Financial Management Part 2

Name:
Section:

Midterm Quiz 2
September 1, 2015

1. Which of the following cash flows are NOT considered in the calculation of the initial outlay for a capital
investment proposal?
a. Training expense
b. Working capital investments
c. Installation costs of an asset
d. Before-tax selling price of old machine
e.
2. Which of the following is NOT a relevant cash flow and thus should not be reflected in the analysis of a capital
budgeting project?
a. Changes in net working capital.
b. Shipping and installation costs.
c. Sunk costs that have been expensed for tax purposes.
d. Opportunity costs.
e.
3. Benefits expected from proposed capital expenditures ________.
a. must be on a pre-tax basis because it provides the true position of profits by the firm
b. must be on an after-tax basis because no benefits may be used until tax claims are satisfied
c. may be valued either on pre-tax or after-tax basis based on the size of the firm
d. are independent of interest and taxes
e.
4. Which of the following is included in the terminal cash flow?
a. The expected salvage value of the asset
b. Tax impacts from selling asset
c. Recapture of any working capital
d. All of the above
e.
5. Which of the following rules is CORRECT for capital budgeting analysis?
a. Sunk costs are not included in the annual cash flows, but they must be deducted from the PV of the
projects other costs when reaching the accept/reject decision.
b. The interest paid on funds borrowed to finance a project must be included in estimates of the projects
cash flows.
c. If a product is competitive with some of the firms other products, this fact should be incorporated into the
estimate of the relevant cash flows. However, if the new product is complementary to some of the firms
other products, this fact need not be reflected in the analysis.
d. Only incremental cash flows, which are the cash flows that would result if a project is accepted, are
relevant when making accept/reject decisions.
e.
6. Which of the following must be considered in computing the terminal value of a replacement project?
a. operating cash flow for the final year
b. after-tax proceeds from the sale of a new asset
c. before-tax proceeds from the sale of an old asset
d. before-tax proceeds from the sale of a new asset
e.
7. Depreciation expenses affect capital budgeting analysis by increasing:
a. taxes paid.
b. incremental cash flows.
c. the initial outlay.
d. working capital.
e.
f.
8. Which of the following would increase the net working capital for a project? An increase in:
a. accounts receivable.
b. fixed assets.
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10.

11.

12.

13.

14.

Midterm Quiz 2

c. accounts payable.
d. common stock.
e.
Depreciation expenses affect tax-related cash flows by:
a. increasing taxable income, thus increasing taxes.
b. decreasing taxable income, thus reducing taxes.
c. decreasing taxable income, but not altering cash flows since depreciation is not a cash expense.
d. all of the above.
When making replacement decisions, the development of relevant cash flows is complicated when compared to
expansion decisions, due to the need to calculate ________ cash inflows.
a. conventional
b. opportunity
c. incremental
d. sunk
e.
f.
Jefferson Corporation is considering an expansion project. The necessary equipment could be purchased for $15
million and shipping and installation costs are another $500,000. The project will also require an initial $2 million
investment in net working capital. The company's tax rate is 40%. What is the project's initial investment outlay
(in millions)?
a. $15.0
b. $15.5
c. $17.0
d. $17.5
e.
The Director of Capital Budgeting of Capital Assets Corp. is considering the acquisition of a new high speed
photocopy machine. The photocopy machine is priced at $85,000 and would require $2,000 in transportation costs
and $4,000 for installation. The equipment will have a useful life of 5 years. The proposal will require that Capital
Assets Corp. send technician for training at a cost of $5,000. The firm's marginal tax rate is 40 percent. How much
is the initial cash outlay of the photocopy machine?
a. $58,600
b. $77,000
c. $81,000
d. $96,000
e.
As assistant to the CFO of Boulder Inc., you must estimate the Year 1 cash flow for a project with the following
data. What is the Year 1 cash flow?
a.
Sales revenues
$12,700
b.
Depreciation
$4,000
c.
Other operating costs $6,000
d.
Tax rate
35.0%
e. $4,950
f. $4,495
g. $5,755
h. $6,165
i.
Liberty Services is now at the end of the final year of a project. The equipment originally cost $30,000, of which
75% has been depreciated. The firm can sell the used equipment today for $6,000, and its tax rate is 40%. What
is the equipments after-tax salvage value for use in a capital budgeting analysis? Note that if the equipment's
final market value is less than its book value, the firm will receive a tax credit as a result of the sale.
a. $6,670
b. $8,250
c. $6,600
d. $6,070
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15.

16.

17.

18.

19.

Midterm Quiz 2

e.
Your company, CSUS Inc., is considering a new project whose data are shown below. The required equipment
has a 3-year tax life, and the accelerated rates for such property are 33%, 45%, 15%, and 7% for Years 1 through
4. Revenues and other operating costs are expected to be constant over the project's 10-year expected operating
life. What is the project's Year 4 cash flow?
a.
Equipment cost (depreciable basis)
$70,000
b.
Sales revenues, each year
$41,000
c.
Operating costs (excl. depr.)
$25,000
d.
Tax rate
35.0%
e. $11,275
f. $9,930
g. $11,270
h. $12,115
i.
Your company is considering replacing an old steel cutting machine with a new one. Two months ago, you sent
the company engineer to a training seminar demonstrating the new machine's operation and efficiency. The
$2,500 cost for this training session has already been paid. If the new machine is purchased, it would require
$5,000 in installation and modification costs to make it suitable for operation in your factory. The old machine
originally cost $50,000 five years ago and has been depreciated by $7,000 per year for five years up to now. The
new machine will cost $75,000 before installation and modification. It will be depreciated by $5,000 per year. The
old machine can be sold today for $10,000. The marginal tax rate for the firm is 40%. Compute the relevant initial
outlay in this capital budgeting decision.
a. $72,500
b. $68,000
c. $70,500
d. $78,000
e.
A corporation is considering expanding operations to meet growing demand. With the capital expansion the
current accounts are expected to change. Management expects cash to increase by $10,000, accounts receivable
by $20,000, and inventories by $30,000. At the same time accounts payable will increase by $40,000, accruals by
$30,000, and long-term debt by $80,000. The change in net working capital is ________.
a. an increase of $10,000
b. a decrease of $10,000
c. a decrease of $90,000
d. an increase of $80,000
e.
f.
Delta Inc. is considering the purchase of a new machine which is expected to increase sales by $10,000 in
addition to increasing non-depreciation expenses by $3,000 annually. Due to the sales increase, Delta expects its
working capital to increase $1,000 during the life of the project. Delta will depreciate the machine using the
straight-line method over the project's five year life to a salvage value of zero. The machine's purchase price is
$20,000. The firm has a marginal tax rate of 34 percent, and its required rate of return is 12 percent.
g.
The machine's initial cash outflow is:
a. $20,000
b. $21,000
c. $27,000
d. $23,000
e.
The machine's incremental after-tax cash inflow for year 1 is:
a. $6,420
b. $7,980
c. $8,620
d. $5,980
e.
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Financial Management Part 2

Midterm Quiz 2

20. The machine's after-tax incremental cash flow in year five is:
a. $6,980
b. $5,980
c. $7,120
d. $8,620
e.
f.