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| 1 | |
Assume a project requires additions to net working capital in each year of its life, all of which will be recovered at the end of the project. In this case, the present value of the net working capital recovery will equal the total dollar outlays for net working capital. |
| | A) | True |
| | B) | False |
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| 2 | |
To accurately reflect the costs associated with a project, you should exclude interest expenses in the computation of operating cash flows. |
| | A) | True |
| | B) | False |
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| 3 | |
Sunk costs and opportunity costs are often the same thing. |
| | A) | True |
| | B) | False |
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| 4 | |
If net working capital grows from $1,000 to $1,500 as a result of taking on a new project, the $500 increase should be included in the initial outlay for the new project. |
| | A) | True |
| | B) | False |
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| 5 | |
For a cost cutting project, the net present value will generally be negative, but the project should still be accepted. |
| | A) | True |
| | B) | False |
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| 6 | |
A company that has a policy of making only cash sales is considering allowing customers to buy on credit. Which one of the following will probably occur? |
| | A) | The accounts receivable will likely increase. |
| | B) | The change will provide a source of funds. |
| | C) | Total sales will likely decrease. |
| | D) | Net working capital will decrease if funding needs are met with long-term liabilities. |
| | E) | Expenses will decrease due to monthly billing and collection efforts. |
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| 7 | |
It is important to identify and use only incremental cash flows in capital investment decisions: |
| | A) | because they are the simplest to identify. |
| | B) | only when the stand-alone principle fails to hold. |
| | C) | because ultimately it is the change in a firm's overall future cash flows that matter. |
| | D) | in order to accommodate unforeseen changes that might occur. |
| | E) | whenever sunk costs are involved. |
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| 8 | |
You are advising Peter who is attempting to decide whether or not to drop one of the college courses he is currently enrolled in. If he drops the course, he will forfeit half of the money spent on tuition. If he stays in the class, he will have to give up his part-time job. His textbook is being replaced by a new edition, so is worthless at this time. Which of the following conclusions is consistent with capital budgeting principles?
I. Remaining in the class incurs an opportunity cost.
II. The entire tuition is irrelevant because it is a sunk cost.
III. The cost of the book is a sunk cost. |
| | A) | I only |
| | B) | I and II only |
| | C) | I and III only |
| | D) | II and III only |
| | E) | I, II, and III |
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| 9 | |
Consider a $10,000 machine that will reduce pretax operating costs by $3,000 per year over a 5-year period. Assume no changes in net working capital and a zero scrap value after five years. For simplicity, assume straight-line depreciation to zero, a marginal tax rate of 34 percent, and a required return of 10 percent. The net present value of acquiring this machine is: |
| | A) | $83. |
| | B) | $449. |
| | C) | $689. |
| | D) | $827. |
| | E) | $1,235. |
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| 10 | |
Given the following information and assuming straight-line depreciation to zero, what is the payback period for this project? The project requires an initial investment of $900,000; has a life of 6 years; produces cost savings of $190,000 per year; has a tax rate of 35 percent; and a discount rate of 9 percent. The fixed assets will be sold for $50,000 at the end of year 6. |
| | A) | 2.54 years |
| | B) | 3.67 years |
| | C) | 3.93 years |
| | D) | 5.10 years |
| | E) | The project never pays back. |
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| 11 | |
Your firm needs a computerized line-boring machine that costs $90,000 and requires $16,000 in maintenance costs for each year of its 3-year life. After 3 years, this machine will be replaced. The machine falls into the MACRS 3-year class life category. The MACRS percentages for each year are 33.33 percent, 44.44 percent, 14.82 percent, and 7.41 percent, respectively. Assume a tax rate of 35 percent and a discount rate of 10 percent. Assume the machine can be sold for $12,000 at the end of year 3. What is the aftertax salvage value of the machine? |
| | A) | $5,633 |
| | B) | $7,800 |
| | C) | $7,920 |
| | D) | $10,134 |
| | E) | $10,678 |
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| 12 | |
Your company just bought a new distillation unit for $175,000 to be used for research and development. Such equipment has a 3-year MACRS classification. The MACRS percentages are 33.33 percent, 44.44 percent, 14.82 percent, and 7.41 percent, respectively. What is the book value of the distillation unit at the end of year 2? |
| | A) | $12,968.00 |
| | B) | $38,902.50 |
| | C) | $49,833.50 |
| | D) | $77,770.00 |
| | E) | $116,673.50 |
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| 13 | |
A condominium developer buys three times as much land as is needed to build a planned 50-unit development so that, if things go well, two additional 50-unit developments can be built without having to acquire additional land. The developer is prepared to exercise the option to: |
| | A) | quit. |
| | B) | expand. |
| | C) | abandon. |
| | D) | wait. |
| | E) | rebuild. |
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| 14 | |
The Sedgwick Company estimates sales of a new product at 5,000 units and $3.00 per unit. Management feels the sales quantity is accurate within a 10 percent plus-or-minus range while the sales price is accurate within a 5 percent plus-or-minus range. What dollar amount should the company use for total sales in their worst-case scenario analysis of this product? |
| | A) | $12,150 |
| | B) | $12,825 |
| | C) | $13,500 |
| | D) | $14,250 |
| | E) | $15,000 |
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| 15 | |
Options for future, related business products or strategies are known as: |
| | A) | strategic options. |
| | B) | capital rationing options. |
| | C) | options to expand. |
| | D) | options to wait. |
| | E) | contingent options. |
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