FIN 370 Week 5 Practice: Week 5 Knowledge Check

Complete the Week 5 “Knowledge Check” in Connect®.

Note: You have unlimited attempts available to complete this practice assignment. The highest scored attempt will be recorded. These assignments have earlier due dates, so plan accordingly. Grades must be transferred manually to eCampus by your instructor. Don’t worry, this might happen after your due date.

Suppose you sell a fixed asset for $90,000 when its book value is $95,000. If your company’s marginal tax rate is 40 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

$92,000

$3,000

$95,000

$5,000

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:

Multiple Choice

sunk cost.

committed cost.

obligated cost.

complementary cost.

Which of the following measures the operating cash flow a project produces minus the necessary investment in operating capital, and is as valid for proposed new projects as it is for the firm’s current operations?

Multiple Choice

Sunk cash flow

Investment in operating capital

Operating cash flow

Free cash flow

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

Multiple Choice

Taxes paid

Operating expenses of the project

Financing costs

Initial investment

A new project would require an immediate increase in raw materials in the amount $17,000. The firm expects that accounts payable will automatically increase $7,000. How much must the firm expect its investment in net working capital to increase if they accept this project?

Multiple Choice

$7,000

$17,000

$10,000

$24,000

When looking at which of these types of projects, one must consider any cash flows that arise from surrendering old equipment before the end of its useful life?

Multiple Choice

Cost-cutting projects

Incremental projects

Replacement projects

New projects

Section 179 allows a business, with certain restrictions, to do which of the following?

Multiple Choice

Get a government grant to purchase the asset.

Expense the asset using double declining balance depreciation during the life of the asset.

Offset the tax liability with the cost of the asset in the year of purchase.

Expense the asset immediately in the year of purchase.

Which statement is true regarding cost-cutting proposals?

Multiple Choice

The main benefits come only from changes in costs.

The main benefits come only from changes in sales.

The main benefits come from the change in sales due to the response from the cost-cutting proposal.

The main benefits are from changes in sales and changes in costs.

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 $25,000 using straight-line depreciation. The cost of capital is 11 percent, and the firm’s tax rate is 34 percent. Estimate the present value of the tax benefits from depreciation.

Multiple Choice

$16,997.13

$15,017.54

$14,841.29

$13,607.52

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

$413.25

$317.88

$361.13

$310.38

Compute the payback statistic for Project Y and recommend whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 11 percent and the maximum allowable payback is one year.

Time:      0     1     2     3     4     5

Cash flow:      −100       75    100  300  75    200

Multiple Choice

1.25 years, reject

1.33 years, accept

1.25 years, accept

2.25 years, accept

Compute the NPV statistic for Project Y given the following cash flows if the appropriate cost of capital is 10 percent.

Project Y

Time       0          1          2          3          4

Cash Flow      –$    8,000                 $     3,350                 $     4,180                 $     1,520                 $     2,000

________________________________________

Multiple Choice

$964.72

$993.97

$1,008.03

$894.37

Compute the discounted payback statistic for Project Y and recommend whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 12 percent and the maximum allowable discounted payback is three years.

Time:      0     1     2     3     4     5

Cash flow:      −5,000    500  2,000      3,000      1,500      500

Multiple Choice

3.45 years, accept

3.86 years, reject

3.86 years, accept

3.45 years, reject

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

Project X

Time       0          1          2          3          4

Cash Flow      –$    15,000               $     6,000                 $     10,000               $     12,000               –$    1,000

________________________________________

Multiple Choice

$37,505.96

$6,234.93

$7,505.96

$8,417.80

Compute the NPV statistic for Project X given the following cash flows if the appropriate cost of capital is 10 percent.

Project X

Time       0          1          2          3          4

Cash Flow      –$    100,000              –$    36,000               $     200,000              $     210,000              –$    10,000

________________________________________

Multiple Choice

$247,410.67

$248,962.50

$262,622.77

$183,507.96

Which of the following is a capital budgeting technique that converts a project’s cash flows using a more consistent reinvestment rate prior to applying the Internal Rate of Return, IRR, decision rule?

Multiple Choice

Modified internal rate of return

Discounted payback

Net present value

Profitability index

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 16.48 percent and the project should be accepted.

The project’s PI is 21.48 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 8.48 percent and the project should be accepted.

Which of the following best describes the NPV profile?

Multiple Choice

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

Incorrect

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 PI statistic for Project Q 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 12 percent.

Project Q

Time       0          1          2          3          4          5

Cash Flow      –$    1,000                 $     250             $     180             $     420             $     300             $     100

________________________________________

Multiple Choice

The project’s PI is −11.70 percent and the project should be rejected.

The project’s PI is 3.70 percent and the project should be accepted.

The project’s PI is 5.70 percent and the project should be accepted.

The project’s PI is −8.70 percent and the project should be rejected.

How many possible IRRs could you find for the following set of cash flows?

Time       0          1          2 &