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Multiple Choice Quiz
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1

On which of the following does the value of a proposed capital budgeting project depend?
A)accounting profits reduced
B)total cash flows produced
C)increase in total sales produced
D)incremental cash flows produced
2

An asset's opportunity cost:
A)should be depreciated annually
B)represents taxable income under current rules
C)is important only for real estate
D)can change with changes in market conditions
3

What is the net effect on a firm's working capital if a new project requires $30,000 increase in inventory, $8,000 increase in accounts receivables, $20,000 increase in machinery and $12,000 increase in accounts payables?
A)$6000
B)$26,000
C)$34,000
D)$50,000
4

If a project is expected to increase inventory by $100,000, increase accounts payable by $60,000, and increase accounts receivables by $30,000, what effect does incremental working capital have on the outlay for the project?
A)Decreases investment by $70,000
B)Increases investment by $70,000
C)Increases investment by $190,000
D)Working capital has no effect during the life of the project
5

At the end of the life of a project that initially required a $50,000 increase in net working capital, what effect is expected?
A)The depreciated working capital must be replaced
B)The $50,000 must now be paid
C)The firm receives a $50,000 cash inflow
D)There is no effect; opportunity costs are not real
6

Your forecast shows $3,000,000 annually in sales for each of the next for each of the next four years. If your second, third and fourth year predictions failed to incorporate 4% expected annual inflation, how far off in total dollars is your four year forecast?
A)$364,800.00
B)$480,000.00
C)$739,392.00
D)$1,248,967.68
7

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
8

For a profitable firm in the 35% marginal tax bracket with $90,000 of annual depreciation expense, the depreciation tax shield will be:
A)$2,571.43
B)$31,500.00
C)$34,071.43
D)$65,571.43
9

What is the amount of operating cash flow for a firm with $150,000 profit before tax, $15,000 depreciation expense, and a 35% marginal tax rate?
A)$82,500
B)$102,750
C)$112,500
D)$187,500
10

What is the present value at a 12% discount rate of the depreciation tax shield for a firm in the 35% tax bracket that purchases a $20,000 asset being depreciated straight line over a four year life to a zero salvage value? Ignore the half-year rule.
A)$3551.63
B)$4433.47
C)$5315.36
D)$7985.10
11

What is the undiscounted cash flow in the final year on an investment, assuming: $7,500 after tax cash flows from operations, the fully depreciated machine is sold for $3000, the project had required $2500 in additional working capital and a 35% tax rate?
A)$6950
B)$11,050
C)$11,950
D)$17,950
12

A new more efficient machine will last five years and allow inventory levels to decrease by $25,000 during its life. At a cost of capital of 11%, how does the net working capital change affect the project's NPV?
A)NPV decreases $10,163.72
B)NPV decreases $8571.73
C)NPV increases $8571.73
D)NPV increases $10,163.72
13

What nominal annual return is required on an investment in order that an investor experiences a 15% gain in purchasing power? Assuming the inflation rate is 5%.
A)5.75%
B)9.52%
C)20.75%
D)32.25%
14

What rate of nominal growth is expected in sales if they are currently $900,000 and expected to reach $1,600,000 in four years?
A)10.22%
B)12.20%
C)15.72%
D)16.02%
15

Suppose a project which costs $100,000 has a CCA rate of 15% (declining balance method) and the half-year rule applies. Assume there is no salvage value. What is the Present Value of CCA Tax Shields if the discount rate is 14% and the tax rate is 40%?
A)$5,367
B)$11,667
C)$19,419
D)$25,927





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