84) A project will produce an operating cash flow of $7,300 a year for three years. The initial investment for fixed assets will be $11,600, which will be depreciated straight-line to zero over the asset’s 4-year life. The project will require an initial $500 in net working capital plus an additional $500 every year with all net working capital levels restored to their original levels when the project ends. The fixed assets can be sold for an estimated $2,500 at the end of the project, the tax rate is 34 percent, and the required rate of return is 12 percent. What is the net present value of the project?

84) A project will produce an operating cash flow of $7,300 a year for three years. The initial investment for fixed assets will be $11,600, which will be depreciated straight-line to zero over the asset’s 4-year life. The project will require an initial $500 in net working capital plus an additional $500 every year with all net working capital levels restored to their original levels when the project ends. The fixed assets can be sold for an estimated $2,500 at the end of the project, the tax rate is 34 percent, and the required rate of return is 12 percent. What is the net present value of the project?

A) $8,398.29 B) $6,353.41 C) $7,072.72 D) $7,532.27 E) $9,896.87

84)

85) Tool Makers manufactures equipment for use by other firms. The initial cost of one customized machine is $850,000 with an annual operating cost of $10,000, and a life of 3 years. The machine will be replaced at the end of its life. What is the equivalent annual cost of this machine if the required rate of return is 15 percent and we ignore taxes?

A) $347,647.78 B) $351,610.29 C) $375,797.41 D) $382,280.42 E) $340,008.02

85)

86) Kay’s Nautique is considering a project which will require additional inventory of $128,000 and will also increase accounts payable by $45,000. Accounts receivable are currently $80,000 and are expected to increase by 10 percent if this project is accepted. What is the initial project cash flow needed for net working capital?

A) $91,000 B) $75,000 C) $99,000 D) $136,000 E) $181,000

86)

87) Wheels and More needs to maintain 8 percent of its sales in net working capital. The firm is considering a 5-year project which will increase sales from their current level of $110,000 to $146,000, $152,000, $158,000, $164,000, and $155,000 for Years 1 to 5 of the project, respectively. What amount should be included in the project analysis for net working capital for Year 3 of the project?

A) $12,640 B) −$480 C) −$12,640 D) $0 E) $480

87)

19

88) Tech Enterprises is considering a new project that will require $325,000 for fixed assets, $160,000 for inventory, and $35,000 for accounts receivable. Short-term debt is expected to increase by $100,000. The project has a 5-year life. The fixed assets will be depreciated straight-line to a zero book value over the life of the project. At the end of the project, the fixed assets can be sold for 25 percent of their original cost and the net working capital will return to its original level. The project is expected to generate annual sales of $554,000 and costs of $430,000. The tax rate is 35 percent and the required rate of return is 15 percent. What is the net present value of this project?

A) −$65.83 B) $3,026.45 C) $6,202.48 D) −$2,318.29 E) $4,138.25

88)

89) The Down Towner is considering a 4-year project that will require $164,800 for fixed assets and $42,400 for net working capital. The fixed assets will be depreciated straight-line to a zero book value over the life of the project. At the end of the project, the fixed assets can be sold for $37,500 and the net working capital will return to its original level. The project is expected to generate annual sales of $195,000 and costs of $117,500. The tax rate is 35 percent and the required rate of return is 13 percent. What is the project’s net present value?

A) $48,909.09 B) $67,316.67 C) $26,485.23 D) $36,500.00 E) $59,488.87

89)

90) In working on a bid project you have determined that $245,000 of fixed assets will be required and that they will be depreciated straight-line to zero over the 5-year life of the project. You have also determined that the discount rate should be 14.5 percent and the tax rate will be 35 percent. In addition, the annual cash costs will be $68,500. After considering all of the project’s cash flows you have determined that the required operating cash flow is $68,700. What is the amount of annual sales revenue that is required?

A) $142,018.27 B) $157,202.19 C) $152,311.89 D) $162,515.75 E) $147,807.69

90)

20

91) Which one of these is a correct definition? A) Current liabilities are debts that must be repaid in 18 months or less. B) Net working capital equals current assets plus current liabilities. C) Current assets are assets with short lives, such as inventory. D) Tangible assets are fixed assets such as patents. E) Long-term debt is defined as a residual claim on a firm’s assets.

91)

92) The corporate controller is generally responsible for which one of these functions? A) cash management B) tax reporting C) capital expenditures D) financial planning E) credit management

92)

93) The corporate treasurer oversees which one of these areas? A) financial accounting B) information systems C) cost accounting D) financial planning E) tax reporting

93)

94) Which one of these is a cash outflow from a corporation? A) sale of common stock B) sale of an asset C) profit retained by the firm D) dividend payment E) issuance of debt

94)

95) Which one of these statements is correct? A) When selecting one of two projects, managers should only consider the total cash

flow from each. B) All overseas operations present the same amount of risk. C) Accountants record sales and expenses after the related cash flows occur. D) The value of an investment by a firm depends on the size, the timing, and the risk

of the investment’s cash flows. E) Most investors prefer greater risk over less risk.

95)

96) An investment is acceptable if the payback period: A) is equal to or greater than some pre-specified period of time. B) is negative. C) is less than some pre-specified period of time. D) is equal to, and only if it is equal to, the investment’s life. E) exceeds the life of the investment.

96)

21

97) The discounted payback rule states that you should accept an investment project if its discounted payback period:

A) exceeds some pre-specified period of time. B) is less than some pre-specified period of time. C) is positive and rejected if it is negative. D) exceeds the life of the investment. E) is less than the payback period.

97)

98) If a project has a net present value equal to zero, then: A) the initial cost of the project exceeds the present value of the project’s subsequent

cash flows. B) the discount rate exceeds the internal rate of return. C) the internal rate of return exceeds the discount rate. D) the project produces cash inflows that exceed the minimum required inflows. E) any delay in receiving the projected cash inflows will cause the project’s NPV to

be negative.

98)

99) Net present value: A) is more useful than the internal rate of return when comparing different sized

projects. B) is not as widely used in practice as payback and discounted payback. C) cannot be used when deciding between two mutually exclusive projects. D) ignores the risk of a project. E) is rarely used by small firms according to the Graham and Harvey survey.

99)

100) Payback is frequently used to analyze independent projects because: A) it produces better decisions than those made using either NPV or IRR. B) it considers the time value of money. C) it is the most desirable of all the available analytical methods from a financial

perspective. D) it is easy and quick to calculate. E) all relevant cash flows are included in the analysis.

100)