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Multiple Choice Quiz
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1

The Fortune Company is considering a new project which will require an initial investment in fixed assets of $800,000. The net working capital requirement is $120,000 initially plus an additional $40,000 in year 2. The project has a 4-year life and generates cost savings of $400,000 per year. The tax rate is 35 percent and the discount rate is 12.5 percent. The fixed assets will be depreciated using 7-year property MACRS and will be sold for $150,000 at the end of year 4. The MACRS depreciation factors are .143, .245, .175, .125, .089, .089, .089, .045 over 8 years, respectively. What is the NPV of this project, rounded to the nearest whole number?
A)$121,494
B)$138,788
C)$159,609
D)$191,214
E)$208,088
2

The managers of Auto Restoration, Inc., plan to manufacture engine blocks for classic cars from the 1960s. The necessary machining equipment will cost a total of $1.2 million and will be depreciated using 7-year MACRS. The MACRS depreciation factors are .143, .245, .175, .125, .089, .089, .089, .045, over 8 years, respectively. The firm expects to be able to sell the equipment for $750,000 at the end of 5 years. Sales are estimated at 200, 500, 650, 400, and 300 units over the next 5 years, respectively. The selling price is $5,500 per unit and the cost estimate is $4,200 per unit. Assume a 35 percent tax rate and a 15 percent discount rate. Management has received permission from the original manufacturer to produce these blocks for five years only and thus, the firm will close at the end of five years. What is the expected aftertax cash flow from the salvage value of the equipment?
A)$487,500
B)$581,160
C)$633,333
D)$750,000
E)$918,840
3

The managers of Auto Restoration, Inc., plan to manufacture engine blocks for classic cars from the 1960s. The necessary machining equipment will cost a total of $1.2 million and will be depreciated using 7-year MACRS. The MACRS depreciation factors are .143, .245, .175, .125, .089, .089, .089, .045, over the 7 years, respectively. The firm expects to be able to sell the equipment for $750,000 at the end of 5 years. Sales are estimated at 200, 500, 650, 400, and 300 units over the next 5 years, respectively. The selling price is $5,500 per unit and the cost estimate is $4,200 per unit. Assume a 35 percent tax rate and a 15 percent discount rate. Management has received permission from the original manufacturer to produce these blocks for five years only and thus, the firm will close at the end of five years. The cash flow from operations for year two is:
A)$387,500.
B)$422,500.
C)$455,500.
D)$487,500.
E)$525,400.
4

The managers of Auto Restoration, Inc., plan to manufacture engine blocks for classic cars from the 1960s. The necessary machining equipment will cost a total of $1.2 million and will be depreciated using 7-year MACRS. The MACRS depreciation factors are .143, .245, .175, .125, .089, .089, .089, .045, over 8 years, respectively. The firm expects to be able to sell the equipment for $750,000 at the end of 5 years. Sales are estimated at 200, 500, 650, 400. and 300 units over the next 5 years, respectively. The selling price is $5,500 per unit and the cost estimate is $4,200 per unit. Assume a 35 percent tax rate and a 15 percent discount rate. The net working capital requirement during the life of the project is $625,000, all of which is recoverable. Management has received permission from the original manufacturer to produce these blocks for five years only and thus, the firm will close at the end of five years. What is the NPV of this project, rounded to the nearest whole number?
A)$87,601
B)$148,492
C)$163,009
D)$287,141
E)$313,003
5

Your firm needs a computerized line-boring machine for a 3-year project. The machine costs $389,000 and can be sold at the end of the project for $269,000. This machine is classified as 7-year MACRS property and has depreciation factors of .143, .245, and .175 over the first three years, respectively. What is the after-tax salvage value if the tax rate is 35 percent?
A)$174,850.00
B)$209,502.45
C)$213,604.55
D)$234,347.55
E)$251,502.45
6

The financial statements of the Berkshire Companies reflects the following:

Beginning Ending
Cash$980$1,012
Accounts receivable823792
Inventory1,105987
Accounts payable918943

What was the change in net working capital for the year?

A)increase of $142
B)increase of $188
C)increase of $206
D)decrease of $142
E)decrease of $188
7

The financial statements of the Older Ones, Inc., reflects the following balances:

   Beginning      Ending   
Accounts payable $426$538
Accounts receivable$602$614
Inventory$787$747
Cash$162$153

What is the change in net working capital for the year?

A)decrease of $149
B)decrease of $75
C)decrease of $68
D)increase of $75
E)increase of $149
8

The Chandler Group has the following account balances:

   Beginning      Ending   
Accounts receivable $218$199
Inventory$315$324
Accounts payable $167$158
Cash$106$111

Which of these accounts represent increases in net working capital?

I. accounts receivable
II. inventory
III. accounts payable
IV. cash

A)I and III only
B)II and IV only
C)I, III, and IV only
D)II, III, and IV only
E)I, II, and III only
9

MACRS depreciation is based on the _____ method of depreciation in the early years and the_____ method in the later years.
A)straight-line; straight-line
B)straight-line; declining-balance
C)declining-balance; zero
D)declining-balance; declining-balance
E)declining-balance; straight-line
10

Your company is investing $130,000 in fixed assets for an R&D project. These assets are classified as 5-year MACRS property. The MACRS rates are .200, .320, .192, .115, .115, and .058. over the life of the property, respectively. What is the book value of the property at the end of year 4?
A)$7,540
B)$14,660
C)$22,490
D)$29,900
E)$37,440





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