Fundamentals of corporate finance canadian 9th edition brealey test bank

Fundamentals of Corporate Finance Canadian 9th Edition Brealey Test Bank Visit to download the full and correct content document: https://testbankdeal.com/dow nload/fundamentals-of-corporate-finance-canadian-9th-edition-brealey-test-bank/

Chapter 09 Test bank - Static Student: ___________________________________________________________________________

1.

Capital budgeting analysis focuses on cash flow as opposed to profits.

True

2.

Accurate capital budgeting analysis depends on total cash flows as opposed to incremental cash flows.

True

3.

False

An asset in the MACRS 5-year class life will have depreciation expense in 6 different years.

True

9.

False

A reduction in working capital increases cash flows.

True

8.

False

In project analysis, allocations of overhead should be limited to those that represent additional expense.

True

7.

False

The method of financing a project affects the determination of its cash flows for capital budgeting purposes.

True

6.

False

Opportunity costs are evaluated for investment decisions at their historical cost.

True

5.

False

Sunk costs influence capital budgeting decisions only when the sunk costs exceed future cash inflows.

True

4.

False

False

The present value of the total depreciation tax shield will be higher when an asset uses MACRS than when depreciated straightline.

True

False

10. If a firm sells an asset for more than its value in the IRS’s books, the resulting net cash flow will be less than the sales price.

True

False

11. When a firm makes an investment in working capital, the cash is usually recovered later.

True

False

12. Discounting real cash flows with real interest rates provides an overly optimistic idea of a project's value.

True

False

13. Sunk costs remain the same whether or not you accept the project.

True

False

14. Sunk costs do not affect the net present value of a project.

True

False

15. Investments in working capital, just like investments in plant and equipment, result in cash inflows.

True

False

16. A project will always generate extra overhead costs.

True

False

17. Discounting real cash flows at a nominal rate is a serious mistake.

True

False

18. Suppose you finance a project partly with debt. You should neither subtract the debt proceeds from the project's required investment, nor would you recognize the interest and principal payments on the debt as cash outflows.

True

False

19. When you finance a project partly with debt, you should still view the project as if it were all equity-financed, treating all cash outflows required for the project as coming from stockholders, and all cash inflows as going to them.

True

False

20. As a project comes to its end, there is a disinvestment in working capital, which also generates positive cash flow as inventories are sold off and accounts receivable are collected.

True

False

21. The total depreciation tax shield equals the product of depreciation and the tax rate.

True

False

22. Cash flow from operations = (revenues − cash expenses) × (1 − tax rate) + (depreciation × tax rate).

True

False

23. Corporate income statements are designed primarily to show: A. cash flows during a period.

B. account balances at the end of a period.

C. performance during a period.

D. market values of assets and liabilities.

24. Projects that have negative NPVs should be: A. depreciated over a longer time period.

B. charged less in overhead costs.

C. discounted using lower rates.

D. rejected or abandoned.

25. If the adoption of a new product will reduce the sales of an existing product, then the project cash flows should: A. reflect only the sales of the new product.

B. include only the reduction amount.

C. be reduced by the cash that would have been generated by those sales.

D. be adjusted upward by the reduction amount.

26. Which one of these represents a cash outflow for a project?

A. A sunk cost B. Increase in accounts receivable C. Depreciation D. Accrued expenses 27. The rationale for not including sunk costs in capital budgeting decisions is that they: A. are usually small in magnitude.

B. revert at the end of the investment.

C. have no incremental effect on project cash flows.

D. reduce the project's net present value.

28. You are considering the introduction of a new product that will require an investment in new machinery. Which one of these will lower the net present value of that project?

A. A reduction in the firm's total variable costs due to the purchase of the new machine B. A loss of sales of existing products due to the introduction of the new product C. The increase in annual depreciation resulting from the asset purchase D. The sale of the machine after it is fully depreciated 29. When is it appropriate to include sunk costs in the evaluation of a project?

A. Whenever they are relatively large B. If they improve the project's NPV C. If they are considered to be overhead costs D. Never 30. A firm invests in a 7-year project that requires the purchase of a $135,000 machine tool. This will be depreciated using 5-year MACRS and will have no salvage value. When will this equipment affect the project's tax payments?

A. Every year for 5 years B. At the time of purchase only C. Every year for 6 years D. Every year for 7 years

31. The opportunity cost of an asset: A. should be depreciated annually.

B. should be included in the project cash flows.

C. is typically ignored in capital budgeting.

D. is important only for parcels of land.

32. Which one of the following is least likely to influence the opportunity cost of an asset?

A. Its current market value B. Alternative uses for the asset C. The current demand for the asset D. Its current book value 33. Assume your firm has an unused machine that originally cost $75,000, has a book value of $20,000, and a market value of $25,000. Ignoring taxes, what is the opportunity cost of using this machine?

A. $75,000 B. $25,000 C. $20,000 D. $5,000 34. Which one of the following changes in working capital is least likely if sales increase?

A. An increase in inventories B. An increase in accounts payable C. A decrease in accounts receivable D. An increase in notes payable 35. A proposed project requires an initial investment of $8,500 in current assets, 75% of which will be financed with accounts payable. The project will have: A. an initial cash outflow of $8,500 at time zero for net working capital.

B. a cash outflow for net working capital at the end of the project.

C. a cash inflow at the end of the project from net working capital.

D. a cash outflow for net working capital every year of the project's life.

36. In which of the following cases will a cash investment in net working capital be most likely?

A. Inventory levels will be reduced when the project is introduced.

B. All sales related to the project will be cash sales to a subsidiary.

C. The project will increase inventory more than accounts payable.

D. The project will require additional inventory which will be financed by a supplier.

37. What is the effect on a firm's net working capital if a new project requires a $30,000 increase in inventory, a $10,000 increase in accounts receivable, a $35,000 expenditure on machinery, and a $20,000 increase in accounts payable?

A. −$5,000 B. $10,000 C. $20,000 D. $55,000

38. A project is expected to increase inventory by $17,000, increase accounts payable by $10,000, and decrease accounts receivable by $1,000. What is the project's cash flow from net working capital at time zero?

A. −$8,000 B. $8,000 C. −$6,000 D. $6,000 39. Net working capital is expected to increase by $25,000 in year 5 of a project. If this extra working capital is recovered when the project ends in year 6, what is the effect on the project's net present value, if the cost of capital is 15%?

A. NPV will not be affected because the $25,000 will all be recouped.

B. NPV will increase by $12,429.42.

C. NPV will decrease by $25,000.

D. NPV will decrease by $1,621.23.

40. Investments in working capital: A. are simply accounting entries and do not affect NPV. B. do not matter because the cash is generally recovered when the project ends.

C. increase NPV because they make the project more valuable.

D. reduce project NPV. 41. Changes in net working capital can occur at: A. the beginning of a project.

B. the end of a project.

C. any time during the life of a project.

D. the beginning of any accounting period.

42. What effect is likely at the end of the life of a project that required a $20,000 investment in net working capital?

A. The $20,000 must now be paid by the firm.

B. The firm receives a $20,000 cash inflow.

C. Taxable income is reduced by $20,000.

D. No effects are expected because the $20,000 is now a sunk cost.

43. Allocations of overheads should not affect a project's incremental cash flows unless the: A. project actually changes the total amount of overhead expenses.

B. overhead will not be recovered at the end of the project.

C. overhead is not currently fully allocated to existing projects.

D. accountant is required to allocate costs to this project.

44. The NPV of an investment proposal becomes negative solely as a result of allocating a portion of the corporation president's salary. It is most likely the case that: A. the project should be accepted.

B. rejecting the project is the correct decision.

C. the allocation should be postponed until the project is accepted.

D. the salary should be considered an opportunity cost of the project.

45. The correct method to handle overhead costs in capital budgeting is to: A. allocate a portion to each project.

B. allocate them to projects with the highest NPVs. C. ignore all except incremental amounts.

D. ignore them in all cases.

46. Which one of the following would not be expected to affect the decision of whether to undertake an investment?

A. Income tax rates B. Estimates of future inflation rates C. Sales reductions in other products caused by this investment D. Cost of the feasibility study that was conducted for this project 47. Which one of the following methods will provide a correct analysis for capital budgeting purposes?

A. Discounting real cash flows with real rates.

B. Discounting real cash flows with nominal rates.

C. Discounting nominal cash flows with real rates.

D. Discounting nominal cash flows with either real or nominal rates.

48. The likely effect of discounting nominal cash flows with real interest rates will be to: A. make an investment's NPV appear more attractive.

B. make an investment's NPV appear less attractive.

C. correctly calculate an investment's NPV if inflation is expected.

D. correctly calculate an investment's NPV, regardless of expected inflation.

49. Your forecast shows $500,000 annually in sales for each of the next 3 years. If your second and third year predictions have failed to incorporate the 3% expected annual inflation, how far off in total dollar sales is your 3-year forecast?

A. $45,450 B. $60,900 C. $52,550 D. $76,250 50. Which one of the following would be more apt to make an unacceptable project appear acceptable?

A. Discounting real cash flows with real rates B. Discounting nominal cash flows with real rates C. Discounting real cash flows with nominal rates D. Discounting nominal cash flows with nominal rates 51. Capital budgeting proposals should be evaluated as if the project were financed: A. entirely by debt.

B. entirely by equity.

C. half by debt and half by equity.

D. with the highest cost source of funds, to be safe.

52. When calculating cash flow from operations, one should: A. subtract depreciation since it represents the cost of replacing worn-out equipment.

B. deduct the depreciation tax shield from after-tax profit.

C. use after-tax profit and ignore depreciation.

D. add depreciation to after-tax profit.

53. The recovery of an additional investment in working capital is likely to: A. occur at the end of a project's life.

B. occur at the beginning of a project's life.

C. occur whenever the project first shows a profit.

D. be a sunk cost.

54. In what manner does depreciation expense affect investment projects?

A. It reduces cash flows by the amount of the depreciation expense.

B. It increases cash flows by the amount of the depreciation expense.

C. It reduces taxable income by the amount of the depreciation expense.

D. It reduces taxes by the amount of the depreciation expense.

55. Given a positive discount rate, which one of the following changes would increase the NPV of a project?

A. Increasing the firm's opportunity cost of capital B. Reducing the amount of working capital that is needed.

C. Spreading the total cash inflows over a longer time interval D. Increasing the project's estimated expenses 56. What is the annual depreciation tax shield for a profitable firm in the 30% marginal tax bracket with $100,000 of annual depreciation expense?

A. $10,500 B. $30,000 C. $35,000 D. $65,000 57. What is the amount of the annual depreciation tax shield for a firm with $200,000 in net income, $75,000 in depreciation expense, and a 35% marginal tax rate?

A. $26,250 B. $43,750 C. $70,000 D. $75,000 58. What is the operating cash flow for a firm with $500,000 profit before tax, $100,000 depreciation expense, and a 35% marginal tax rate?

A. $260,000 B. $325,000 C. $360,000 D. $425,000

59. A tax shield is equal to the reduction in a firm's: A. total tax liability resulting from a tax deductible expense.

B. taxable income resulting from depreciation.

C. taxable income resulting from a decrease in long-term debt.

D. net income caused by depreciation.

60. Which one of the following categories would be least likely to require annual adjustments in a capital budgeting analysis due to the effects of inflation?

A. Sales B. Expenses C. Working capital D. Depreciation expense 61. Methods of accelerated depreciation: A. allow more total depreciation over the asset's life.

B. decrease the depreciation tax shield.

C. increase the depreciation tax shield.

D. allow assets to be depreciated more rapidly.

62. Why is accelerated depreciation often favored for the corporation's set of tax books?

A. It increases the total depreciation tax shield over the project's life.

B. It reduces the total amount of taxes paid over the project's life.

C. It increases net accounting profits over the project's life.

D. It allows the depreciation tax savings to be realized earlier.

63. The modified accelerated cost recovery system (MACRS) allows an increase: A. in total depreciation over the asset's life.

B. in annual depreciation during earlier years.

C. in real but not nominal depreciation expense.

D. in the asset's depreciable cost basis.

64. Under the MACRS: A. all assets are depreciated over 5 years.

B. depreciable percentages decline throughout the asset's class life.

C. straight-line depreciation percentages are doubled.

D. assets are assumed to be purchased and sold midyear.

65. A firm plans to purchase a $50,000 asset that will be depreciated straight-line over a 5-year life to a zero salvage value. What is the present value of the resulting depreciation tax shield if the tax rate is 35% and the discount rate is 10%?

A. $10,866.67 B. $13,267.75 C. $17,500.00 D. $37,908.18

66. The present value of the depreciation tax shield at any given discount rate is: A. equal for all depreciation methods.

B. higher with MACRS than with straight-line depreciation.

C. higher for the 7-year recovery period than for the 5-year recovery period class.

D. likely to increase annually due to inflation.

67. When the real rate of interest is less than the nominal rate of interest, then: A. disinflation must be occurring.

B. investment returns cannot increase the purchasing power of an investment.

C. nominal cash flows should be discounted with real rates.

D. the rate of inflation must be positive.

68. When a depreciable asset is ultimately sold, the sales price is: A. fully taxable.

B. nontaxable.

C. nontaxable only if accelerated depreciation was used.

D. taxable to the extent that the sales price exceeds book value.

69. Which one of the following statements regarding depreciation is correct?

A. The depreciation tax shield adjusts annually with the level of inflation.

B. The real amount of annual depreciation is fixed, thus the higher the rate of inflation, the higher the depreciation tax shield.

C. Tax law allows accelerated depreciation to be used for tax purposes.

D. MACRS can be used for accounting purposes but not for tax purposes.

70. The statement "We've got too much invested in that project to pull out now" possibly illustrates the need to: A. switch to an accelerated method of depreciation.

B. recognize sunk costs.

C. reduce net working capital assigned to the project.

D. reduce discount rates to improve NPV. 71. What is the undiscounted cash flow in the final year of an investment, assuming $10,000 after-tax cash flows from operations, $1,000 from the sale of a fully depreciated machine, a $2,000 investment in working capital, and a 35% tax rate?

A. $8,450 B. $12,600 C. $12,650 D. $14,000 72. At a 13% cost of capital, a project's NPV is $100,000 if you invest today. By what amount must the initial cost of the project decrease before you would wish to wait 2 years before investing? Assume all else is held constant.

A. $21,685 B. $26,000 C. $27,690 D. $29,380

73. Which of the following correctly adjusts for depreciation when calculating a project’s operating cash flow?

A. (revenues − cash expenses) × (1 − tax rate) + (tax rate × depreciation).

B. pretax profit + depreciation tax shield.

C. after-tax profit − depreciation.

D. ignore depreciation since it is not a cash flow.

74. A new inventory system will immediately reduce inventory levels by $100,000. If this reduction is permanent and the cost of capital is 13%, how does the net working capital change affect company value?

A. Company value increases by $100,000.

B. NPV increases by $13,000.

C. Company value will not change.

D. Company value increases by $769,231.

75. The opportunity cost of a resource should be considered in project analysis, unless: A. negative cash flows result from its use.

B. the resource was purchased in a prior time period.

C. the resource has been fully depreciated.

D. the resource has no identifiable market value or alternative use within the firm.

76. A new project requires an increase in both current assets and current liabilities of $125,000 each. What is the overall impact on the net working capital investment?

A. An increase of zero B. An increase of $125,000 C. An increase of $250,000 D. An increase of $62,500, when averaged over the life of the project 77. The primary difficulty in the allocation of overhead costs to prospective projects is that the: A. allocation will reduce the project's NPV. B. discount rate is unknown.

C. costs may not represent an incremental expense.

D. expenses may have been previously allocated.

78. If inflation is forecast to increase, which of the company’s following cash flows is most likely to change?

A. The depreciation tax shield.

B. Labor costs.

C. Costs of raw materials purchased on a fixed price contract.

D. Interest payments on its long-term debt.

79. A project costs $12,800 and is expected to provide a real cash inflow of $10,000 at the end of each of years 1 through 5.

Calculate the net present value of this project if inflation is expected to be 4% in each year and the firm employs a nominal discount rate of 10.76%.

A. $33,522.30 B. $28,756.79 C. $33,294.07 D. $26,311.15

80. An investment today of $25,000 promises to return $10,000 annually for the next 3 years. What is the real rate of return on this investment if inflation averages 6% annually during the period?

A. 3.49% B. 9.78% C. 4.84% D. 6.38% 81. What nominal annual return is required on an investment for an investor to experience a 12% gain in purchasing power? Assume inflation is 4%.

A. 7.69% B. 9.29% C. 12.00% D. 16.48% 82. What is the NPV of a 6-year project that costs $100,000, has annual revenues of $50,000 and costs of $15,000? Assume the investment can be depreciated for tax purposes straight-line over 6 years, the corporate tax rate is 35%, and the discount rate is 14%.

A. −$15,560.04 B. $11,151.08 C. $3,411.14 D. $14,782.09 83. An investment of $120,000 can be depreciated for tax purposes straight line over 6 years. The corporate tax rate is 40%. When calculating cash flow: A. the company should deduct a depreciation tax shield of $8,000 a year from after-tax (revenues less cash expenses) B. the company should add a depreciation tax shield of $8,000 a year to after-tax (revenues less cash expenses) C. the company should add a depreciation tax shield of $20,000 a year to after-tax (revenues less cash expenses) D. no adjustment should be made for depreciation since it is not a cash expense.

84. A project that increased sales was accompanied by a $50,000 increase in inventory, a $20,000 increase in accounts receivable, and a $25,000 increase in accounts payable. Assuming these amounts remain constant, by how much has net working capital increased?

A. $5,000 B. $25,000 C. $30,000 D. $45,000 85. Which of the following costs probably should not be allocated to the investment needed for a new project?

A. Project's required increase in accounts receivable B. New warehouse, built for this project C. A portion of the vice president's salary D. Labor expense for employees involved in the project

86. A parcel of corporate land was recently chosen as the new plant site. What cost allocation should the land receive, based on the following: original cost of $200,000, highest market value during time of ownership of $300,000, net book value of $200,000, a recent offer to purchase for $250,000?

A. $200,000 B. $250,000 C. $275,000 D. $300,000 87. Which of the following is true of the depreciation tax shield?

A. It increases annually with the rate of inflation.

B. It decreases annually in nominal terms.

C. It is not altered by inflation.

D. The real value of the depreciation is fixed.

88. Assuming an asset has been fully depreciated according to its MACRS class life, which one of the following statements is correct?

A. Its market value is zero.

B. Its book value is zero.

C. Its book value is the current market value.

D. It has neither a book value nor a market value.

89. New projects can have multiple effects on a firm. Which one of the following appears to be a positive indirect effect?

A. Additional working capital will be required at the start of the project.

B. The sales force will need to be increased over the life of the project.

C. Sales of replacement parts are expected in the future.

D. The cost of employee benefits will increase due to new hires.

90. New projects or products can provide positive indirect effects as well as negative effects. Which one of the following appears to be a negative indirect effect?

A. The new machine required for the project uses less electricity than the existing machine.

B. Orders for your complementary products are expected to increase.

C. Customer orders of supplies for the firm’s existing products are expected to decrease.

D. Variable costs are expected to decrease since the firm can order larger quantities.

91. Lew's Metals has a machine sitting idle in its warehouse. The machine originally cost $213,000, has a current book value of $32,300, has a scrap metal value of $13,000, and a market value of $46,900. The machine is totally paid for. What value should be placed on this machine if it is used for a new project?

A. $0 B. $13,000 C. $32,300 D. $46,900

92. A project requires an additional commitment of $100,000 in net working capital in each of years 1 to 4. These extra investments can be recovered in year 5 when the project comes to an end. What is the effect on NPV? A. NPV is reduced by $100,000.

B. NPV is reduced by the present value of $100,000 discounted at the firm's cost of capital for 4 years.

C. NPV is reduced by the present value of $100,000 discounted at the firm's cost of capital for each of years 1 to 4 minus the discounted value of the $400,000 that is recovered in year 5.

D. No opportunity cost is involved.

93. The additional inventory investment that is often required for new projects is partially offset by: A. switching to accelerated depreciation methods.

B. reducing accounts receivable.

C. decreasing equipment purchases.

D. increasing accounts payable.

94. What rate of nominal growth is expected in sales if they are currently $1,000,000 and are expected to reach $1,600,000 in 5 years? Assume an inflation rate of 3.5%.

A. 3.20% B. 9.86% C. 12.00% D. 26.49% 95. What is the effect of using MACRS rather than straight-line depreciation?

A. It increases the NPV. B. The total amount of depreciation is increased.

C. It allows asset book values to increase with market values.

D. It increases gross fixed assets.

96. In the MACRS depreciation schedules, the depreciation percentage is lower in the first year than in the second year. This is due to the fact that: A. the depreciation percentage increases every year over the project's life.

B. assets are assumed to be acquired at midyear.

C. depreciation expense increases at the rate of inflation.

D. MACRS depreciation is less attractive than straight-line depreciation.

97. A firm invests $10 million in a new stamping machine. It depreciates it straight line for tax purposes over 5 years. The tax rate is 30%, inflation is 4% a year, and the discount rate is 8%. What is the PV of the depreciation tax shield?

A. $600,000.

B. $2,395,626.

C. $2,579,497.

D. $3,000,000.

98. Capital budgeting projects typically assume that all cash flows transpire at the end of the year. The reason for this is that: A. less tax liability results from this practice.

B. balance sheets are prepared at the end of the year.

C. it simplifies the analysis and the resulting errors are usually small compared with the errors in forecasting future cash flows.

D. most corporations collect their cash at the end of the year.

99. Which one of the following is not accurate in depicting the cash flows from operations for an all-equity firm?

A. (revenues − cash expenses)(1 − tax rate) + (depreciation × tax rate) B. (revenues − expenses − taxes) C. (net profit + depreciation) D. (revenues − cash expenses − taxes) 100. Which of the following typically results from using straight-line depreciation rather than MACRS in the set of books for shareholders?

A. Net income appears higher during the early periods of depreciation.

B. Less money is paid to the Internal Revenue Service over an asset's life.

C. Financial managers have more funds from operations available over the asset's life.

D. Cash flow from operations will be higher in the second year of the asset's life.

101. When you evaluate a proposed project you should: A. allocate a percentage of current overhead costs to the project.

B. include all indirect effects.

C. include sunk costs.

D. ignore opportunity costs.

102. Which one of the following formulas is incorrect?

A. Operating cash flow = revenues − cash expenses − taxes B. Operating cash flow = net profit + depreciation C. Depreciation tax shield = depreciation × (1 − tax rate) D. Operating cash flow = (revenues − cash expenses) × (1 − tax rate) + (depreciation × tax rate) 103. Which one of these statements is incorrect?

A. Real cash flows must be discounted at a real discount rate.

B. (1 + real rate of interest) = (1 + nominal rate of interest) / (1 + inflation rate) C. The actual real rate of interest almost equals "nominal rate of interest − inflation rate."

D. Inflation rate = nominal rate / real rate − 1 104. Which of the following statements regarding investment in working capital is incorrect?

A. An investment in working capital, unlike an investment in plant and equipment, represents a positive cash flow when the investment is made.

B. Net working capital cash flow is measured by the change in working capital, not the level of working capital.

C. Net working capital may change during the life of a project.

D. Working capital is generally recovered at the end of a project.

Chapter 09 Test bank - Static Key 1.

Capital budgeting analysis focuses on cash flow as opposed to profits.

TRUE AACSB: Communication Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Gradable: automatic Learning Objective: 09-01 Identify the cash flows from a proposed new project.

Topic: Cash flows

2.

Accurate capital budgeting analysis depends on total cash flows as opposed to incremental cash flows.

FALSE AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 1 Easy Gradable: automatic Learning Objective: 09-01 Identify the cash flows from a proposed new project.

Topic: Cash flows

3.

Sunk costs influence capital budgeting decisions only when the sunk costs exceed future cash inflows.

FALSE AACSB: Communication Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Gradable: automatic Learning Objective: 09-01 Identify the cash flows from a proposed new project.

Topic: Cash flows

4.

Opportunity costs are evaluated for investment decisions at their historical cost.

FALSE AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 1 Easy Gradable: automatic Learning Objective: 09-01 Identify the cash flows from a proposed new project.

Topic: Cash flows

5.

The method of financing a project affects the determination of its cash flows for capital budgeting purposes.

FALSE AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 1 Easy

Gradable: automatic Learning Objective: 09-01 Identify the cash flows from a proposed new project.

Topic: Cash flows

6.

In project analysis, allocations of overhead should be limited to those that represent additional expense.

TRUE AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-01 Identify the cash flows from a proposed new project.

Topic: Cash flows

7.

A reduction in working capital increases cash flows.

TRUE AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-01 Identify the cash flows from a proposed new project.

Topic: Cash flows

8.

An asset in the MACRS 5-year class life will have depreciation expense in 6 different years.

TRUE AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-03 Understand how the company's tax bill is affected by depreciation and how this affects project value.

Topic: Depreciation

9.

The present value of the total depreciation tax shield will be higher when an asset uses MACRS than when depreciated straight-line.

TRUE AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-03 Understand how the company's tax bill is affected by depreciation and how this affects project value.

Topic: Depreciation

10.

If a firm sells an asset for more than its value in the IRS’s books, the resulting net cash flow will be less than the sales price.

TRUE AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Gradable: automatic

Learning Objective: 09-03 Understand how the company's tax bill is affected by depreciation and how this affects project value.

Topic: Cash flows

11.

When a firm makes an investment in working capital, the cash is usually recovered later.

TRUE AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-01 Identify the cash flows from a proposed new project.

Topic: Cash flows

12.

Discounting real cash flows with real interest rates provides an overly optimistic idea of a project's value.

FALSE AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-01 Identify the cash flows from a proposed new project.

Topic: Nominal and real rates

13.

Sunk costs remain the same whether or not you accept the project.

TRUE AACSB: Communication Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-01 Identify the cash flows from a proposed new project.

Topic: Cash flows

14.

Sunk costs do not affect the net present value of a project.

TRUE AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-01 Identify the cash flows from a proposed new project.

Topic: Cash flows

15.

Investments in working capital, just like investments in plant and equipment, result in cash inflows.

FALSE AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-01 Identify the cash flows from a proposed new project.

Topic: Net working capital

16.

A project will always generate extra overhead costs.

FALSE AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-01 Identify the cash flows from a proposed new project.

Topic: Fixed and variable costs

17.

Discounting real cash flows at a nominal rate is a serious mistake.

TRUE AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-01 Identify the cash flows from a proposed new project.

Topic: Nominal and real rates

18.

Suppose you finance a project partly with debt. You should neither subtract the debt proceeds from the project's required investment, nor would you recognize the interest and principal payments on the debt as cash outflows.

TRUE AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-01 Identify the cash flows from a proposed new project.

Topic: Cash flows

19.

When you finance a project partly with debt, you should still view the project as if it were all equity-financed, treating all cash outflows required for the project as coming from stockholders, and all cash inflows as going to them.

TRUE AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-01 Identify the cash flows from a proposed new project.

Topic: Cash flows

20.

As a project comes to its end, there is a disinvestment in working capital, which also generates positive cash flow as inventories are sold off and accounts receivable are collected.

TRUE AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-01 Identify the cash flows from a proposed new project.

Topic: Cash flows

21.

The total depreciation tax shield equals the product of depreciation and the tax rate.

TRUE AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-03 Understand how the company's tax bill is affected by depreciation and how this affects project value.

Topic: Depreciation

22.

Cash flow from operations = (revenues − cash expenses) × (1 − tax rate) + (depreciation × tax rate).

TRUE AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-03 Understand how the company's tax bill is affected by depreciation and how this affects project value.

Topic: Operating cash flow

23.

Corporate income statements are designed primarily to show: A. cash flows during a period.

B. account balances at the end of a period.

C. performance during a period.

D. market values of assets and liabilities.

AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 1 Easy Gradable: automatic Learning Objective: 09-02 Calculate the cash flows of a project from standard financial statements.

Topic: Income statement

24.

Projects that have negative NPVs should be: A. depreciated over a longer time period.

B. charged less in overhead costs.

C. discounted using lower rates.

D. rejected or abandoned.

AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 1 Easy Gradable: automatic Learning Objective: 09-01 Identify the cash flows from a proposed new project.

Topic: Project analysis and evaluation

25.

If the adoption of a new product will reduce the sales of an existing product, then the project cash flows should: A. reflect only the sales of the new product.

B. include only the reduction amount.

C. be reduced by the cash that would have been generated by those sales.

D. be adjusted upward by the reduction amount.

AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-01 Identify the cash flows from a proposed new project.

Topic: Pro forma statements

26.

Which one of these represents a cash outflow for a project?

A. A sunk cost B. Increase in accounts receivable C. Depreciation D. Accrued expenses AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-01 Identify the cash flows from a proposed new project.

Topic: Cash flows

27.

The rationale for not including sunk costs in capital budgeting decisions is that they: A. are usually small in magnitude.

B. revert at the end of the investment.

C. have no incremental effect on project cash flows.

D. reduce the project's net present value.

AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 1 Easy Gradable: automatic Learning Objective: 09-01 Identify the cash flows from a proposed new project.

Topic: Cash flows

28.

You are considering the introduction of a new product that will require an investment in new machinery. Which one of these will lower the net present value of that project?

A. A reduction in the firm's total variable costs due to the purchase of the new machine B. A loss of sales of existing products due to the introduction of the new product C. The increase in annual depreciation resulting from the asset purchase D. The sale of the machine after it is fully depreciated AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-01 Identify the cash flows from a proposed new project.

Topic: Project analysis and evaluation

29.

When is it appropriate to include sunk costs in the evaluation of a project?

A. Whenever they are relatively large B. If they improve the project's NPV C. If they are considered to be overhead costs D. Never AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 1 Easy Gradable: automatic Learning Objective: 09-01 Identify the cash flows from a proposed new project.

Topic: Cash flows

30.

A firm invests in a 7-year project that requires the purchase of a $135,000 machine tool. This will be depreciated using 5year MACRS and will have no salvage value. When will this equipment affect the project's tax payments?

A. Every year for 5 years B. At the time of purchase only C. Every year for 6 years D. Every year for 7 years AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-03 Understand how the company's tax bill is affected by depreciation and how this affects project value.

Topic: Cash flows

31.

The opportunity cost of an asset: A. should be depreciated annually.

B. should be included in the project cash flows.

C. is typically ignored in capital budgeting.

D. is important only for parcels of land.

AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-01 Identify the cash flows from a proposed new project.

Topic: Cash flows

32.

Which one of the following is least likely to influence the opportunity cost of an asset?

A. Its current market value B. Alternative uses for the asset C. The current demand for the asset D. Its current book value AACSB: Reflective Thinking Accessibility: Keyboard Navigation

Blooms: Apply Difficulty: 1 Easy Gradable: automatic Learning Objective: 09-01 Identify the cash flows from a proposed new project.

Topic: Cash flows

33.

Assume your firm has an unused machine that originally cost $75,000, has a book value of $20,000, and a market value of $25,000. Ignoring taxes, what is the opportunity cost of using this machine?

A. $75,000 B. $25,000 C. $20,000 D. $5,000 AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-01 Identify the cash flows from a proposed new project.

Topic: Cash flows

34.

Which one of the following changes in working capital is least likely if sales increase?

A. An increase in inventories B. An increase in accounts payable C. A decrease in accounts receivable D. An increase in notes payable AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 1 Easy Gradable: automatic Learning Objective: 09-04 Understand how changes in working capital affect project cash flows.

Topic: Net working capital

35.

A proposed project requires an initial investment of $8,500 in current assets, 75% of which will be financed with accounts payable. The project will have: A. an initial cash outflow of $8,500 at time zero for net working capital.

B. a cash outflow for net working capital at the end of the project.

C. a cash inflow at the end of the project from net working capital.

D. a cash outflow for net working capital every year of the project's life.

AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 1 Easy Gradable: automatic Learning Objective: 09-04 Understand how changes in working capital affect project cash flows.

Topic: Net working capital

36.

In which of the following cases will a cash investment in net working capital be most likely?

A. Inventory levels will be reduced when the project is introduced.

B. All sales related to the project will be cash sales to a subsidiary.

C. The project will increase inventory more than accounts payable.

D. The project will require additional inventory which will be financed by a supplier.

AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 1 Easy Gradable: automatic Learning Objective: 09-04 Understand how changes in working capital affect project cash flows.

Topic: Net working capital

37.

What is the effect on a firm's net working capital if a new project requires a $30,000 increase in inventory, a $10,000 increase in accounts receivable, a $35,000 expenditure on machinery, and a $20,000 increase in accounts payable?

A. −$5,000 B. $10,000 C. $20,000 D. $55,000 Change in NWC = $30,000 + 10,000 − 20,000 = $20,000

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-04 Understand how changes in working capital affect project cash flows.

Topic: Net working capital

38.

A project is expected to increase inventory by $17,000, increase accounts payable by $10,000, and decrease accounts receivable by $1,000. What is the project's cash flow from net working capital at time zero?

A. −$8,000 B. $8,000 C. −$6,000 D. $6,000 Cash flow0 = −$17,000 + 10,000 + 1,000 = −$6,000

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-04 Understand how changes in working capital affect project cash flows.

Topic: Net working capital

39.

Net working capital is expected to increase by $25,000 in year 5 of a project. If this extra working capital is recovered when the project ends in year 6, what is the effect on the project's net present value, if the cost of capital is 15%?

A. NPV will not be affected because the $25,000 will all be recouped.

B. NPV will increase by $12,429.42.

C. NPV will decrease by $25,000.

D. NPV will decrease by $1,621.23. ΔNPV = −$25,000 / 1.155 + 25,000 / 1.156 = $1,621.23

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-04 Understand how changes in working capital affect project cash flows.

Topic: Net working capital

40.

Investments in working capital: A. are simply accounting entries and do not affect NPV. B. do not matter because the cash is generally recovered when the project ends.

C. increase NPV because they make the project more valuable.

D. reduce project NPV. AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-04 Understand how changes in working capital affect project cash flows.

Topic: Net working capital

41.

Changes in net working capital can occur at: A. the beginning of a project.

B. the end of a project.

C. any time during the life of a project.

D. the beginning of any accounting period.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Gradable: automatic Learning Objective: 09-04 Understand how changes in working capital affect project cash flows.

Topic: Net working capital

42.

What effect is likely at the end of the life of a project that required a $20,000 investment in net working capital?

A. The $20,000 must now be paid by the firm.

B. The firm receives a $20,000 cash inflow.

C. Taxable income is reduced by $20,000.

D. No effects are expected because the $20,000 is now a sunk cost.

AACSB: Reflective Thinking Accessibility: Keyboard Navigation

Blooms: Apply Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-04 Understand how changes in working capital affect project cash flows.

Topic: Net working capital

43.

Allocations of overheads should not affect a project's incremental cash flows unless the: A. project actually changes the total amount of overhead expenses.

B. overhead will not be recovered at the end of the project.

C. overhead is not currently fully allocated to existing projects.

D. accountant is required to allocate costs to this project.

AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-01 Identify the cash flows from a proposed new project.

Topic: Cash flows

44.

The NPV of an investment proposal becomes negative solely as a result of allocating a portion of the corporation president's salary. It is most likely the case that: A. the project should be accepted.

B. rejecting the project is the correct decision.

C. the allocation should be postponed until the project is accepted.

D. the salary should be considered an opportunity cost of the project.

AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-01 Identify the cash flows from a proposed new project.

Topic: Project analysis and evaluation

45.

The correct method to handle overhead costs in capital budgeting is to: A. allocate a portion to each project.

B. allocate them to projects with the highest NPVs. C. ignore all except incremental amounts.

D. ignore them in all cases.

AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-01 Identify the cash flows from a proposed new project.

Topic: Project analysis and evaluation

46.

Which one of the following would not be expected to affect the decision of whether to undertake an investment?

A. Income tax rates B. Estimates of future inflation rates C. Sales reductions in other products caused by this investment D. Cost of the feasibility study that was conducted for this project AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-01 Identify the cash flows from a proposed new project.

Topic: Cash flows

47.

Which one of the following methods will provide a correct analysis for capital budgeting purposes?

A. Discounting real cash flows with real rates.

B. Discounting real cash flows with nominal rates.

C. Discounting nominal cash flows with real rates.

D. Discounting nominal cash flows with either real or nominal rates.

AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 1 Easy Gradable: automatic Learning Objective: 09-01 Identify the cash flows from a proposed new project.

Topic: Nominal and real rates

48.

The likely effect of discounting nominal cash flows with real interest rates will be to: A. make an investment's NPV appear more attractive.

B. make an investment's NPV appear less attractive.

C. correctly calculate an investment's NPV if inflation is expected.

D. correctly calculate an investment's NPV, regardless of expected inflation.

AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-01 Identify the cash flows from a proposed new project.

Topic: Nominal and real rates

49.

Your forecast shows $500,000 annually in sales for each of the next 3 years. If your second and third year predictions have failed to incorporate the 3% expected annual inflation, how far off in total dollar sales is your 3-year forecast?

A. $45,450 B. $60,900 C. $52,550 D. $76,250 Difference = $500,000 + ($500,000 × 1.03) + ($500,000 × 1.03 2) − ($500,000 × 3) = $45,450

AACSB: Analytical Thinking Accessibility: Keyboard Navigation

Blooms: Analyze Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-01 Identify the cash flows from a proposed new project.

Topic: Sales forecasts

50.

Which one of the following would be more apt to make an unacceptable project appear acceptable?

A. Discounting real cash flows with real rates B. Discounting nominal cash flows with real rates C. Discounting real cash flows with nominal rates D. Discounting nominal cash flows with nominal rates AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-01 Identify the cash flows from a proposed new project.

Topic: Nominal and real rates

51.

Capital budgeting proposals should be evaluated as if the project were financed: A. entirely by debt.

B. entirely by equity.

C. half by debt and half by equity.

D. with the highest cost source of funds, to be safe.

AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-01 Identify the cash flows from a proposed new project.

Topic: Project analysis and evaluation

52.

When calculating cash flow from operations, one should: A. subtract depreciation since it represents the cost of replacing worn-out equipment.

B. deduct the depreciation tax shield from after-tax profit.

C. use after-tax profit and ignore depreciation.

D. add depreciation to after-tax profit.

AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-01 Identify the cash flows from a proposed new project.

Topic: Operating cash flow

53.

The recovery of an additional investment in working capital is likely to: A. occur at the end of a project's life.

B. occur at the beginning of a project's life.

C. occur whenever the project first shows a profit.

D. be a sunk cost.

AACSB: Reflective Thinking

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-04 Understand how changes in working capital affect project cash flows.

Topic: Net working capital

54.

In what manner does depreciation expense affect investment projects?

A. It reduces cash flows by the amount of the depreciation expense.

B. It increases cash flows by the amount of the depreciation expense.

C. It reduces taxable income by the amount of the depreciation expense.

D. It reduces taxes by the amount of the depreciation expense.

AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-03 Understand how the company's tax bill is affected by depreciation and how this affects project value.

Topic: Depreciation

55.

Given a positive discount rate, which one of the following changes would increase the NPV of a project?

A. Increasing the firm's opportunity cost of capital B. Reducing the amount of working capital that is needed.

C. Spreading the total cash inflows over a longer time interval D. Increasing the project's estimated expenses AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-04 Understand how changes in working capital affect project cash flows.

Topic: Net working capital

56.

What is the annual depreciation tax shield for a profitable firm in the 30% marginal tax bracket with $100,000 of annual depreciation expense?

A. $10,500 B. $30,000 C. $35,000 D. $65,000 Depreciation tax shield = $100,000 × 0.30 = $30,000

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 1 Easy Gradable: automatic Learning Objective: 09-03 Understand how the company's tax bill is affected by depreciation and how this affects project value.

Topic: Depreciation

57.

What is the amount of the annual depreciation tax shield for a firm with $200,000 in net income, $75,000 in depreciation expense, and a 35% marginal tax rate?

A. $26,250 B. $43,750 C. $70,000 D. $75,000 Depreciation tax shield = $75,000 × 0.35 = $26,250

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-03 Understand how the company's tax bill is affected by depreciation and how this affects project value.

Topic: Depreciation

58.

What is the operating cash flow for a firm with $500,000 profit before tax, $100,000 depreciation expense, and a 35% marginal tax rate?

A. $260,000 B. $325,000 C. $360,000 D. $425,000 OCF = [$500,000 × (1 − 0.35)] + $100,000 = $425,000

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-01 Identify the cash flows from a proposed new project.

Topic: Operating cash flow

59.

A tax shield is equal to the reduction in a firm's: A. total tax liability resulting from a tax deductible expense.

B. taxable income resulting from depreciation.

C. taxable income resulting from a decrease in long-term debt.

D. net income caused by depreciation.

AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 1 Easy Gradable: automatic Learning Objective: 09-03 Understand how the company's tax bill is affected by depreciation and how this affects project value.

Topic: Depreciation

60.

Which one of the following categories would be least likely to require annual adjustments in a capital budgeting analysis due to the effects of inflation?

A. Sales B. Expenses C. Working capital D. Depreciation expense AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 1 Easy Gradable: automatic Learning Objective: 09-01 Identify the cash flows from a proposed new project.

Topic: Project analysis and evaluation

61.

Methods of accelerated depreciation: A. allow more total depreciation over the asset's life.

B. decrease the depreciation tax shield.

C. increase the depreciation tax shield.

D. allow assets to be depreciated more rapidly.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-03 Understand how the company's tax bill is affected by depreciation and how this affects project value.

Topic: Depreciation

62.

Why is accelerated depreciation often favored for the corporation's set of tax books?

A. It increases the total depreciation tax shield over the project's life.

B. It reduces the total amount of taxes paid over the project's life.

C. It increases net accounting profits over the project's life.

D. It allows the depreciation tax savings to be realized earlier.

AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-03 Understand how the company's tax bill is affected by depreciation and how this affects project value.

Topic: Depreciation

63.

The modified accelerated cost recovery system (MACRS) allows an increase: A. in total depreciation over the asset's life.

B. in annual depreciation during earlier years.

C. in real but not nominal depreciation expense.

D. in the asset's depreciable cost basis.

AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 1 Easy Gradable: automatic Learning Objective: 09-03 Understand how the company's tax bill is affected by depreciation and how this affects project value.

Topic: Depreciation

64.

Under the MACRS: A. all assets are depreciated over 5 years.

B. depreciable percentages decline throughout the asset's class life.

C. straight-line depreciation percentages are doubled.

D. assets are assumed to be purchased and sold midyear.

AACSB: Communication Accessibility: Keyboard Navigation Blooms: Remember Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-03 Understand how the company's tax bill is affected by depreciation and how this affects project value.

Topic: Depreciation

65.

A firm plans to purchase a $50,000 asset that will be depreciated straight-line over a 5-year life to a zero salvage value. What is the present value of the resulting depreciation tax shield if the tax rate is 35% and the discount rate is 10%?

A. $10,866.67 B. $13,267.75 C. $17,500.00 D. $37,908.18 Annual depreciation tax shield = $50,000 / 5 × 0.35 = $3,500 PV of tax shield = $3,500 {(1 / 0.1) − [1 / 0.1(1.1)5]} = $13,267.75

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-03 Understand how the company's tax bill is affected by depreciation and how this affects project value.

Topic: Depreciation

66.

The present value of the depreciation tax shield at any given discount rate is: A. equal for all depreciation methods.

B. higher with MACRS than with straight-line depreciation.

C. higher for the 7-year recovery period than for the 5-year recovery period class.

D. likely to increase annually due to inflation.

AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-03 Understand how the company's tax bill is affected by depreciation and how this affects project value.

Topic: Depreciation

67.

When the real rate of interest is less than the nominal rate of interest, then: A. disinflation must be occurring.

B. investment returns cannot increase the purchasing power of an investment.

C. nominal cash flows should be discounted with real rates.

D. the rate of inflation must be positive.

AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 1 Easy Gradable: automatic Learning Objective: 09-01 Identify the cash flows from a proposed new project.

Topic: Nominal and real rates

68.

When a depreciable asset is ultimately sold, the sales price is: A. fully taxable.

B. nontaxable.

C. nontaxable only if accelerated depreciation was used.

D. taxable to the extent that the sales price exceeds book value.

AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-03 Understand how the company's tax bill is affected by depreciation and how this affects project value.

Topic: Depreciation

69.

Which one of the following statements regarding depreciation is correct?

A. The depreciation tax shield adjusts annually with the level of inflation.

B. The real amount of annual depreciation is fixed, thus the higher the rate of inflation, the higher the depreciation tax shield.

C. Tax law allows accelerated depreciation to be used for tax purposes.

D. MACRS can be used for accounting purposes but not for tax purposes.

AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 1 Easy Gradable: automatic Learning Objective: 09-03 Understand how the company's tax bill is affected by depreciation and how this affects project value.

Topic: Depreciation

70.

The statement "We've got too much invested in that project to pull out now" possibly illustrates the need to: A. switch to an accelerated method of depreciation.

B. recognize sunk costs.

C. reduce net working capital assigned to the project.

D. reduce discount rates to improve NPV. AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 1 Easy Gradable: automatic Learning Objective: 09-01 Identify the cash flows from a proposed new project.

Topic: Project analysis and evaluation

71.

What is the undiscounted cash flow in the final year of an investment, assuming $10,000 after-tax cash flows from operations, $1,000 from the sale of a fully depreciated machine, a $2,000 investment in working capital, and a 35% tax rate?

A. $8,450 B. $12,600 C. $12,650 D. $14,000 Cash flowFinal = $10,000 + $2,000 + $1,000 × (1 − 0.35) = $12,650

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-01 Identify the cash flows from a proposed new project.

Topic: Cash flows

72.

At a 13% cost of capital, a project's NPV is $100,000 if you invest today. By what amount must the initial cost of the project decrease before you would wish to wait 2 years before investing? Assume all else is held constant.

A. $21,685 B. $26,000 C. $27,690 D. $29,380 Required decrease = $100,000 × (1.13)2 − $100,000 = $27,690

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Gradable: automatic Learning Objective: 09-01 Identify the cash flows from a proposed new project.

Topic: Project analysis and evaluation

73.

Which of the following correctly adjusts for depreciation when calculating a project’s operating cash flow?

A. (revenues − cash expenses) × (1 − tax rate) + (tax rate × depreciation).

B. pretax profit + depreciation tax shield.

C. after-tax profit − depreciation.

D. ignore depreciation since it is not a cash flow.

AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-01 Identify the cash flows from a proposed new project.

Topic: Project analysis and evaluation

74.

A new inventory system will immediately reduce inventory levels by $100,000. If this reduction is permanent and the cost of capital is 13%, how does the net working capital change affect company value?

A. Company value increases by $100,000.

B. NPV increases by $13,000.

C. Company value will not change.

D. Company value increases by $769,231.

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-04 Understand how changes in working capital affect project cash flows.

Topic: Net working capital

75.

The opportunity cost of a resource should be considered in project analysis, unless: A. negative cash flows result from its use.

B. the resource was purchased in a prior time period.

C. the resource has been fully depreciated.

D. the resource has no identifiable market value or alternative use within the firm.

AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-01 Identify the cash flows from a proposed new project.

Topic: Cash flows

76.

A new project requires an increase in both current assets and current liabilities of $125,000 each. What is the overall impact on the net working capital investment?

A. An increase of zero B. An increase of $125,000 C. An increase of $250,000 D. An increase of $62,500, when averaged over the life of the project AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 1 Easy Gradable: automatic Learning Objective: 09-04 Understand how changes in working capital affect project cash flows.

Topic: Net working capital

77.

The primary difficulty in the allocation of overhead costs to prospective projects is that the: A. allocation will reduce the project's NPV. B. discount rate is unknown.

C. costs may not represent an incremental expense.

D. expenses may have been previously allocated.

AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium

Gradable: automatic Learning Objective: 09-01 Identify the cash flows from a proposed new project.

Topic: Project analysis and evaluation

78.

If inflation is forecast to increase, which of the company’s following cash flows is most likely to change?

A. The depreciation tax shield.

B. Labor costs.

C. Costs of raw materials purchased on a fixed price contract.

D. Interest payments on its long-term debt.

AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-01 Identify the cash flows from a proposed new project.

Topic: Project analysis and evaluation

79.

A project costs $12,800 and is expected to provide a real cash inflow of $10,000 at the end of each of years 1 through 5.

Calculate the net present value of this project if inflation is expected to be 4% in each year and the firm employs a nominal discount rate of 10.76%.

A. $33,522.30 B. $28,756.79 C. $33,294.07 D. $26,311.15 Real rate = 1.1076 / 1.04 − 1 = 0.065 NPV = −$12,800 + $10,000{(1 / 0.065) − [1 / 0.065(1.065)5]} = $28,756.79

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Gradable: automatic Learning Objective: 09-01 Identify the cash flows from a proposed new project.

Topic: Nominal and real rates

80.

An investment today of $25,000 promises to return $10,000 annually for the next 3 years. What is the real rate of return on this investment if inflation averages 6% annually during the period?

A. 3.49% B. 9.78% C. 4.84% D. 6.38% Using a financial calculator: n = 3, PV = −$25,000, PMT = $10,000, FV = $0, CPT i/Y = 9.701% Real return = 1.09701 / 1.06 − 1 = 0.0349, or 3.49%

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Gradable: automatic Learning Objective: 09-01 Identify the cash flows from a proposed new project.

Topic: Nominal and real rates

81.

What nominal annual return is required on an investment for an investor to experience a 12% gain in purchasing power?

Assume inflation is 4%.

A. 7.69% B. 9.29% C. 12.00% D. 16.48% Nominal rate = 1.12 × 1.04 − 1 = 0.1648, or 16.48%

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-01 Identify the cash flows from a proposed new project.

Topic: Nominal and real rates

82.

What is the NPV of a 6-year project that costs $100,000, has annual revenues of $50,000 and costs of $15,000? Assume the investment can be depreciated for tax purposes straight-line over 6 years, the corporate tax rate is 35%, and the discount rate is 14%.

A. −$15,560.04 B. $11,151.08 C. $3,411.14 D. $14,782.09 Annual cash flow = (revenues − costs) × (1 − tax rate) + (tax rate × depreciation) = (50,000 − 15,000) × (1 − 0.35) + (0.35 × 100,000 / 6) = $27,417 NPV = −$100,000 + $27,417 × [1 / 0.14 −1 / (0.14 × 1.14 6] = $11,151.08

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 3 Hard Gradable: automatic Learning Objective: 09-01 Identify the cash flows from a proposed new project.

Topic: Project analysis and evaluation

83.

An investment of $120,000 can be depreciated for tax purposes straight line over 6 years. The corporate tax rate is 40%.

When calculating cash flow: A. the company should deduct a depreciation tax shield of $8,000 a year from after-tax (revenues less cash expenses) B. the company should add a depreciation tax shield of $8,000 a year to after-tax (revenues less cash expenses) C. the company should add a depreciation tax shield of $20,000 a year to after-tax (revenues less cash expenses) D. no adjustment should be made for depreciation since it is not a cash expense.

AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-02 Calculate the cash flows of a project from standard financial statements.

Topic: Operating cash flow

84.

A project that increased sales was accompanied by a $50,000 increase in inventory, a $20,000 increase in accounts receivable, and a $25,000 increase in accounts payable. Assuming these amounts remain constant, by how much has net working capital increased?

A. $5,000 B. $25,000 C. $30,000 D. $45,000 ΔNWC = $50,000 + 20,000 − 25,000 = $45,000

AACSB: Analytical Thinking Accessibility: Keyboard Navigation Blooms: Analyze Difficulty: 2 Medium

Gradable: automatic Learning Objective: 09-04 Understand how changes in working capital affect project cash flows.

Topic: Net working capital

85.

Which of the following costs probably should not be allocated to the investment needed for a new project?

A. Project's required increase in accounts receivable B. New warehouse, built for this project C. A portion of the vice president's salary D. Labor expense for employees involved in the project AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-01 Identify the cash flows from a proposed new project.

Topic: Project analysis and evaluation

86.

A parcel of corporate land was recently chosen as the new plant site. What cost allocation should the land receive, based on the following: original cost of $200,000, highest market value during time of ownership of $300,000, net book value of $200,000, a recent offer to purchase for $250,000?

A. $200,000 B. $250,000 C. $275,000 D. $300,000 AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-01 Identify the cash flows from a proposed new project.

Topic: Cash flows

87.

Which of the following is true of the depreciation tax shield?

A. It increases annually with the rate of inflation.

B. It decreases annually in nominal terms.

C. It is not altered by inflation.

D. The real value of the depreciation is fixed.

AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-03 Understand how the company's tax bill is affected by depreciation and how this affects project value.

Topic: Depreciation

88.

Assuming an asset has been fully depreciated according to its MACRS class life, which one of the following statements is correct?

A. Its market value is zero.

B. Its book value is zero.

C. Its book value is the current market value.

D. It has neither a book value nor a market value.

AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 1 Easy Gradable: automatic Learning Objective: 09-03 Understand how the company's tax bill is affected by depreciation and how this affects project value.

Topic: Depreciation

89.

New projects can have multiple effects on a firm. Which one of the following appears to be a positive indirect effect?

A. Additional working capital will be required at the start of the project.

B. The sales force will need to be increased over the life of the project.

C. Sales of replacement parts are expected in the future.

D. The cost of employee benefits will increase due to new hires.

AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-01 Identify the cash flows from a proposed new project.

Topic: Cash flows

90.

New projects or products can provide positive indirect effects as well as negative effects. Which one of the following appears to be a negative indirect effect?

A. The new machine required for the project uses less electricity than the existing machine.

B. Orders for your complementary products are expected to increase.

C. Customer orders of supplies for the firm’s existing products are expected to decrease.

D. Variable costs are expected to decrease since the firm can order larger quantities.

AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-01 Identify the cash flows from a proposed new project.

Topic: Cash flows

91.

Lew's Metals has a machine sitting idle in its warehouse. The machine originally cost $213,000, has a current book value of $32,300, has a scrap metal value of $13,000, and a market value of $46,900. The machine is totally paid for. What value should be placed on this machine if it is used for a new project?

A. $0 B. $13,000 C. $32,300 D. $46,900 AACSB: Reflective Thinking Accessibility: Keyboard Navigation

Blooms: Apply Difficulty: 1 Easy Gradable: automatic Learning Objective: 09-01 Identify the cash flows from a proposed new project.

Topic: Cash flows

92.

A project requires an additional commitment of $100,000 in net working capital in each of years 1 to 4. These extra investments can be recovered in year 5 when the project comes to an end. What is the effect on NPV? A. NPV is reduced by $100,000.

B. NPV is reduced by the present value of $100,000 discounted at the firm's cost of capital for 4 years.

C. NPV is reduced by the present value of $100,000 discounted at the firm's cost of capital for each of years 1 to 4 minus the discounted value of the $400,000 that is recovered in year 5.

D. No opportunity cost is involved.

AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 3 Hard Gradable: automatic Learning Objective: 09-04 Understand how changes in working capital affect project cash flows.

Topic: Net working capital

93.

The additional inventory investment that is often required for new projects is partially offset by: A. switching to accelerated depreciation methods.

B. reducing accounts receivable.

C. decreasing equipment purchases.

D. increasing accounts payable.

AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-04 Understand how changes in working capital affect project cash flows.

Topic: Net working capital

94.

What rate of nominal growth is expected in sales if they are currently $1,000,000 and are expected to reach $1,600,000 in 5 years? Assume an inflation rate of 3.5%.

A. 3.20% B. 9.86% C. 12.00% D. 26.49% ($1,600,000 / $1,000,000)1/5 − 1 = 9.86%

AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-01 Identify the cash flows from a proposed new project.

Topic: Nominal and real rates

95.

What is the effect of using MACRS rather than straight-line depreciation?

A. It increases the NPV. B. The total amount of depreciation is increased.

C. It allows asset book values to increase with market values.

D. It increases gross fixed assets.

AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-03 Understand how the company's tax bill is affected by depreciation and how this affects project value.

Topic: Depreciation

96.

In the MACRS depreciation schedules, the depreciation percentage is lower in the first year than in the second year. This is due to the fact that: A. the depreciation percentage increases every year over the project's life.

B. assets are assumed to be acquired at midyear.

C. depreciation expense increases at the rate of inflation.

D. MACRS depreciation is less attractive than straight-line depreciation.

AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Understand Difficulty: 1 Easy Gradable: automatic Learning Objective: 09-03 Understand how the company's tax bill is affected by depreciation and how this affects project value.

Topic: Depreciation

97.

A firm invests $10 million in a new stamping machine. It depreciates it straight line for tax purposes over 5 years. The tax rate is 30%, inflation is 4% a year, and the discount rate is 8%. What is the PV of the depreciation tax shield?

A. $600,000.

B. $2,395,626.

C. $2,579,497.

D. $3,000,000.

Annual depreciation tax shield = 0.3 × $10 million / 5 =$600,000 PV shield = $600,000{1 / 0.08 − 1 / (0.08 × 1.08 5)] = $2,395,626

AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-01 Identify the cash flows from a proposed new project.

Topic: Nominal and real rates

98.

Capital budgeting projects typically assume that all cash flows transpire at the end of the year. The reason for this is that: A. less tax liability results from this practice.

B. balance sheets are prepared at the end of the year.

C. it simplifies the analysis and the resulting errors are usually small compared with the errors in forecasting future cash flows.

D. most corporations collect their cash at the end of the year.

AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-01 Identify the cash flows from a proposed new project.

Topic: Cash flows

99.

Which one of the following is not accurate in depicting the cash flows from operations for an all-equity firm?

A. (revenues − cash expenses)(1 − tax rate) + (depreciation × tax rate) B. (revenues − expenses − taxes) C. (net profit + depreciation) D. (revenues − cash expenses − taxes) AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-01 Identify the cash flows from a proposed new project.

Topic: Operating cash flow

100.

Which of the following typically results from using straight-line depreciation rather than MACRS in the set of books for shareholders?

A. Net income appears higher during the early periods of depreciation.

B. Less money is paid to the Internal Revenue Service over an asset's life.

C. Financial managers have more funds from operations available over the asset's life.

D. Cash flow from operations will be higher in the second year of the asset's life.

AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-03 Understand how the company's tax bill is affected by depreciation and how this affects project value.

Topic: Depreciation

101.

When you evaluate a proposed project you should: A. allocate a percentage of current overhead costs to the project.

B. include all indirect effects.

C. include sunk costs.

D. ignore opportunity costs.

AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium

Gradable: automatic Learning Objective: 09-01 Identify the cash flows from a proposed new project.

Topic: Cash flows

102.

Which one of the following formulas is incorrect?

A. Operating cash flow = revenues − cash expenses − taxes B. Operating cash flow = net profit + depreciation C. Depreciation tax shield = depreciation × (1 − tax rate) D. Operating cash flow = (revenues − cash expenses) × (1 − tax rate) + (depreciation × tax rate) AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 2 Medium Gradable: automatic Learning Objective: 09-03 Understand how the company's tax bill is affected by depreciation and how this affects project value.

Topic: Depreciation

103.

Which one of these statements is incorrect?

A. Real cash flows must be discounted at a real discount rate.

B. (1 + real rate of interest) = (1 + nominal rate of interest) / (1 + inflation rate) C. The actual real rate of interest almost equals "nominal rate of interest − inflation rate."

D. Inflation rate = nominal rate / real rate − 1 AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 1 Easy Gradable: automatic Learning Objective: 09-01 Identify the cash flows from a proposed new project.

Topic: Nominal and real rates

104.

Which of the following statements regarding investment in working capital is incorrect?

A. An investment in working capital, unlike an investment in plant and equipment, represents a positive cash flow when the investment is made.

B. Net working capital cash flow is measured by the change in working capital, not the level of working capital.

C. Net working capital may change during the life of a project.

D. Working capital is generally recovered at the end of a project.

AACSB: Reflective Thinking Accessibility: Keyboard Navigation Blooms: Apply Difficulty: 1 Easy Gradable: automatic Learning Objective: 09-04 Understand how changes in working capital affect project cash flows.

Topic: Net working capital

Chapter 09 Test bank - Static Summary Category AACSB: Analytical Thinking

# of Questions 18

AACSB: Communication

4

AACSB: Reflective Thinking

82

Accessibility: Keyboard Navigation

104

Blooms: Analyze

14

Blooms: Apply

56

Blooms: Remember

9

Blooms: Understand

25

Difficulty: 1 Easy

28

Difficulty: 2 Medium

71

Difficulty: 3 Hard

5

Gradable: automatic

104

Learning Objective: 09-01 Identify the cash flows from a proposed new project.

61

Learning Objective: 09-02 Calculate the cash flows of a project from standard financial statements.

2

Learning Objective: 09-03 Understand how the company's tax bill is affected by depreciation and how this affects project value.

24

Learning Objective: 09-04 Understand how changes in working capital affect project cash flows.

17

Topic: Cash flows

31

Topic: Depreciation

21

Topic: Fixed and variable costs

1

Topic: Income statement

1

Topic: Net working capital

18

Topic: Nominal and real rates

12

Topic: Operating cash flow

5

Topic: Pro forma statements

1

Topic: Project analysis and evaluation

13

Topic: Sales forecasts

1