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FIN 370 Week 5 Practice: Project Cash Flows and Capital Budgeting Quiz

FIN 370 Week 5 Practice: Project Cash Flows and Capital Budgeting Quiz
 

Complete the Week 5 “Practice: Project Cash Flows and Capital Budgeting Quiz” in Connect®.

Note: You have unlimited attempts available to complete practice assignments. The highest scored attempt will be recorded.

These assignments have earlier due dates, so plan accordingly.

Grades must be transferred manually to eCampus by your instructor. Don’t worry, this might happen after your due date.

 

Effects that arise from a new product or service that increase sales of the firm’s existing products or services are referred to as:

Multiple Choice

 

 

 

 
 

 

 

sunk effects.

 

 

 

 
 

 

 

substitutionary effects.

 

 

 

 
 

 

 

complementary effects.

 

 

 

 
 

 

 

marginal effects.

 

A new project would require an immediate increase in raw materials in the amount $17,000. The firm expects that accounts payable will automatically increase $7,000. How much must the firm expect its investment in net working capital to increase if they accept this project?

Multiple Choice

 

 

 

 
 

 

 

$7,000

 

 

 

 
 

 

 

$10,000

 

 

 

 
 

 

 

$24,000

 

 

 

 
 

 

 

$17,000

 

 

A new project would require an immediate increase in raw materials in the amount of $12,000. The firm expects that accounts payable will automatically increase $8,500. How much must the firm expect its investment in net working capital to change if they accept this project?

Multiple Choice

 

 

 

 
 

 

 

−$20,500

 

 

 

 
 

 

 

+$3,500

 

 

 

 
 

 

 

+$20,000

 

 

 

 
 

 

 

−$3,500

 

 

All of the following can be included in the depreciable basis of an asset EXCEPT:

Multiple Choice

 

 

 

 
 

 

 

sales tax.

 

 

 

 
 

 

 

variable costs.

 

 

 

 
 

 

 

freight charges.

 

 

 

 
 

 

 

installation fees.

 

 

A local bank is contemplating adding a new ATM to their lobby. They will need another phone line to provide communications that has a monthly cost of $50 per month. This is an example of:

Multiple Choice

 

 

 

 
 

 

 

none of the options.

 

 

 

 
 

 

 

complementary costs.

 

 

 

 
 

 

 

incremental cash flow.

 

 

 

 
 

 

 

sunk cost.

 

 

 

Which of these is used as a measure of the total amount of available cash flow from a project?

Multiple Choice

 

 

 

 
 

 

 

Investment in operating capital

 

 

 

 
 

 

 

Free cash flow

 

 

 

 
 

 

 

Sunk cash flow

 

 

 

 
 

 

 

Operating cash flow

 

 

Equipment was purchased for $45,000 plus $2,000 in freight charges. Installation costs were $1,500 and sales tax totaled $1,000. Hiring a special consultant to provide advice during the selection of the equipment cost $3,000. What is this asset’s depreciable basis?

Multiple Choice

 

 

 

 
 

 

 

$48,500

 

 

 

 
 

 

 

$51,500

 

 

 

 
 

 

 

$49,500

 

 

 

 
 

 

 

$52,500

 

 

Suppose you sell a fixed asset for $10,000 when its book value is $2,000. If your company’s marginal tax rate is 35 percent, what will be the effect on cash flows of this sale (i.e., what will be the after-tax cash flow of this sale)?

Multiple Choice

 

 

 

 
 

 

 

$6,500

 

 

 

 
 

 

 

$7,200

 

 

 

 
 

 

 

$5,200

 

 

 

 
 

 

 

$2,800

 

 

 

As new capital budgeting projects arise, we must estimate:

Multiple Choice

 

 

 

 
 

 

 

when such projects will require cash flows.

 

 

 

 
 

 

 

the cost of the stock being sold for the specific project.

 

 

 

 
 

 

 

the float costs for financing the project.

 

 

 

 
 

 

 

the cost of the loan for the specific project.

 

 

AB Mining Company just commissioned a firm to identify if an unused portion of their mine contains any silver or gold at a cost of $125,000. This is an example of a(n):

Multiple Choice

 

 

 

 
 

 

 

sunk cost.

 

 

 

 
 

 

 

opportunity cost.

 

 

 

 
 

 

 

relevant cash flow.

 

 

 

 
 

 

 

incremental cash flow.

 

 

Effects that arise from a new product or service that decrease sales of the firm’s existing products or services are referred to as:

Multiple Choice

 

 

 

 
 

 

 

complementary effects.

 

 

 

 
 

 

 

marginal effects.

 

 

 

 
 

 

 

sunk effects.

 

 

 

 
 

 

 

substitutionary effects.

 

 

To correctly project cash flows, we need to consider all of the factors EXCEPT:

Multiple Choice

 

 

 

 
 

 

 

use of assets or employees already employed by the firm.

 

 

 

 
 

 

 

All of the options are factors that need to be considered.

 

 

 

 
 

 

 

the likely impact that the new service or product will have on the firm’s existing products’ cost and revenues.

 

 

 

 
 

 

 

the new product’s or service’s costs and revenues.

 

 

 

Equipment was purchased for $50,000 plus $2,500 in freight charges. Installation costs were $1,500 and sales tax totaled $1,000. Hiring a special consultant to provide advice during the selection of the equipment cost $3,000. What is this asset’s depreciable basis?

Multiple Choice

 

 

 

 
 

 

 

$58,000

 

 

 

 
 

 

 

$55,000

 

 

 

 
 

 

 

$57,000

 

 

 

 
 

 

 

$51,000

 

 

A new project would require an immediate increase in raw materials in the amount $6,000. The firm expects that accounts payable will automatically increase $2,000. How much must the firm expect its investment in net working capital to increase if they accept this project?

Multiple Choice

 

 

 

 
 

 

 

−$4,000

 

 

 

 
 

 

 

+$6,000

 

 

 

 
 

 

 

−$6,000

 

 

 

 
 

 

 

+$4,000

 

 

An asset’s cost plus the amounts you paid for items such as sales tax, freight charges, and installation and testing fees is referred to as the: ___________________.

Multiple Choice

 

 

 

 
 

 

 

sunk cost

 

 

 

 
 

 

 

opportunity cost

 

 

 

 
 

 

 

asset costing reference

 

 

 

 
 

 

 

depreciable basis

 

 

If a firm has already paid an expense or is obligated to pay one in the future, regardless of whether a particular project is undertaken, that expense is a(n):

Multiple Choice

 

 

 

 
 

 

 

expensible item.

 

 

 

 
 

 

 

opportunity cost.

 

 

 

 
 

 

 

sunk cost.

 

 

 

 
 

 

 

incremental cash outflow.

 

 

Suppose you sell a fixed asset for $75,000 when its book value is $80,000. If your company’s marginal tax rate is 35 percent, what will be the effect on cash flows of this sale (i.e., what will be the after-tax cash flow of this sale)?

Multiple Choice

 

 

 

 
 

 

 

$48,750

 

 

 

 
 

 

 

$80,000

 

 

 

 
 

 

 

$76,750

 

 

 

 
 

 

 

$5,000

 

 

Suppose you sell a fixed asset for $90,000 when its book value is $95,000. If your company’s marginal tax rate is 40 percent, what will be the effect on cash flows of this sale (i.e., what will be the after-tax cash flow of this sale)?

Multiple Choice

 

 

 

 
 

 

 

$5,000

 

 

 

 
 

 

 

$3,000

 

 

 

 
 

 

 

$95,000

 

 

 

 
 

 

 

$92,000

 

 

If a firm has already paid an expense or is obligated to pay one in the future, regardless of whether a particular project is undertaken, that expense is a:

Multiple Choice

 

 

 

 
 

 

 

obligated cost.

 

 

 

 
 

 

 

sunk cost.

 

 

 

 
 

 

 

committed cost.

 

 

 

 
 

 

 

complementary cost.

 

 

Which of these is the process of estimating expected future cash flows of a project using only the relevant parts of the balance sheet and income statements?

Multiple Choice

 

 

 

 
 

 

 

Substitutionary analysis

 

 

 

 
 

 

 

Pro forma analysis

 

 

 

 
 

 

 

Incremental cash flows

 

 

 

 
 

 

 

Cash flow analysis

 

 

With regard to depreciation, the time value of money concept tells us that:

Multiple Choice

 

 

 

 
 

 

 

delaying the depreciation expense is sometimes better.

 

 

 

 
 

 

 

taking the depreciation expense sooner is always better.

 

 

 

 
 

 

 

delaying the depreciation expense is always better.

 

 

 

 
 

 

 

taking the depreciation expense sooner is sometimes better.

 

 

 

Which statement is true regarding cost-cutting proposals?

Multiple Choice

 

 

 

 
 

 

 

The main benefits come from the change in sales due to the response from the cost-cutting proposal.

 

 

 

 
 

 

 

The main benefits come only from changes in costs.

 

 

 

 
 

 

 

The main benefits come only from changes in sales.

 

 

 

 
 

 

 

The main benefits are from changes in sales and changes in costs.

 

 

 

Your company is considering a new project that will require $100,000 of new equipment at the start of the project. The equipment will have a depreciable life of 10 years and will be depreciated to a book value of $25,000 using straight-line depreciation. The cost of capital is 11 percent, and the firm’s tax rate is 34 percent. Estimate the present value of the tax benefits from depreciation.

Multiple Choice

 

 

 

 
 

 

 

$14,841.29

 

 

 

 
 

 

 

$15,017.54

 

 

 

 
 

 

 

$13,607.52

 

 

 

 
 

 

 

$16,997.13

 

 

 

Accelerated depreciation allows firms to:

Multiple Choice

 

 

 

 
 

 

 

receive more of the dollars of depreciation earlier in the asset’s life.

 

 

 

 
 

 

 

receive more of the dollars of depreciation later in the asset’s life.

 

 

 

 
 

 

 

not pay any taxes during an asset’s life.

 

 

 

 
 

 

 

receive less of the dollars of depreciation earlier in the asset’s life.

 

 

You are trying to pick the least expensive car for your new delivery service. You have two choices: the Scion xA, which will cost $13,000 to purchase and which will have OCF of −$1,200 annually throughout the vehicle’s expected life of three years as a delivery vehicle; and the Toyota Prius, which will cost $23,000 to purchase and which will have OCF of −$550 annually throughout that vehicle’s expected five-year life. Both cars will be worthless at the end of their life. If you intend to replace whichever type of car you choose with the same thing when its life runs out, again and again out into the foreseeable future, and if your business has a cost of capital of 12 percent, what is the difference in the EAC of the two cars?

Multiple Choice

 

 

 

 
 

 

 

$413.25

 

 

 

 
 

 

 

$317.88

 

 

 

 
 

 

 

$310.38

 

 

 

 
 

 

 

$361.13

 

 

A disadvantage of the payback statistic is that:

Multiple Choice

 

 

 

 
 

 

 

it does not reflect the time value of money.

 

 

 

 
 

 

 

it does not give an indication of the project’s riskiness.

 

 

 

 
 

 

 

it does not consider cash flows beyond the payback period.

 

 

 

 
 

 

 

All of the options are disadvantages of payback.

 

 

Compute the MIRR statistic for Project I and note whether to accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 15 percent.

Project I

 

Time       0          1          2          3          4          5

Cash Flow      –$    1,000                 $     400             $     300             $     200             $     300             $     50

________________________________________

Multiple Choice

 

 

 

 
 

 

 

The project’s MIRR is 18.19 percent and the project should be accepted.

 

 

 

 
 

 

 

The project’s MIRR is 10.29 percent and the project should be rejected.

 

 

 

 
 

 

 

The project’s MIRR is 17.17 percent and the project should be accepted.

 

 

 

 
 

 

 

The project’s MIRR is 12.67 percent and the project should be rejected.

 

 

 

Compute the payback statistic for Project X and recommend whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent and the maximum allowable payback is five years.

 

Time:      0     1     2     3     4     5

Cash flow:      −75  −75  0     100  75    50

Multiple Choice

 

 

 

 
 

 

 

3.67 years, accept

 

 

 

 
 

 

 

3.67 years, reject

 

 

 

 
 

 

 

4.67 years, reject

 

 

 

 
 

 

 

4.67 years, accept

 

 

All of the following are strengths of payback EXCEPT:

Multiple Choice

 

 

 

 
 

 

 

its benchmark is not determined by a relevant external constraint.

 

 

 

 
 

 

 

it incorporates the time value of money.

 

 

 

 
 

 

 

it uses a conservative reinvestment rate.

 

 

 

 
 

 

 

none of the options.

 

 

 

Compute the NPV for Project X with the cash flows shown as follows if the appropriate cost of capital is 9 percent.

 

Time       0          1          2          3          4          5

Cash Flow      –$    5,000                 $     1,000                 $     2,000                 $     2,000                 $     500               $     500

________________________________________

Multiple Choice

 

 

 

 
 

 

 

−$2,013.18

 

 

 

 
 

 

 

$9,824.34

 

 

 

 
 

 

 

$486.29

 

 

 

 
 

 

 

−$175.66

 

 

Compute the discounted payback statistic for Project Y and recommend whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 12 percent and the maximum allowable discounted payback is three years.

 

Time:      0     1     2     3     4     5

Cash flow:      −5,000    500  2,000      3,000      1,500      500

Multiple Choice

 

 

 

 
 

 

 

3.86 years, reject

 

 

 

 
 

 

 

3.45 years, reject

 

 

 

 
 

 

 

3.45 years, accept

 

 

 

 
 

 

 

3.86 years, accept

 

 

All of the following are strengths of NPV EXCEPT:

Multiple Choice

 

 

 

 
 

 

 

it works equally well for independent and mutually exclusive projects.

 

 

 

 
 

 

 

managers have a preference for using a statistic that is in percent instead of dollars.

 

 

 

 
 

 

 

it uses a conservative reinvestment rate assumption.

 

 

 

 
 

 

 

these are all strengths of the NPV statistic.

 

 

Which of the following is a technique for evaluating capital projects that is particularly useful when firms face time constraints in repaying investors?

Multiple Choice

 

 

 

 
 

 

 

Profitability index

 

 

 

 
 

 

 

Payback

 

 

 

 
 

 

 

Net present value

 

 

 

 
 

 

 

Internal rate of return

 

 

Compute the NPV for Project X with the cash flows shown as follows if the appropriate cost of capital is 10 percent.

 

Time       0          1          2          3          4

Cash Flow      –$    100,000              $     36,000               $     200,000              $     210,000              $     10,000

________________________________________

Multiple Choice

 

 

 

 
 

 

 

$262,622.77

 

 

 

 
 

 

 

$247,410.67

 

 

 

 
 

 

 

$248,962.50

 

 

 

 
 

 

 

$183,507.96

 

 

 

Compute the NPV statistic for Project Y given the following cash flows if the appropriate cost of capital is 10 percent.

Project Y

 

Time       0          1          2          3          4

Cash Flow      –$    8,000                 $     3,350                 $     4,180                 $     1,520                 $     2,000

________________________________________

Multiple Choice

 

 

 

 
 

 

 

$1,008.03

 

 

 

 
 

 

 

$993.97

 

 

 

 
 

 

 

$964.72

 

 

 

 
 

 

 

$894.37

 

 

A project costs $91,000 today and is expected to generate cash flows of $11,000 per year for the next 20 years. The firm has a cost of capital of 8 percent. Should this project be accepted, and why?

Multiple Choice

 

 

 

 
 

 

 

Yes, the project should be accepted since it has a NPV = $15,391.23.

 

 

 

 
 

 

 

Yes, the project should be accepted since it has a NPV = $13,610.89.

 

 

 

 
 

 

 

Yes, the project should be accepted since it has a NPV = $16,999.62.

 

 

 

 
 

 

 

None of the options are correct.

 

 

Which of the following is a technique for evaluating capital projects that tells how long it will take a firm to earn back the money invested in a project plus interest at market rates?

Multiple Choice

 

 

 

 
 

 

 

Net present value

 

 

 

 
 

 

 

Profitability index

 

 

 

 
 

 

 

Discounted payback

 

 

 

 
 

 

 

Payback

 

 

Compute the discounted payback statistic for Project X and recommend whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent and the maximum allowable discounted payback is three years.

 

Time:      0     1     2     3     4     5

Cash flow:      −1,000    500  480  400  300  150

Multiple Choice

 

 

 

 
 

 

 

3.49 years, reject

 

 

 

 
 

 

 

4.98 years, reject

 

 

 

 
 

 

 

2.98 years, accept

 

 

 

 
 

 

 

2.49 years, accept

 

 

Compute the NPV for Project X and accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent.

 

Time:      0     1     2     3     4     5

Cash flow:      −75  −75  0     100  75    50

Multiple Choice

 

 

 

 
 

 

 

$14.22

 

 

 

 
 

 

 

$136.90

 

 

 

 
 

 

 

$12.93

 

 

 

 
 

 

 

$62.07

 

 

Compute the NPV statistic for Project X given the following cash flows if the appropriate cost of capital is 10 percent.

Project X

 

Time       0          1          2          3          4

Cash Flow      –$    100,000              –$    36,000               $     200,000              $     210,000              –$    10,000

________________________________________

Multiple Choice

 

 

 

 
 

 

 

$183,507.96

 

 

 

 
 

 

 

$262,622.77

 

 

 

 
 

 

 

$248,962.50

 

 

 

 
 

 

 

$247,410.67

 

 

Which of these describe groups or pairs of projects where you can accept one but not all?

Multiple Choice

 

 

 

 
 

 

 

Dependent

 

 

 

 
 

 

 

Mutually exclusive

 

 

 

 
 

 

 

Mutually dependent

 

 

 

 
 

 

 

Independent

 

 

Which of these are sets of cash flows where all the initial cash flows are negative and all the subsequent ones are either zero or positive?

Multiple Choice

 

 

 

 
 

 

 

Non-normal cash flows

 

 

 

 
 

 

 

Time line cash flows

 

 

 

 
 

 

 

Normal cash flows

 

 

 

 
 

 

 

Expected cash flows

 

 

A decision rule and associated methodology for converting the NPV statistic into a rate-based metric is referred to as:

Multiple Choice

 

 

 

 
 

 

 

MIRR.

 

 

 

 
 

 

 

NPV.

 

 

 

 
 

 

 

profitability index.

 

 

 

 
 

 

 

discounted payback.

 

 

Compute the PI statistic for Project Z and advise the firm whether to accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent.

 

Project Z

 

Time       0          1          2          3          4          5

Cash Flow      –$    1,000                 $     350             $     380             $     420             $     300             $     100

________________________________________

Multiple Choice

 

 

 

 
 

 

 

The project’s PI is 21.48 percent and the project should be accepted.

 

 

 

 
 

 

 

The project’s PI is 8.48 percent and the project should be accepted.

 

 

 

 
 

 

 

The project’s PI is 16.48 percent and the project should be accepted.

 

 

 

 
 

 

 

The project’s PI is 8.48 percent and the project should be rejected.

 

 

The benchmark for the profitability index (PI) is the:

Multiple Choice

 

 

 

 
 

 

 

zero or anything larger than zero.

 

 

 

 
 

 

 

managers’ maximum number of years.

 

 

 

 
 

 

 

cost of capital.

 

 

 

 
 

 

 

zero or anything less than zero.

 

 

Compute the IRR statistic for Project X and note whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent.

 

Time:      0     1     2     3     4     5

Cash flow:      −75  −75  0     100  75    50

Multiple Choice

 

 

 

 
 

 

 

10 percent, reject

 

 

 

 
 

 

 

13.26 percent, reject

 

 

 

 
 

 

 

13.26 percent, accept

 

 

 

 
 

 

 

10 percent, accept

 

 

Which of these is a capital budgeting technique that generates a decision rule and associated metric for choosing projects based on the total discounted value of their cash flows?

Multiple Choice

 

 

 

 
 

 

 

Net present value

 

 

 

 
 

 

 

Profitability index

 

 

 

 
 

 

 

Internal rate of return

 

 

 

 
 

 

 

Discounted payback

 

 

Which of these is a capital budgeting technique that generates decision rules and associated metrics for choosing projects based upon the implicit expected geometric average of a project’s rate of return?

Multiple Choice

 

 

 

 
 

 

 

Profitability index

 

 

 

 
 

 

 

Internal rate of return

 

 

 

 
 

 

 

Net present value

 

 

 

 
 

 

 

Discounted payback

 

 

Which of the following best describes the NPV profile?

Multiple Choice

 

 

 

 
 

 

 

A graph of a project’s NPV as a function of possible IRRs.

 

 

 

 
 

 

 

A graph of a project’s NPV over time.

 

 

 

 
 

 

 

A graph of a project’s NPV as a function of possible capital costs.

 

 

 

 
 

 

 

None of the statements are correct.

 

 

All of the following are strengths of NPV EXCEPT:

Multiple Choice

 

 

 

 
 

 

 

it works equally well for independent and mutually exclusive projects.

 

 

 

 
 

 

 

managers have a preference for using a statistic that is in percent instead of dollars.

 

 

 

 
 

 

 

it uses a conservative reinvestment rate assumption.

 

 

 

 
 

 

 

these are all strengths of the NPV statistic.

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