B)Cash flows after taxes
C)Earnings before taxes
D)Earnings after taxes
2
The following cash flows should be treated as incremental flows when deciding whether to go ahead with an electric car except:
A)The consequent reduction in sales of the company's existing gasoline models
B)The expenditure on new plant, property, and equipment
C)New spare parts inventory
D)Interest payment on debt
3
Money that a firm has already spent or committed to spend regardless of whether a project is taken is called:
A)Sunk costs
B)Opportunity costs
C)Fixed costs
D)None of the above
4
A firm owns a building with a book value of $100,000 and a market value of $250,000. If the building is utilized for a project, then the opportunity cost ignoring taxes is:
A)$100,000
B)$150,000
C)$250,000
D)None of the above
5
The real rate of interest is 3 % and the inflation is 4%. What is the nominal rate of interest?
A)3%
B)4%
C)7.12%
D)7%
6
Suppose a real cash flow occurring in year 2 is 50,000. If the inflation rate is 10% per year, calculate nominal cash flow for year 2.
A)60,500
B)50,000
C)55,000
D)None of the above
7
Capital equipment costing $200,000 today has salvage value of $50,000 at the end of 5 years. If straight line depreciation is used, what is the book value of the equipment at the end of year 2?
A)$200,000
B)$170,000
C)$140,000
D)$50,000
8
For project A in year 2, inventories increase by $10,000 and accounts payable by $4,000. Calculate the increase or decrease in net working capital for year 2.
A)Increases by $12,000
B)Decreases by $12,000
C)Increases by $6,000
D)Decreases by $6,000
9
If the depreciation amount is $100,000 and the marginal tax rate is 30%, then the tax shield due to depreciation is:
A)$333,333
B)$100,000
C)$30,000
D)None of the above
10
Two machines, A and B, which perform the same functions, have the following costs and lives.
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Which machine would you choose? The two machines are mutually exclusive and the cost of capital is 10%.
A)B because the EAC is 667
B)A because the EAC is 1,125
C)B because the EAC is 1,174
D)A because the PV of Costs is 6,000
11
For NPV calculations:
A)Only cash flows are relevant
B)Always estimate cash flows on an incremental basis
C)Be consistent in the treatment of inflation
D)All of the above
12
Which of the following is not included in working capital?
A)Cash
B)Raw material and finished goods inventories
C)Plant, property, and equipment
D)Accounts payable
13
A new manufacturing project uses land which could otherwise be sold. This land is an example of
A)Sunk cost
B)Opportunity cost
C)Incremental cost
D)Working capital
14
In the first year of a project inventories decrease by $50,000, accounts payables decrease by$20,000 and accounts receivables increase by $30,000. What is the change in working capital?
A)$0
B)$10,000
C)$$40,000
D)$100,000
15
If the depreciable investment is $500,000 and the MACRS 5-Year class schedule is: Year 1: 20% ; Year 2: 32%; Year 3: 19.2%; Year 4: 11.5%; Year 5: 11.5% and Year 6: 5.8%. Calculate the depreciation tax shield for Year 2 using a tax rate of 30%.
A)$80,000
B)$30,000
C)$48,000
D)$17,250





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