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| 1 | |
Both after-tax cash inflows and outflows are computed by multiplying the before-tax flows by (1-tax rate). |
| | A) | True |
| | B) | False |
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| 2 | |
Which of the following is not a reason for making a capital investment? |
| | A) | Need to replace worn out long-term operating assets |
| | B) | Need to expand operating capacity |
| | C) | Need to take advantage of tax benefits. |
| | D) | Need to comply with governmental regulations. |
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| 3 | |
Your client brings you a report that shows a seven year project with an initial investment of $4,000 that is expected to generate fairly constant cash flows over the project's life. The total return based on those expected cash flows is a whopping 26% return on investment. Should you tell your client to jump at this opportunity based on the high returns? |
| | A) | Yes, 26% return on investment should always be pursued, even if you need to borrow at high rates to get it done. |
| | B) | No, 26% return on investment sounds high but depending on the timing of the cash flows over the seven year period, it could be as low as 3% annualized rate of return. |
| | C) | Yes, depending on the timing of the cash flows over the seven year period, the annualized rate of return may be even higher than 26%. |
| | D) | No, 26% return on investment may increase their taxes to the point that the return is no longer generating positive cash flow. |
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| 4 | |
A negative net present value for a project means: |
| | A) | The cost of capital has been computed incorrectly. |
| | B) | The investment does not generate positive cash flows over the project life. |
| | C) | Project cost is greater than the discounted expected cash flows. |
| | D) | The depreciation rate is too low and the tax rate is too high. |
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| 5 | |
Norton Corporation, has $5,000,000 in debt and $15,000,000 in stockholders' equity. If the debt carries an interest rate of 9%, and the stockholders are demanding a 15% rate of return, Norton's cost of capital is: |
| | A) | 15.0% |
| | B) | 12.0% |
| | C) | 18.0% |
| | D) | 13.5% |
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| 6 | |
Which of the following is NOT needed to compute the expected cash flows of a potential investment? |
| | A) | Depreciation rate on assets acquired as part of the investment |
| | B) | Acquiring firm's expected overall tax rate |
| | C) | Historical cost of asset being replaced |
| | D) | Firms' cost of capital |
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| 7 | |
Looking at the table of opportunities shown below, assuming no other projects are suitable in the near term, which opportunity are you most likely to recommend to a client seeking a project in the $20,000 size range? |
| | A) | Gamma because it leaves a large portion available for more projects. |
| | B) | Alpha because the total return on investment is the highest. |
| | C) | Beta because the time adjusted return is the highest. |
| | D) | None because good investments deliver consistent returns across time. |
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| 8 | |
If a project is expected to generate revenues of $50,000, expenditures of $20,000 and depreciation of $10,000 in each year of the project's life, how would you treat each of these in computing net present value (assuming an effective tax rate of 20%)? |
| | A) | You would compute the PV of after-tax net cash inflows of $30,000 plus a tax shield of $2,000 from depreciation. |
| | B) | You would compute the PV of an net cash inflow (annuity) of $30,000 plus a tax shield of $10,000 from depreciation |
| | C) | You would compute the PV of after-tax net cash inflows of $24,000 plus a tax shield of $2,000 from depreciation. |
| | D) | You would compute the PV of after-tax net cash inflows of $24,000 less a tax shield of $2,000 from depreciation. |
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| 9 | |
Bonner Corporation had cash sales of $240,000 and operating expenses of $102,500 for the year just ended. Included in the operating expenses was $42,000 of depreciation expense with the rest being cash expenses. If Conner's income tax rate is 30%, its net after-tax cash flows for the year amounted to: |
| | A) | $125,650 |
| | B) | $96,250 |
| | C) | $138,250 |
| | D) | $138,600 |
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| 10 | |
Limited Pipes, Inc. sold equipment with a cost of $75,000 and accumulated depreciation of $30,000 for $32,000 cash. If Limited Pipe's income tax rate is 30%, the after-tax cash inflow from the sale of the equipment was: |
| | A) | $26,600 |
| | B) | $37,100 |
| | C) | $27,100 |
| | D) | $17,000 |
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| 11 | |
Conk Corp sold machinery with a cost of $100,000 and accumulated depreciation of $70,000 for $34,000 cash. If Conk's income tax rate is 30%, the after-tax cash inflow from the sale of the machinery was: |
| | A) | $34,000 |
| | B) | $30,000 |
| | C) | $21,000 |
| | D) | $32,800 |
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| 12 | |
Royal Bee Company is considering the purchase of some new equipment that will cost the company $180,000. The equipment is estimated to have a 3 year life and no salvage value. The equipment is expected to generate the cash inflows (before income taxes) described below over the life of the equipment. Royal Bee's cost of capital is 10%, its tax rate is 30% and the depreciation each year of the life of the asset is $50,000. <![CDATA[<a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=jpg::::/sites/dl/free/0078136601/794881/image006.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (6.0K)</a>]]>
What is the cash savings (benefit) created by depreciation in each year? |
| | A) | $15,000 |
| | B) | $30,000 |
| | C) | $21,000 |
| | D) | $0 |
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| 13 | |
Royal Bee Company is considering the purchase of some new equipment that will cost the company $180,000. The equipment is estimated to have a 3 year life and no salvage value. The equipment is expected to generate the cash inflows (before income taxes) described below over the life of the equipment. Royal Bee's cost of capital is 10%, its tax rate is 30% and the depreciation each year of the life of the asset is $50,000.<![CDATA[<a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=jpg::::/sites/dl/free/0078136601/794881/image006.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (6.0K)</a>]]>
Maximum price Royal Bee should pay for this equipment is (using tables, round to dollars): |
| | A) | $173,716 |
| | B) | $218,004 |
| | C) | $316,296 |
| | D) | $217,000 |
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| 14 | |
Royal Bee Company is considering the purchase of some new equipment that will cost the company $180,000. The equipment is estimated to have a 3 year life and no salvage value. The equipment is expected to generate the cash inflows (before income taxes) described below over the life of the equipment. Royal Bee's cost of capital is 10%, its tax rate is 30% and the depreciation each year of the life of the asset is $50,000.<![CDATA[<a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=jpg::::/sites/dl/free/0078136601/794881/image006.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (6.0K)</a>]]>
If Royal Bee's cost of capital ______, the maximum price they should pay for the equipment will _______. |
| | A) | declines, increase |
| | B) | declines, decrease |
| | C) | increases, increase |
| | D) | increases, decrease |
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| 15 | |
Royal Bee Company is considering the purchase of some new equipment that will cost the company $180,000. The equipment is estimated to have a 3 year life and no salvage value. The equipment is expected to generate the cash inflows (before income taxes) described below over the life of the equipment. Royal Bee's cost of capital is 10%, its tax rate is 30% and the depreciation each year of the life of the asset is $50,000.<![CDATA[<a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=jpg::::/sites/dl/free/0078136601/794881/image006.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (6.0K)</a>]]>
Royal Bee should: |
| | A) | not purchase the equipment since the net present value is negative |
| | B) | not purchase the equipment since the net present value is positive |
| | C) | purchase the equipment since the net present value is negative |
| | D) | purchase the equipment since the net present value is positive |
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