Test Bank Docx Ch9 Making Capital Investment Decisions

Chapter 09

Making Capital Investment Decisions

Test Bank - Static Key

1. Any changes to a firm's projected future cash flows that are caused by adding a new project are referred to as:

A. eroded cash flows.

B. deviated projections.

C. incremental cash flows.

D. directly impacted flows.

E. opportunity cash flows.

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-01 Determine the relevant cash flows for a proposed investment.

Section: 9.1 Project Cash Flows: A First Look

Topic: Cash flows

2. Which one of the following principles refers to the assumption that a project will be evaluated based on its incremental cash flows?

A. Forecast assumption principle

B. Base assumption principle

C. Fallacy principle

D. Erosion principle

E. Stand-alone principle

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-01 Determine the relevant cash flows for a proposed investment.

Section: 9.1 Project Cash Flows: A First Look

Topic: Project analysis and evaluation

3. A cost that should be ignored when evaluating a project because that cost has already been incurred and cannot be recouped is referred to as a(n):

A. fixed cost.

B. forgotten cost.

C. variable cost.

D. opportunity cost.

E. sunk cost.

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-01 Determine the relevant cash flows for a proposed investment.

Section: 9.1 Project Cash Flows: A First Look

Topic: Cash flows

4. Which one of the following terms refers to the best option that was foregone when a particular investment is selected?

A. Side effect

B. Erosion

C. Sunk cost

D. Opportunity cost

E. Marginal cost

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-01 Determine the relevant cash flows for a proposed investment.

Section: 9.2 Incremental Cash Flows

Topic: Opportunity costs

5. Which one of the following terms is most commonly used to describe the cash flows of a new project that are simply an offset of reduced cash flows for a current project?

A. Opportunity cost

B. Sunk cost

C. Erosion

D. Replicated flows

E. Pirated flows

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-01 Determine the relevant cash flows for a proposed investment.

Section: 9.2 Incremental Cash Flows

Topic: Cash flows

6. A pro forma financial statement is a financial statement that:

A. expresses all values as a percentage of either total assets or total sales.

B. compares actual results to the budgeted amounts.

C. compares the performance of a firm to its industry.

D. projects future years' operating results.

E. values all assets based on their current market values.

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.3 Pro Forma Financial Statements and Project Cash Flows

Topic: Pro forma statements

7. The amount by which a firm's tax bill is reduced as a result of the depreciation expense is referred to as the depreciation:

A. tax shield.

B. credit.

C. erosion.

D. opportunity cost.

E. adjustment.

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.3 Pro Forma Financial Statements and Project Cash Flows

Topic: Cash flows

8. Which one of the following refers to a method of increasing the rate at which an asset is depreciated?

A. Noncash expense

B. Straight-line depreciation

C. Depreciation tax shield

D. Accelerated cost recovery system

E. Market-based depreciation

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.4 More on Project Cash Flow

Topic: Depreciation

9. Forecasting risk is best defined as:

A. reality risk.

B. value risk.

C. potential risk.

D. management risk.

E. estimation risk.

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-03 Evaluate an estimated NPV.

Section: 9.5 Evaluating Npv Estimates

Topic: Forecasting risk

10. Jamie is analyzing the estimated net present value of a project under various conditions by revising the sales quantity, sales price, and the cost estimates. The type of analysis that Jamie is doing is best described as:

A. sensitivity analysis.

B. erosion planning.

C. scenario analysis.

D. benefit planning.

E. opportunity evaluation.

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-03 Evaluate an estimated NPV.

Section: 9.6 Scenario and Other What-If Analyses

Topic: Scenario analysis

11. Kate is analyzing a proposed project to determine how changes in the sales quantity would affect the project's net present value. What type of analysis is being conducted?

A. Sensitivity analysis

B. Erosion planning

C. Scenario analysis

D. Benefit-cost analysis

E. Opportunity cost analysis

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-03 Evaluate an estimated NPV.

Section: 9.6 Scenario and Other What-If Analyses

Topic: Sensitivity analysis

12. The opportunities that a manager has to modify a project once the project has started are called:

A. sensitivity choices.

B. managerial options.

C. scenario adjustments.

D. restructuring options.

E. erosion control measures.

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-03 Evaluate an estimated NPV.

Section: 9.7 Additional Considerations in Capital Budgeting

Topic: Real options

13. Contingency planning focuses on the:

A. opportunity costs involved with a project.

B. sunk costs related to a project.

C. economic effects on a project's profitability.

D. managerial options implicit in a project.

E. optional capital requirements of a project.

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-03 Evaluate an estimated NPV.

Section: 9.7 Additional Considerations in Capital Budgeting

Topic: Real options

14. Which one of the following refers to the option to expand into related businesses in the future?

A. Strategic option

B. Contingency option

C. Soft rationing

D. Hard rationing

E. Capital rationing option

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-03 Evaluate an estimated NPV.

Section: 9.7 Additional Considerations in Capital Budgeting

Topic: Real options

15. Kyle Electric has three positive net present value opportunities. Unfortunately, the firm has not been able to find financing for any of these projects. Which one of the following terms best fits the situation facing the firm?

A. Sensitivity analysis

B. Capital rationing

C. Soft rationing

D. Contingency planning

E. Sunk cost

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-03 Evaluate an estimated NPV.

Section: 9.7 Additional Considerations in Capital Budgeting

Topic: Capital rationing

16. Northern Companies has three separate divisions. Each year, the company determines the amount it can afford to spend in total for capital expenditures and then allocates one-third of that amount to each division. This allocation process is called:

A. soft rationing.

B. hard rationing.

C. opportunity cost allocation.

D. divisional separation.

E. strategic planning.

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-03 Evaluate an estimated NPV.

Section: 9.7 Additional Considerations in Capital Budgeting

Topic: Capital rationing

17. Dismal Outlook is unable to obtain financing for any new projects under any circumstances. This company is faced with:

A. contingency planning.

B. soft rationing.

C. hard rationing.

D. real options.

E. sunk costs.

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-03 Evaluate an estimated NPV.

Section: 9.7 Additional Considerations in Capital Budgeting

Topic: Capital rationing

18. The Shoe Box is considering adding a new line of winter footwear to its product lineup. When analyzing the viability of this addition, the company should include all of the following in its analysis with the exception of:

A. any expected changes in the sales levels of current products caused by adding the new product line.

B. cost of new display counters for the additional winter footwear.

C. increased taxes from winter footwear profits.

D. the research and development costs to produce the current winter footwear samples.

E. the expected revenue from winter footwear sales.

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 09-01 Determine the relevant cash flows for a proposed investment.

Section: 9.2 Incremental Cash Flows

Topic: Cash flows

19. Lake City Plastics currently produces plastic plates and silverware. The company is considering expanding its product offerings to include plastic serving trays. All of the following are relevant costs to this project with the exception of:

A. the cost of additional utilities required to operate the serving tray production operation.

B. any change in the expected sales of plates and silverware gained from offering trays also.

C. a percentage of the current operating overhead.

D. the additional plastic raw materials that would be required.

E. the cost to acquire the forms needed to mold the trays.

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 09-01 Determine the relevant cash flows for a proposed investment.

Section: 9.2 Incremental Cash Flows

Topic: Cash flows

20. The Corner Market has decided to expand its retail store by building on a vacant lot it currently owns. This lot was purchased four years ago at a cost of $299,000, which the firm paid in cash. To date, the firm has spent another $38,000 on land improvements, all of which was also paid in cash. Today, the lot has a market value of $329,000. What value should be included in the analysis of the expansion project for the cost of the land?

A. The sum of the cash paid to date for both the lot and the improvements

B. The original purchase price only

C. The current market value of the land plus the cash paid for the improvements

D. The current market value of the land

E. Zero because the land and the improvements were previously purchased with cash

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-01 Determine the relevant cash flows for a proposed investment.

Section: 9.2 Incremental Cash Flows

Topic: Cash flows

21. Weston Steel purchased a new coal furnace six years ago at a cost of $2.2 million. Last year, the government changed the emission requirements and this furnace cannot meet those standards. Thus, the company can no longer use the furnace, nor has it been able to locate anyone willing to purchase the furnace. Given the current situation, the furnace is best described as which type of cost?

A. Erosion

B. Book

C. Sunk

D. Market

E. Opportunity

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-01 Determine the relevant cash flows for a proposed investment.

Section: 9.2 Incremental Cash Flows

Topic: Cash flows

22. Valley Forge and Metal purchased a truck five years ago for local deliveries. Which one of the following costs related to this truck is the best example of a sunk cost? Assume the truck has a usable life of five years.

A. New tires that will be purchased this winter

B. Costs of repairs needed so the truck can pass inspection next month

C. Money spent last month repairing a damaged front fender

D. Engine tune-up that is scheduled for this afternoon

E. Cost for a truck driver for the remainder of the truck's useful life

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-01 Determine the relevant cash flows for a proposed investment.

Section: 9.2 Incremental Cash Flows

Topic: Cash flows

23. CrossTown Builders is considering remodeling an old building it currently owns. The building was purchased ten years ago for $1.2 million. Over the past ten years, the firm rented out the building and used the rent to pay off the mortgage. The building is now owned free and clear and has a current market value of $1.9 million. The company is considering remodeling the building into industrial-type apartments at an estimated cost of $1.6 million. The estimated present value of the future income from these apartments is $4.1 million. Which one of the following defines the opportunity cost of the remodeling project?

A. Present value of the future income

B. Cost of the remodeling

C. Current market value of the building

D. Initial cost of the building plus the remodeling costs

E. Current market value of the building plus the remodeling costs

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-01 Determine the relevant cash flows for a proposed investment.

Section: 9.2 Incremental Cash Flows

Topic: Opportunity costs

24. Bruce Moneybags owns several restaurants and hotels near a local interstate. One restaurant, Beef and More, originally cost $1.8 million, is currently fully paid for, but needs modernized. Bruce is trying to decide whether to accept an offer and sell Beef and More, as is, for the offer price of $1.1 million or renovate the restaurant himself. The projected renovation cost is $1.3 million. The restaurant would need to be shut down completely during the renovation which would cause an aftertax net loss of $90,000 in today's dollars. The estimated present value of the cash inflows from the renovated restaurant is $3.2 million. When analyzing the renovation project, what cost, if any, should be included for the current restaurant?

A. $0

B. $1.1 million

C. $1.1 million + $90,000

D. $1.8 million + 1.3 million + 90,000

E. $3.2 million -($1.8 million + 1.3 million + 90,000)

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-01 Determine the relevant cash flows for a proposed investment.

Section: 9.2 Incremental Cash Flows

Topic: Opportunity costs

25. Flo is considering three mutually exclusive options for the additional space she plans to add to her specialty women's store. The cost of the expansion will be $148,000. She can use this additional space to add children’s clothing, an exclusive gifts department, or a home décor section. She estimates the present value of the cash inflows from these projects are $121,000 for children’s clothing, $178,000 for exclusive gifts, and $145,000 for decorator items. Which option(s), if any, should she accept?

A. None of these options

B. Children’s clothing only

C. Exclusive gifts only

D. Exclusive gifts and decorator items only

E. All three options

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-03 Evaluate an estimated NPV.

Section: 9.2 Incremental Cash Flows

Topic: Mutually exclusive projects

26. Ed owns a store that caters primarily to men. Each of the answer options represents an item related to a planned store expansion. Each of these items should be included in the expansion analysis with the exception of the cost:

A. of the property insurance premium increase.

B. of the exterior landscaping that will be required once the expansion is complete.

C. of the additional sales person that will be required.

D. of the inventory required to fill the additional retail space.

E. of the blueprints that have been drawn of the expansion area.

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-01 Determine the relevant cash flows for a proposed investment.

Section: 9.2 Incremental Cash Flows

Topic: Cash flows

27. Thrill Rides is considering adding a new roller coaster to its amusement park. The addition is expected to increase its overall ticket sales. In particular, the company expects to sell more tickets for its current roller coaster and experience extremely high demand for its new coaster. Sales for its boat ride are expected to decline but food and beverage sales are expected to increase significantly. All of the following are side effects associated with the new roller coaster with the exception of the:

A. increased food sales.

B. additional sales for the existing coaster.

C. increased food costs.

D. reduced sales for the boat ride.

E. ticket sales for the new coaster.

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-01 Determine the relevant cash flows for a proposed investment.

Section: 9.2 Incremental Cash Flows

Topic: Cash flows

28. The analysis of a new project should exclude:

A. tax effects.

B. erosion effects.

C. side effects.

D. sunk costs.

E. opportunity costs.

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-01 Determine the relevant cash flows for a proposed investment.

Section: 9.2 Incremental Cash Flows

Topic: Cash flows

29. The net working capital invested in a project is generally:

A. a sunk cost.

B. an opportunity cost.

C. recouped in the first year of the project.

D. recouped at the end of the project.

E. depreciated to a zero balance over the life of the project.

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.2 Incremental Cash Flows

Topic: Cash flows

30. A proposed project will increase a firm's accounts payables. This increase is generally:

A. treated as an erosion cost.

B. treated as an opportunity cost.

C. a sunk cost and should be ignored.

D. a cash outflow at Time zero and a cash inflow at the end of the project.

E. a cash inflow at Time zero and a cash outflow at the end of the project.

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.2 Incremental Cash Flows

Topic: Cash flows

31. Which of the following create cash inflows from net working capital?

A. Decrease in accounts payable and increase in accounts receivable

B. Decrease in both accounts receivable and accounts payable

C. Increase in accounts payable and decrease in inventory

D. Increase in both accounts receivable and inventory

E. Increase in inventory and decrease in cash

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.2 Incremental Cash Flows

Topic: Cash flows

32. The pro forma income statements for a proposed investment should include all of the following except:

A. fixed costs.

B. forecasted sales.

C. depreciation expense.

D. taxes.

E. changes in net working capital.

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.3 Pro Forma Financial Statements and Project Cash Flows

Topic: Pro forma statements

33. Firm A uses straight-line depreciation. Firm B uses MACRS depreciation. Both firms bought $75,000 worth of equipment last year that has a tax life of 5 years. The 5-year MACRS percentage rates, starting with Year 1, are: 20, 32, 19.2, 11.52, 11.52, and 5.76. Both firms have a marginal tax rate of 34 percent and identical operating cash flows except for the depreciation effects. Given this, you know the:

A. depreciation expense for Firm A will be greater than Firm B's expense every year.

B. equipment has a higher value on Firm B's books than on Firm A's at the end of Year 2.

C. operating cash flow of Firm A is greater than that of Firm B for Year 3.

D. market value of Firm A's equipment is greater than the market value of Firm B's at end the first year.

E. market value of Firm B's equipment is greater than the market value of Firm A's equipment at the end of Year 2.

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.4 More on Project Cash Flow

Topic: Cash flows

34. Assume an all-equity firm has positive net earnings. The operating cash flow of this firm:

A. ignores both depreciation and taxes.

B. is unaffected by the depreciation expense.

C. must be negative.

D. increases when the tax rate decreases.

E. is equal to net income minus depreciation.

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.5 Evaluating Npv Estimates

Topic: Operating cash flow

35. The operating cash flows of a project:

A. are unaffected by the depreciation method selected.

B. are equal to the project's total projected net income.

C. decrease when net working capital increases.

D. include any aftertax salvage values.

E. include erosion effects.

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.2 Incremental Cash Flows

Topic: Operating cash flow

36. The tax shield approach to computing the operating cash flow, given a tax-paying firm:

A. ignores both interest expense and taxes.

B. separates cash inflows from cash outflows.

C. considers the changes in net working capital resulting from a new project.

D. ignores all noncash expenses and their effects.

E. recognizes that depreciation creates a cash inflow.

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.3 Pro Forma Financial Statements and Project Cash Flows

Topic: Operating cash flow

37. Which one of the following will increase the operating cash flow as computed using the tax shield approach?

A. Decrease in depreciation

B. Decrease in sales

C. Increase in variable costs

D. Decrease in fixed costs

E. Increase in the tax rate

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.3 Pro Forma Financial Statements and Project Cash Flows

Topic: Operating cash flow

38. Scenario analysis is best described as the determination of the:

A. most likely outcome for a project.

B. reasonable range of project outcomes.

C. variable that has the greatest effect on a project's outcome.

D. effect that a project's initial cost has on the project's net present value.

E. change in a project's net present value given a stated change in projected sales.

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-03 Evaluate an estimated NPV.

Section: 9.6 Scenario and Other What-If Analyses

Topic: Scenario analysis

39. Which one of the following is a correct value to use if you are conducting a best-case scenario analysis?

A. Sales price that is most likely to occur

B. Lowest expected level of sales quantity

C. Lowest expected salvage value

D. Highest expected need for net working capital

E. Lowest expected value for fixed costs

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-03 Evaluate an estimated NPV.

Section: 9.6 Scenario and Other What-If Analyses

Topic: Scenario analysis

40. Scenario analysis asks questions such as:

A. How will changing the number of units sold affect the outcome of this project?

B. What is the best outcome that should reasonably be expected?

C. How much will a $1 increase in the variable cost per unit change the net present value?

D. Will the net present value increase or decrease if the quantity sold increases by 100 units?

E. How will the operating cash flow change if the depreciation method is changed?

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-03 Evaluate an estimated NPV.

Section: 9.6 Scenario and Other What-If Analyses

Topic: Scenario analysis

41. Scenario analysis:

A. determines the impact a $1 change in sales has on a project’s internal rate of return.

B. determines which variable has the greatest impact on a project's net present value.

C. helps determine the reasonable range of expectations for a project's anticipated outcome.

D. evaluates a project's net present value while sensitivity analysis evaluates a project's internal rate of return.

E. determines the absolute worst and absolute best outcome that could ever occur.

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-03 Evaluate an estimated NPV.

Section: 9.6 Scenario and Other What-If Analyses

Topic: Scenario analysis

42. Sensitivity analysis:

A. looks at the most reasonably optimistic and pessimistic results for a project.

B. helps identify the variable within a project that presents the greatest forecasting risk.

C. is used for projects that cannot be analyzed by scenario analysis because the cash flows are unconventional.

D. is generally conducted prior to scenario analysis just to determine if the range of potential outcomes is acceptable.

E. illustrates how an increase in operating cash flow caused by changing both the revenue and the costs simultaneously will change the net present value for a project.

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-03 Evaluate an estimated NPV.

Section: 9.6 Scenario and Other What-If Analyses

Topic: Sensitivity analysis

43. Turner Industries started a new project three months ago. Sales arising from this project are significantly less than anticipated. Given this, which one of the following is management most apt to implement?

A. Option to wait

B. Soft rationing

C. Option to delay

D. Option to expand

E. Option to abandon

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-03 Evaluate an estimated NPV.

Section: 9.7 Additional Considerations in Capital Budgeting

Topic: Real options

44. Ignoring the option to wait:

A. may overestimate the internal rate of return on a project.

B. may underestimate the net present value of a project.

C. ignores the ability of a manager to increase output after a project has been implemented.

D. is the same as ignoring all strategic options.

E. ignores the value of discontinuing a project early.

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-03 Evaluate an estimated NPV.

Section: 9.7 Additional Considerations in Capital Budgeting

Topic: Real options

45. Which one of these has the least potential to increase the net present value of a proposed investment? Assume the project has a positive net present value in at least one set of circumstances.

A. Ability to wait until the economy improves before making the investment

B. Ability to immediately shut down a project should the project become unprofitable

C. Option to increase production beyond that initially projected

D. Option to place the investment on hold until a more favorable discount rate becomes available

E. Option to discontinue a project at the end of its intended life

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-03 Evaluate an estimated NPV.

Section: 9.7 Additional Considerations in Capital Budgeting

Topic: Real options

46. The ability to delay an investment:

A. is commonly referred to as the best-case scenario.

B. is valuable provided there are conditions under which the investment will have a positive net present value.

C. ensures that the investment will have an expected net present value that is positive.

D. offsets the need to conduct sensitivity analysis.

E. is referred to as the option to abandon.

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-03 Evaluate an estimated NPV.

Section: 9.7 Additional Considerations in Capital Budgeting

Topic: Real options

47. Nu Tek is comprised of four separate operating divisions. For this year, the firm has decided to allocate capital funds using a soft rationing approach. Which one of the following applies to this situation?

A. Division managers will be limited to accepting a single new project each.

B. Division managers are being given blanket approval to accept all positive net present value projects.

C. Division managers should expect to be treated equally, at least initially, in the capital distribution process.

D. Division managers will not receive any funding for new projects but will be allowed to expand current operations.

E. Division managers will not receive capital funding for any project.

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-03 Evaluate an estimated NPV.

Section: 9.7 Additional Considerations in Capital Budgeting

Topic: Capital rationing

48. When a firm faces hard rationing,:

A. all positive net present value projects will be accepted.

B. each division within a firm will be allocated an amount for capital expenditures that will be less than the total value of its positive net present value projects.

C. there will be no available funds for capital expenditures.

D. the firm will fund only those projects that create value for its shareholders.

E. the firm will finance only the projects that have the highest profitability index values.

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-03 Evaluate an estimated NPV.

Section: 9.7 Additional Considerations in Capital Budgeting

Topic: Capital rationing

49. The Market Farms purchased a parcel of land six years ago for $200,000. At that time, the firm invested $75,000 grading the site so that it would be usable. Since the firm wasn't ready to use the site itself at that time, it decided to lease the land for $40,000 a year. The Green Tomato is now considering building a hotel on the site as the rental lease is expiring. The current value of the land is $225,000. The firm has no loans or mortgages secured by the property. What value should be included in the initial cost of the hotel project for the use of this land?

A. $0

B. $200,000

C. $225,000

D. $229,000

E. $101,900

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-01 Determine the relevant cash flows for a proposed investment.

Section: 9.2 Incremental Cash Flows

Topic: Opportunity costs

50. Six years ago, China Exporters paid cash for a new packaging machine that cost $347,000. Three years ago, the firm spent $14,300 on repairs and modifications to the machine. The machine is now fully depreciated and has just sat idly in a back corner of the shop for the past seven months. The estimated value of the machine today is $157,500. The firm is considering using this machine in a new project. If it does so, what value should be assigned to this machine and included in the initial costs of the new project?

A. $0

B. $361,300

C. $157,500

D. $128,900

E. $171,800

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-01 Determine the relevant cash flows for a proposed investment.

Section: 9.2 Incremental Cash Flows

Topic: Opportunity costs

51. The Tattle Teller has a printing press sitting idly in its back room. The press has no market value to another printer because the machine utilizes old technology. The firm could get $480 for the press as scrap metal. The press is six years old and originally cost $174,000. The current book value is $3,570. The president of the firm is considering a new project and feels he can use this press for that project. What value, if any, should be assigned to the press as an initial cost of the new project?

A. $0

B. $480

C. $3,570

D. $3,090

E. $4,050

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-01 Determine the relevant cash flows for a proposed investment.

Section: 9.2 Incremental Cash Flows

Topic: Opportunity costs

52. Left Eye Promotions is a specialty retailer offering T-shirts, sweatshirts, and caps. Its most recent annual sales consisted of $27,000 of T-shirts, $21,000 of sweatshirts, and $3,500 of caps. The company is adding polo shirts to the lineup and projects that this addition will result in sales next year of $25,000 of T-shirts, $17,000 of sweatshirts, $14,000 of Polo shirts, and $3,000 of caps. What sales amount should be used when evaluating the Polo shirt project?

A. $13,300

B. $7,500

C. $6,700

D. $6,800

E. $7,900

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-01 Determine the relevant cash flows for a proposed investment.

Section: 9.2 Incremental Cash Flows

Topic: Cash flows

53. Sherpa Outfitters sells specialty equipment for mountain climbers. Its sales for last year included $488,500 of tents and $ 800,000 of climbing gear. For next year, management has decided to sell specialty sleeping bags also. As a result of this change, sales projections for next year are $537,350 of tents, $880,000 of climbing gear, and $150,000 of sleeping bags. How much of next year's sales are derived from the side effects of adding the new product to its sales offerings?

A. $0

B. $145,650

C. $128,850

D. $278,850

E. $256,850

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-01 Determine the relevant cash flows for a proposed investment.

Section: 9.2 Incremental Cash Flows

Topic: Cash flows

54. Floral Shoppes has a new project in mind that will increase accounts receivable by $19,000, decrease accounts payable by $4,000, increase fixed assets by $27,000, and decrease inventory by $2,000. What is the amount the firm should use as the initial cash flow attributable to net working capital when it analyzes this project?

A. -$25,000

B. -$17,000

C. -$21,000

D. -$12,000

E. -$52,000

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.2 Incremental Cash Flows

Topic: Cash flows

55. British Metals is reviewing its current accounts to determine how a proposed project might affect the account balances. The firm estimates the project will initially require $81,000 in additional current assets and $57,000 in additional current liabilities. The firm also estimates the project will require an additional $8,000 a year in current assets in each of the first three of the four years of the project. How much net working capital will the firm recoup at the end of the project assuming that all net working capital can be recaptured?

A. $105,000

B. $24,000

C. $48,000

D. $68,000

E. $81,000

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.3 Pro Forma Financial Statements and Project Cash Flows

Topic: Cash flows

56. Shannon’s Irish Cookware is implementing a project that will initially increase accounts payable by $5,000, increase inventory by $3,200, and decrease accounts receivable by $1,800. All net working capital will be recouped when the project terminates. What is the cash flow related to the net working capital for the last year of the project?

A. $500,00

B. $600

C. -$3,600

D. $2,500

E. $5,600

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.3 Pro Forma Financial Statements and Project Cash Flows

Topic: Cash flows

57. Jim's Hardware is adding a new product to its sales lineup. Initially, the firm will stock $36,000 of the new inventory, which will be purchased on 30 days' credit from a supplier. The firm will also invest $13,000 in accounts receivable and $11,000 in equipment. What amount should be included in the initial project costs for net working capital?

A. -$49,000

B. -$47,000

C. -$3,000

D. -$13,000

E. -$24,000

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.4 More on Project Cash Flow

Topic: Cash flows

58. A five-year project is expected to generate annual revenues of $159,000, variable costs of $72,500, and fixed costs of $15,000. The annual depreciation is $19,500 and the tax rate is 21 percent. What is the annual operating cash flow?

A. $71,500

B. $117,855

C. $72.430

D. $41,080

E. $60,580

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.3 Pro Forma Financial Statements and Project Cash Flows

Topic: Operating cash flow

59. A debt-free firm has net income of $142,658, taxes of $37,921.75, and depreciation of $27,500. What is the operating cash flow?

A. $131,458

B. $142,658

C. $166,958

D. $170,158

E. $162,358

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.3 Pro Forma Financial Statements and Project Cash Flows

Topic: Operating cash flow

60. Logan Hunting has a proposed project that will generate sales of 2,200 units annually at a selling price of $29.95 each. The fixed costs are $15,000 and the variable costs per unit are $6.95. The project requires $42,000 of fixed assets that will be depreciated on a straight-line basis to a zero book value over the four-year life of the project. The salvage value of the fixed assets is $5,500 and the tax rate is 21 percent. What is the operating cash flow for Year 4?

A. $ 30,329

B. $ 19,829

C. $ 21,124

D. $ 42,179

E. $ 22,564

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.3 Pro Forma Financial Statements and Project Cash Flows

Topic: Operating cash flow

61. Your local athletic center is planning a $1.2 million expansion to its current facility. This cost will be depreciated on a straight-line basis over a 20-year period. The expanded area is expected to generate $745,000in additional annual sales. Variable costs are 39* percent of sales, the annual fixed costs are $140,000, and the tax rate is 21percent. What is the operating cash flow for the first year of this project?

A. $218,336.00

B. $201,015.00

C. $261,015.50

D. $371,615.50

E. $314,450.00

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.3 Pro Forma Financial Statements and Project Cash Flows

Topic: Operating cash flow

62. A cost-cutting project will decrease costs by $52,000 a year. The annual depreciation on the project's fixed assets will be $5,000 and the tax rate is 21 percent. What is the amount of the change in the firm's operating cash flow resulting from this project?

A. $37,130

B. $52,000

C. $41,080

D. $46,080

E. $42,130

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.3 Pro Forma Financial Statements and Project Cash Flows

Topic: Operating cash flow

63. An all-equity firm has net income of $78,500, depreciation of $6,250, and taxes of $20,867. What is the firm's operating cash flow?

A. $50,965

B. $72,250

C. $46,250

D. $84,750

E. $78,500

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.3 Pro Forma Financial Statements and Project Cash Flows

Topic: Operating cash flow

64. The Blue Lagoon is considering a project with a five-year life. The project requires $32,000 of fixed assets that are classified as five-year property for MACRS. Variable costs equal 67 percent of sales, fixed costs are $12,600, and the tax rate is 34 percent. What is the operating cash flow for Year 4 given the following sales estimates and MACRS depreciation allowance percentages?

A. -$1,806.67

B. $640.89

C. $1,311.16

D. $1,409.80

E. -$2,276.60

AACSB: Analytical Thinking

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.4 More on Project Cash Flow

Topic: Operating cash flow

65. A new project is expected to generate an operating cash flow of $75,560 and will initially free up $12,250 in net working capital. Purchases of fixed assets costing $75,000 will be required to start up the project. What is the total cash flow for this project at Time zero?

A. -$64,410

B. - $62,750

C. -$75,000

D. -87,250

E. $62,250

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.4 More on Project Cash Flow

Topic: Cash flows

66. A project has an annual operating cash flow of $52,620. Initially, this four-year project required $5,160 in net working capital, which is recoverable when the project ends. The firm also spent $39,700 on equipment to start the project. This equipment will have a book value of $17,014 at the end of Year 4. What is the cash flow for Year 4 of the project if the equipment can be sold for $15,900 and the tax rate is 35 percent?

A. $63,749.90

B. $73,680.00

C. $74,069.90

D. $73,862.00

E. $73,290.10

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.4 More on Project Cash Flow

Topic: Cash flows

67. The Outpost, a sole proprietorship currently sells short leather jackets for $369 each. The firm is considering selling long coats also. The long coats would sell for $719 each and the company expects to sell 820 a year. If the company decides to carry the long coat, management feels that the annual sales of the short jacket will decline from 1,120 to 1,040 units. Variable costs on the jacket are $228 and $435 on the long coat. The fixed costs for this project are $23,100, depreciation is $10,400 a year, and the tax rate is 34 percent. What is the projected operating cash flow for this project?

A. $134,546

B. $131,264

C. $112,212

D. $131,062

E. $128,749

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.4 More on Project Cash Flow

Topic: Operating cash flow

68. Burke's Corner currently sells blue jeans and T-shirts. Management is considering adding fleece tops to its inventory. The tops would sell for $49 each with expected sales of 3,200 tops annually. By adding the fleece tops, management feels the company will sell an additional 150 pairs of jeans at $79 a pair and 220 fewer T-shirts at $18 each. The variable cost per unit is $36 on the jeans, $7 on the T-shirts, and $21 on the fleece tops. The project’s depreciation expense is $23,000 a year and the fixed costs are $21,000 annually. The tax rate is 34 percent. What is the project's operating cash flow?

A. $47,935.80

B. $52,201.20

C. $55,755.80

D. $43,209.90

E. $38,419.70

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.3 Pro Forma Financial Statements and Project Cash Flows

Topic: Operating cash flow

69. Kite Flite is considering making and selling custom kites in two sizes. The small kites would be priced at $12 and the large kites would be $39. The variable cost per unit is $5 and $14, respectively. Jill, the owner, feels that she can sell 1,900 of the small kites and 1,400 of the large kites each year. The fixed costs would be only $1,890 a year and the tax rate is 34 percent. What is the annual operating cash flow if the annual depreciation expense is $380?

A. $26,064.12

B. $30,759.80

C. $29,848.20

D. $28,309.40

E. $30,630.60

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.3 Pro Forma Financial Statements and Project Cash Flows

Topic: Operating cash flow

70. A project has sales of $600,000, costs of $366,500, depreciation of $34,500, interest expense of $5,500, and a tax rate of 21 percent. What is the value of the depreciation tax shield?

A. $7,245.00

B. $7,645.00

C. $6,200.00

D. $98,800.00

E. $10,810,200.00a

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.3 Pro Forma Financial Statements and Project Cash Flows

Topic: Operating cash flow

71. A project will reduce costs by $62,750 but increase depreciation by $14,812. What is the operating cash flow of this project based on the tax shield approach if the tax rate is 34 percent?

A. $41,415.00

B. $31,639.08

C. $38,211.19

D. $42,006.20

E. $46,451.08

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.3 Pro Forma Financial Statements and Project Cash Flows

Topic: Operating cash flow

72. A project has annual depreciation of $15,028, costs of $82,592, and sales of $138,765. The applicable tax rate is 34 percent. What is the operating cash flow according to the tax shield approach?

A. $21,540.09

B. $27,666.67

C. $27,157.02

D. $42,183.70

E. $39,878.84

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.3 Pro Forma Financial Statements and Project Cash Flows

Topic: Operating cash flow

73. A project requires $428,000 of equipment that is classified as seven-year property. What is the depreciation expense in Year 3 given the following MACRS depreciation allowances, starting with Year 1: 14.29, 24.49, 17.49, 12.49, 8.93, 8.92, 8.93, and 4.46 percent?

A. $89,038.42

B. $48,447.30

C. $56,038.15

D. $74,857.20

E. $104,817.20

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.4 More on Project Cash Flow

Topic: Depreciation

74. Woodland Lake Manufacturing has a new project that requires $652,000 of equipment. What is the depreciation in Year 5 of this project if the equipment is classified as seven-year property for MACRS purposes? The MACRS allowance percentages are as follows, commencing with year 1: 14.29, 24.49, 17.49, 12.49, 8.93, 8.92, 8.93, and 4.46 percent.

A. $81,434.80

B. $58,158.40

C. $93,170.80

D. $58,223.60

E. $74,749.60

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.4 More on Project Cash Flow

Topic: Depreciation

75. What is the Year 2 depreciation on equipment costing $148,315 if it is classified as five-year property for MACRS purposes? The MACRS allowance percentages are as follows, commencing with Year 1: 20.00, 32.00, 19.20, 11.52, 11.52, and 5.76 percent.

A. $37,968.64

B. $38,201.50

C. $41,984.30

D. $48,398.80

E. $47,460.80

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.4 More on Project Cash Flow

Topic: Depreciation

76. Classic Cars is considering a project that requires $311,250 of fixed assets that are classified as five-year property for MACRS. What is the book value of these assets at the end of Year 3? The MACRS allowance percentages are as follows, commencing with Year 1: 20.00, 32.00, 19.20, 11.52, 11.52, and 5.76 percent.

A. $153,742

B. $136,811

C. $89,640

D. $93,450

E. $144,504

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.4 More on Project Cash Flow

Topic: Depreciation

77. Northern Lighting purchased some three-year MACRS property three years ago. What is the current book value of this equipment if the original cost was $385,000? The MACRS allowance percentages are as follows, commencing with Year 1: 33.33, 44.45, 14.81, and 7.41 percent.

A. $0

B. $57,037.75

C. $28,528.50

D. $85,547.00

E. $96,250.00

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.4 More on Project Cash Flow

Topic: Depreciation

78. Great Western Southern purchased $525,000 of equipment four years ago. The equipment is seven-year MACRS property. The firm is selling this equipment today for $150,000. What is the aftertax cash flow from this sale if the tax rate is 27 percent? The MACRS allowance percentages are as follows, commencing with Year 1: 14.29, 24.49, 17.49, 12.49, 8.93, 8.92, 8.93, and 4.46 percent.

A. $166,712.33

B. $ 152,941.10

C. $143,096.78

D. $168,825.81

E. $147,057.90

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.4 More on Project Cash Flow

Topic: Cash flows

79. Sandy Bottom, Inc., purchased some seven-year MACRS welding equipment six years ago at a cost of $60,000. Today, the company is selling this equipment for $10,000. The tax rate is 21 percent. What is the aftertax cash flow from this sale? The MACRS allowance percentages are as follows, commencing with Year 1: 14.29, 24.49, 17.49, 12.49, 8.93, 8.92, 8.93, and 4.46 percent.

A. $6,212.86

B. $8.461.96

C. $9,587.14

D. $10,711.06

E. $11,824.41

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.4 More on Project Cash Flow

Topic: Cash flows

80. Phil's Diner, a sole proprietorship purchased some new equipment two years ago for $32,600. Today, it is selling this equipment for $22,000. What is the aftertax cash flow from this sale if the tax rate is 35 percent? The applicable MACRS allowance percentages are as follows, commencing with Year 1: 20.00, 32.00, 19.20, 11.52, 11.52, and 5.76 percent.

A. $19,776.80

B. $18,846.67

C. $24,223.20

D. $20,408.20

E. $25,153.33

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.4 More on Project Cash Flow

Topic: Cash flows

81. Three years ago, Stock Tek purchased some five-year MACRS property for $82,600. Today, it is selling this property for $31,500. How much tax will the company owe on this sale if the tax rate is 34 percent? The MACRS allowance percentages are as follows, commencing with Year 1: 20.00, 32.00, 19.20, 11.52, 11.52, and 5.76 percent.

A. -$2,451.81

B. -$5,857.08

C. $0

D. $5,857.08

E. $2,621.81

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.4 More on Project Cash Flow

Topic: Cash flows

82. You are analyzing a project and have developed the following estimates. The depreciation is $13,600 a year and the tax rate is 34 percent. What is the base-case operating cash flow?

A. $8,770

B. $6,204

C. $11,433

D. $19,804

E. $20,410

AACSB: Analytical Thinking

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.6 Scenario and Other What-If Analyses

Topic: Scenario analysis

83. You are analyzing a project and have developed the following estimates. The depreciation is $5,800 a year and the tax rate is 35 percent. What is the best-case operating cash flow?

A. $7,473.00

B. $4,196.80

C. $5,377.50

D. $6,701.40

E. $8,627.50

AACSB: Analytical Thinking

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.6 Scenario and Other What-If Analyses

Topic: Scenario analysis

84. You are analyzing a project and have developed the following estimates. The depreciation is $1,020 a year and the tax rate is 35 percent. What is the worst-case operating cash flow?

A. -$110.50

B. -$64.10

C. $909.50

D. $209.00

E. $660.50

AACSB: Analytical Thinking

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.6 Scenario and Other What-If Analyses

Topic: Scenario analysis

85. You are analyzing a project and have developed the following estimates. The depreciation is $17,340 a year and the tax rate is 34 percent. What is the best-case operating cash flow?

A. $190,035.60

B. $172,695.60

C. $167,904.00

D. $173,799.60

E. $166,240.00

AACSB: Analytical Thinking

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.6 Scenario and Other What-If Analyses

Topic: Scenario analysis

86. You are analyzing a project and have developed the following estimates. The depreciation is $47,900 a year and the tax rate is 35 percent. What is the worst-case operating cash flow?

A. -$2,545

B. $11,145

C. $88,855

D. $27,556

E. $61,095

AACSB: Analytical Thinking

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.6 Scenario and Other What-If Analyses

Topic: Scenario analysis

87. You are analyzing a project and have developed the following estimates: unit sales = 2,600, price per unit = $109, variable cost per unit = $67, fixed costs per year = $38,000. The depreciation is $12,000 a year and the tax rate is 34 percent. What effect would the sale of one more unit have on the operating cash flow?

A. $24.18

B. $16.66

C. $13.10

D. $27.72

E. $15.70

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.6 Scenario and Other What-If Analyses

Topic: Sensitivity analysis

88. You are analyzing a project and have developed the following estimates: unit sales = 2,150, price per unit = $84, variable cost per unit = $57, fixed costs per year = $13,900. The depreciation is $8,300 a year and the tax rate is 35 percent. What effect would an increase of $1 in the selling price have on the operating cash flow?

A. $1,397.50

B. $1,249.65

C. $1,320.65

D. $3,773.25

E. $1,430.35

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.6 Scenario and Other What-If Analyses

Topic: Sensitivity analysis

89. A project has projected values of: unit sales = 1,650, price per unit = $19, variable cost per unit = $7, fixed costs per year = $4,700. The depreciation is $1,100 a year and the tax rate is 34 percent. What effect would a decrease of $1 in the variable cost per unit have on the operating cash flow?

A. -$8.58

B. -$1,089

C. -$912

D. $1,089

E. $912

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.6 Scenario and Other What-If Analyses

Topic: Sensitivity analysis

90. Newton Industries is considering a project and has developed the following estimates: unit sales = 4,800, price per unit = $67, variable cost per unit = $42, annual fixed costs = $11,900. The depreciation is $14,700 a year and the tax rate is 34 percent. What effect would an increase of $1 in the selling price have on the operating cash flow?

A. $3,168

B. $4,823

C. $1

D. $83,448

E. $82,368

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.6 Scenario and Other What-If Analyses

Topic: Sensitivity analysis

91. Lakeside Winery is considering expanding its winemaking operations. The expansion will require new equipment costing $708,000 that would be depreciated on a straight-line basis to a zero balance over the four-year life of the project. The equipment can be sold for $220,000 after the four years. The project requires $46,000 initially for net working capital, all of which will be recouped at the end of the project. The projected operating cash flow is $211,500 a year. What is the net present value of this project if the relevant discount rate is 13 percent and the tax rate is 34 percent?

A. -$7,632.77

B. -$8,309.18

C. -$10,747.11

D. $7,008.14

E. $1,309.54

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.5 Evaluating Npv Estimates

Topic: Project analysis and evaluation

92. Outdoor Sports is considering adding a miniature golf course to its facility. The course would cost $138,000, would be depreciated on a straight-line basis over its five-year life, and would have a zero salvage value. The estimated income from the golfing fees would be $72,000 a year with $24,000 of that amount being variable cost. The fixed cost would be $11,600. In addition, the firm anticipates an additional $14,000 in revenue from its existing facilities if the golf course is added. The project will require $3,000 of net working capital, which is recoverable at the end of the project. What is the net present value of this project at a discount rate of 12 percent and a tax rate of 34 percent?

A. $11,309.11

B. $11,628.04

C. $12,737.26

D. $14,438.78

E. $14,900.41

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.5 Evaluating Npv Estimates

Topic: Project analysis and evaluation

93. A project has an initial requirement of $ 260,000 for fixed assets and $16,500 for net working capital. The fixed assets will be depreciated to a zero book value over the four-year life of the project and have an estimated salvage value of $50,000. All of the net working capital will be recouped at the end of the project. The annual operating cash flow is $82,500 and the discount rate is 12 percent. What is the project's net present value if the tax rate is 21 percent?

A. $15,684.29

B. $12,345,34

C. $9,670.33

D. -$15.432.63

E. $16,343.27

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.5 Evaluating Npv Estimates

Topic: Project analysis and evaluation

94. Global Water Treatment, Inc. is analyzing a proposed investment that would initially require $750,000 of new equipment. This equipment would be depreciated on a straight-line basis to a zero balance over the four-year life of the project. The estimated salvage value is $150,000. The project requires $50,000 initially for net working capital, all of which will be recouped at the end of the project. The projected operating cash flow is $ 265,000 a year. What is the internal rate of return on this project if the relevant tax rate is 21 percent?

A. 15.51 percent

B. 15.98 percent

C. 20.12 percent

D. 17.64 percent

E. 17.99 percent

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.5 Evaluating Npv Estimates

Topic: Project analysis and evaluation

95. The Golf Range is considering adding an additional driving range to its facility. The range would cost $229,000, would be depreciated on a straight-line basis over its seven-year life, and would have a zero salvage value. The anticipated revenue from the project is $62,500 a year with $18,400 of that amount being variable cost. The fixed cost would be $15,700. The firm believes that it will earn an additional $22,500 a year from its current operations should the driving range be added. The project will require $3,000 of net working capital, which is recoverable at the end of the project. What is the internal rate of return on this project at a tax rate of 34 percent?

A. 8.32 percent

B. 8.68 percent

C. 7.47 percent

D. 11.09 percent

E. 12.14 percent

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.5 Evaluating Npv Estimates

Topic: Project analysis and evaluation

96. A project has an initial requirement of $311,700 for fixed assets and $47,600 for net working capital. The fixed assets will be depreciated to a zero book value over the four-year life of the project and will be worthless at the end of the project. All of the net working capital will be recouped after four years. The expected annual operating cash flow is $108,315. What is the project's internal rate of return if the tax rate is 34 percent?

A. 12.06 percent

B. 11.99 percent

C. 10.69 percent

D. 12.15 percent

E. 10.87 percent

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.5 Evaluating Npv Estimates

Topic: Project analysis and evaluation

97. Lee’s currently sells 13,800 motor homes per year at $87,900 each, and 1,100 luxury motor coaches per year at $139,900 each. The company wants to introduce a low-range camper to fill out its product line; it hopes to sell 7,200 of these campers per year at $17,500 each. An independent consultant has determined that if the company introduces the new campers, it should boost the sales of its existing motor homes by 1,100 units per year, and reduce the sales of its luxury motor coaches by 610 units per year. What amount should be used as the annual sales figure when evaluating this project?

A. $128,309,000

B. $97,480,000

C. $137,351,000

D. $106,542,000

E. $128,787,000

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-01 Determine the relevant cash flows for a proposed investment.

Section: 9.2 Incremental Cash Flows

Topic: Cash flows

98. Consider an asset that costs $311,000 and is depreciated straight-line to zero over its six-year tax life. The asset is to be used in a four-year project; at the end of the project, the asset can be sold for $58,000. If the relevant tax rate is 34 percent, what is the aftertax cash flow from the sale of this asset?

A. $73,526.67

B. $68,411.19

C. $70,103.33

D. $40,466.67

E. $42,473.33

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.4 More on Project Cash Flow

Topic: Cash flows

99. An asset used in a three-year project falls in the three-year MACRS class for tax purposes. The MACRS percentage rates starting with Year 1 are: 33.33, 44.45, 14.81, and 7.41.The asset has an acquisition cost of $2.6 million and will be sold for $1.1 million at the end of the project. If the tax rate is 34 percent, what is the aftertax salvage value of the asset?

A. $742,519.10

B. $726,000.00

C. $832,056.60

D. $791,504.40

E. $887,560.15

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.4 More on Project Cash Flow

Topic: Cash flows

100. The Corner Shop is considering a new four-year expansion project that requires an initial fixed asset investment of $210,000. The fixed asset will be depreciated straight-line to zero over its four-year life, after which time it will be worthless. The project is estimated to generate $48,000 in annual sales, with costs of $31,000. If the tax rate is 34 percent, what is the OCF for this project?

A. $29,070

B. $63,270

C. $69,250

D. $17,850

E. $29,640

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.3 Pro Forma Financial Statements and Project Cash Flows

Topic: Operating cash flow

101. The Sausage Hut is looking at a new sausage system with an installed cost of $187,400. This cost will be depreciated straight-line to zero over the project's four-year life, at the end of which the sausage system can be scrapped for $25,000. The sausage system will save the firm $69,000 per year in pretax operating costs, and the system requires an initial investment in net working capital of $9,000, which will be recouped at project end. If the tax rate is 34 percent and the discount rate is 12 percent, what is the NPV of this project?

A. $6,508.54

B. -$320.81

C. $560.24

D. $1,410.10

E. $8,211.15

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.5 Evaluating Npv Estimates

Topic: Project analysis and evaluation

102. JL & Co. is contemplating the purchase of a new $428,000 computer-based order entry system. The system will be depreciated straight-line to zero over the project’s six-year life. The pretax resale value is $215,000. The system will save $148,000 before taxes per year in order processing costs and will reduce working capital by $46,000 at the beginning of the project. Working capital will revert back to normal at the end of the project. If the tax rate is 34 percent, what is the IRR for this project?

A. 15.51 percent

B. 22.79 percent

C. 25.32 percent

D. 31.08 percent

E. 14.20 percent

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.4 More on Project Cash Flow

Topic: Project analysis and evaluation

103. Cinram Machines has the following estimates for its new gear assembly project: price = $1,870 per unit; variable costs = $949 per unit; fixed costs = $1.4 million; quantity = 42,000 units. Suppose the company believes all of its estimates are accurate only to within ± 3 percent. What value should the company use for its total variable costs when performing its best-case scenario analysis?

A. $38,578,064

B. $39,822,128

C. $38,216,051

D. $41,802,137

E. $40,864,538

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-03 Evaluate an estimated NPV.

Section: 9.6 Scenario and Other What-If Analyses

Topic: Scenario analysis

104. A project costs $2.43 million and has no salvage value. Depreciation is straight-line to zero over the five-year life of the project. Sales are projected at 64,000 units per year, price per unit is $73.29, variable cost per unit is $42.93, and fixed costs are $623,000 per year. The tax rate is 35 percent, and the required rate of return is 11percent. What is the sensitivity of NPV to a 100-unit increase in the sales figure?

A. $9,198.40

B. $8,609.18

C. $8,097.40

D. $7,293.48

E. $7,557.12

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-03 Evaluate an estimated NPV.

Section: 9.6 Scenario and Other What-If Analyses

Topic: Sensitivity analysis

105. Boyertown Industrial Tools is considering a three-year project to improve its production efficiency. Buying a new machine press for $578,000 is estimated to result in $184,000 in annual pretax cost savings. The press falls in the MACRS five-year class, which has percentage rates starting with Year 1, of 20, 32, 19.20,11.52, 11.52, and 5.76. The salvage value at the end of the project of $162,000. The press also requires an initial investment in spare parts inventory of $19,000, along with an additional $1,500 in inventory for each succeeding year of the project. The inventory will all be recovered when the project ends. If the tax rate is 35 percent and the discount rate is 12 percent, should the company buy and install the machine press? Why or why not?

A. Yes; the NPV is $51,613.33

B. Yes; the NPV is $45,602.57

C. No; the NPV is -$22,311.09

D. No; the NPV is -$52,918.78

E. Yes; the NPV is $64,728.29

AACSB: Analytical Thinking

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.4 More on Project Cash Flow

Topic: Special projects

106. Consider a three-year project with the following information: initial fixed asset investment = $347,600; straight-line depreciation to zero over the three-year life; zero salvage value; price per unit = $49.99; variable costs per unit = $30.82; fixed costs per year = $187,000; quantity sold per year = 65,500 units; tax rate = 35 percent. How sensitive is OCF to an increase of one unit in the quantity sold?

A. $12.46

B. $11.67

C. $8.67

D. $9.08

E. $13.40

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Understand

Difficulty: 2 Medium

Learning Objective: 09-03 Evaluate an estimated NPV.

Section: 9.6 Scenario and Other What-If Analyses

Topic: Sensitivity analysis

New Questions

107. Herschbach Ad Pros is a specialty retailer offering T-shirts, sweatshirts, and caps. Its most recent annual sales consisted of $15,000 of T-shirts, $11,000 of sweatshirts, and $1,800 of caps. The company is adding polo shirts to the lineup and projects that this addition will result in sales next year of $14,000 of T-shirts, $9,800 of sweatshirts, $15,000 of Polo shirts, and $2,500 of caps. What sales amount should be used when evaluating the Polo shirt project?

A. $19,300

B. $13,500

C. $12,700

D. $12,800

E. $13,900

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-01 Determine the relevant cash flows for a proposed investment.

Section: 9.2 Incremental Cash Flows

Topic: Cash flows

108. Outdoors Essentials sells specialty equipment for mountain climbers. Its sales for last year included $255,000 of tents and $ 550,000 of climbing gear. For next year, management has decided to sell specialty sleeping bags also. As a result of this change, sales projections for next year are $300,000 of tents, $600,000 of climbing gear, and $110,000 of sleeping bags. How much of next year's sales are derived from the side effects of adding the new product to its sales offerings?

A. $0

B. $205,000

C. $95,000

D. $145,000

E. $110,000

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-01 Determine the relevant cash flows for a proposed investment.

Section: 9.2 Incremental Cash Flows

Topic: Cash flows

109. Scrapping Products is implementing a project that will initially increase accounts payable by $3,000, increase inventory by $1,800, and decrease accounts receivable by $1,200. All net working capital will be recouped when the project terminates. What is the cash flow related to the net working capital for the last year of the project?

A. $2,400

B. $2,100

C. -$2.400

D. -$2,100

E. $3,300

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.3 Pro Forma Financial Statements and Project Cash Flows

Topic: Cash flows

110. A five-year project is expected to generate annual revenues of $210,000, variable costs of $90,000, and fixed costs of $22,000. The annual depreciation is $24,000 and the tax rate is 21 percent. What is the annual operating cash flow?

A. $71,500

B. $117,855

C. $72.430

D. $41,080

E. $60,580

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.3 Pro Forma Financial Statements and Project Cash Flows

Topic: Operating cash flow

111. A debt-free firm has net income of $210,000, taxes of $55,822.78, and depreciation of $42,000. What is the operating cash flow?

A. $213.300

B. $248,800

C. $202.400

D. $252,000

E. $244,200

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.3 Pro Forma Financial Statements and Project Cash Flows

Topic: Operating cash flow

112. Shay Hand Outfitters has a proposed project that will generate sales of 3,100 units annually at a selling price of $37.00 each. The fixed costs are $25,000 and the variable costs per unit are $11.95. The project requires $72,000 of fixed assets that will be depreciated on a straight-line basis to a zero book value over the four-year life of the project. The salvage value of the fixed assets is $9,700 and the tax rate is 21 percent. What is the operating cash flow for Year 4?

A. $ 45,377.45

B. $ 27,377.45

C. $ 41,597.45

D. $ 52,655.00

E. $ 22,564.00

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.3 Pro Forma Financial Statements and Project Cash Flows

Topic: Operating cash flow

113. Your local athletic center is planning a $500,000 expansion to its current facility. This cost will be depreciated on a straight-line basis over a 20-year period. The expanded area is expected to generate $175,000 in additional annual sales. Variable costs are 32 percent of sales, the annual fixed costs are $40,000, and the tax rate is 21 percent. What is the operating cash flow for the first year of this project?

A. $62,410.00

B. $99,260.00

C. $67.660.00

D. $42,660.00

E. $31,450.00

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.3 Pro Forma Financial Statements and Project Cash Flows

Topic: Operating cash flow

114. A cost-cutting project will decrease costs by $37,000 a year. The annual depreciation on the project's fixed assets will be $2,750 and the tax rate is 21 percent. What is the amount of the change in the firm's operating cash flow resulting from this project?

A. $27,057.50

B. $31.980.00

C. $29,230.50

D. $26,080.00

E. $29,807.50

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.3 Pro Forma Financial Statements and Project Cash Flows

Topic: Operating cash flow

115. An all-equity firm has net income of $112,780, depreciation of $8,750, and taxes of $29,980. What is the firm's operating cash flow?

A. $150,965

B. $142,760

C. $91,550

D. $121,530

E. $151,510

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.3 Pro Forma Financial Statements and Project Cash Flows

Topic: Operating cash flow

116. A new project is expected to generate an operating cash flow of $85,560 and will initially free up $10,475 in net working capital. Purchases of fixed assets costing $85,000 will be required to start up the project. What is the total cash flow for this project at Time zero?

A. -$75,085

B. - $74,525

C. -$85,000

D. -87,250

E. $62,250

AACSB: Analytical Thinking

Accessibility: Keyboard Navigation

Blooms: Remember

Difficulty: 1 Easy

Learning Objective: 09-02 Analyze a projects expected cash flows.

Section: 9.4 More on Project Cash Flow

Topic: Cash flows