Question 1

The real rate of interest is 3% and inflation is 4%.What is the nominal rate of interest?
A)3%
B)1.00%
C)7.12%
D)-1.00%

Accepted Answer

To find the nominal rate of interest, we add the real rate and inflation rate. Therefore, nominal rate = real rate + inflation rate
Nominal rate = 3% + 4% = 7%. Therefore, the correct option is C) 7.12% as it is the closest to 7%.

Question 2

Capital equipment costing $250,000 today has 50,000 salvage value at the end of five years.If the straight-line depreciation method is used,what is the book value of the equipment at the end of two years?
A)$200,000
B)$170,000
C)$140,000
D)$150,000

Accepted Answer

The straight-line depreciation method spreads the cost of the equipment evenly over its useful life. The annual depreciation is calculated as (Cost - Salvage Value) / Useful Life = ($250,000 - $50,000) / 5 = $40,000 per year. After two years, the total depreciation is $40,000 * 2 = $80,000. Therefore, the book value at the end of two years is Cost - Accumulated Depreciation = $250,000 - $80,000 = $170,000.

Question 3

Proper treatment of inflation in NPV calculations involves:
I.discounting nominal cash flows by the nominal discount rate;
II.discounting real cash flows by the real discount rate;
III.discounting nominal cash flows by the real discount rate
A)I only
B)II only
C)III only
D)I and II only

Accepted Answer

Proper treatment of inflation in NPV calculations involves discounting nominal cash flows by the nominal discount rate (I) and discounting real cash flows by the real discount rate (II). Therefore, the correct choice is D, which includes both I and II. Option III, which involves discounting nominal cash flows by the real discount rate, is not a valid approach for accounting for inflation in NPV calculations.

Question 4

If the nominal interest rate is 7.5% and the inflation rate is 4.0%,what is the real interest rate?
A)4.0%
B)9.5%
C)3.4%
D)11.5%

Accepted Answer

The real interest rate is calculated as the nominal interest rate minus the inflation rate. Therefore, the real interest rate is 7.5% - 4.0% = 3.5%. Answer C is the closest option, as it is only off by 0.1%.

Question 5

The real interest rate is 3.0% and the inflation rate is 5.0%.What is the nominal interest rate?
A)3.00%
B)5.00%
C)8.15%
D)2.00%

Accepted Answer

The nominal interest rate can be calculated by adding the real interest rate and inflation rate. Nominal interest rate = Real interest rate + Inflation rate, thus Nominal interest rate = 3.0% + 5.0% = 8.0%. Therefore, the closest answer from the options is C, which is 8.15%.

Question 6

A project requires an initial investment of $200,000 and expects to produce a cash flow before taxes of 120,000 per year for two years .The corporate tax rate is 30%.The assets will depreciate using the MACRS - 3-year schedule: (t = 1,33%); (t = 2: 45%); (t = 3: 15%); (t = 4: 7%).The company's tax situation is such that it can use all applicable tax shields.The opportunity cost of capital is 12%.Assume that the asset can sell for book value at the end of the project.Calculate the NPV of the project (approximately):
A)$22,463.
B)$19,315.
C)$16,244.
D)$5,721

Accepted Answer

The answer of A project requires an initial investment of...

Question 7

The NPV value obtained by discounting nominal cash flows using the nominal discount rate is the same as the NPV value obtained by discounting:
I.real cash flows using the real discount rate;
II.real cash flows using the nominal discount rate;
III.nominal cash flows using the real discount rate
A)I only
B)II only
C)III only
D)II and III only

Accepted Answer

The answer of The NPV value obtained by discounting nominal...

Question 8

Suppose that a project has a depreciable investment of $600,000 and falls under the following MACRS year 5 class depreciation schedule:
Year 1: 20%; year 2: 32%; year 3: 19.2%; year 4: 11.5%; year 5: 11.5%; and year 6: 5.8%.
Calculate depreciation for year 2.
A)$120,000
B)$192,000
C)$96,000
D)$115,200

Accepted Answer

To calculate the depreciation for year 2, first we need to determine the depreciation basis for that year. To do this, we take the original investment of $600,000 and multiply it by the percentage applicable for year 2 (32%).

$600,000 x 0.32 = $192,000

Therefore, the depreciation for year 2 is $192,000. Answer choice B is correct.

Question 9

A piece of capital equipment costing $400,000 today has no (zero)salvage value at the end of five years.If straight-line depreciation is used,what is the book value of the equipment at the end of three years?
A)$120,000
B)$80,000
C)$160,000
D)$240,000

Accepted Answer

Straight-line depreciation means that the cost of the equipment will be spread evenly over 5 years, so the annual depreciation will be $400,000/5 = $80,000.

After 3 years, the equipment will have depreciated by 3*$80,000 = $240,000.

Therefore, the book value at the end of 3 years will be:
$400,000 - $240,000 = $160,000

So the correct answer is choice C.

Question 10

Working capital is a frequent source of errors in estimating project cash flows.These errors include:
I.forgetting about working capital entirely;
II.forgetting that working capital may change during the life of the project;
III.forgetting that working capital is recovered at the end of the project;
IV.forgetting to depreciate working capital
A)I and II only
B)I,II,and III only
C)II,III,and IV only
D)I,II,and IV only

Accepted Answer

Working capital is often overlooked in cash flow estimations, and it is important to remember that it can change during the project and is typically recovered at the end. However, working capital is not depreciated, so IV is incorrect.

Question 11

For project Z,year 5 inventories increase by $6,000,accounts receivable by $4,000,and accounts payable by $3,000.Calculate the increase or decrease in working capital for year 5.
A)increases by $5,000
B)decreases by $1,000
C)increases by $7,000
D)decreases by $7,000

Accepted Answer

Working capital is calculated by subtracting current liabilities from current assets. In this case, the increase in inventories ($6,000) and accounts receivable ($4,000) means that current assets have increased by $10,000. The increase in accounts payable ($3,000) means that current liabilities have increased by $3,000. Therefore, the increase in working capital is $10,000 - $3,000 = $7,000.

Question 12

Given the following data for Project M:

A)$25.85.
B)$17.77.
C)$22.65.
D)$35.00.

Accepted Answer

The answer of Given the following data for Project M:...

Question 13

If depreciation is $100,000 and the marginal tax rate is 35%,then the tax shield due to depreciation is:
A)$35,000
B)$100,000
C)$65,000
D)cannot be determined from the information given

Accepted Answer

The tax shield is calculated as depreciation multiplied by the tax rate: $100,000 * 35% = $35,000.

Question 14

Your firm expects to receive a cash flow in two years of $10,816 in nominal terms.If the real rate of interest is 2% and the inflation rate is 4%,what is the real cash flow for year 2?
A)$11,236
B)$10,816
C)$10,000
D)$9,246

Accepted Answer

The real cash flow is calculated by discounting the nominal cash flow by the inflation rate. The formula is: Real Cash Flow = Nominal Cash Flow / (1 + Inflation Rate)^n. Here, $10,816 / (1 + 0.04)^2 = $10,000.

Question 15

For project A in year 2,inventories increase by $12,000 and accounts payable increases by $2,000.Accounts receivable remain the same.Calculate the increase or decrease in net working capital for year 2.
A)decreases by $14,000
B)increases by $14,000
C)decreases by $10,000
D)increases by $10,000

Accepted Answer

The answer of For project A in year 2,inventories increase...

Question 16

The real cash flow occurring in year 2 is $60,000.If the inflation rate is 5% per year and the real rate of interest is 2% per year,calculate the nominal cash flow for year 2.
A)$60,000
B)$62,424
C)$66,150
D)$63,654

Accepted Answer

The nominal cash flow is calculated by adjusting the real cash flow for inflation. The formula is: Nominal Cash Flow = Real Cash Flow * (1 + Inflation Rate)^n. For year 2, it is $60,000 * (1 + 0.05)^2 = $66,150.

Question 17

Given the following data for Project M: 
A)$51.70.
B)$35.54.
C)$45.21.
D)$70.00.

Accepted Answer

The answer of Given the following data for Project M:...

Question 18

A firm has a general-purpose machine,which has a book value of $300,000 and is worth $500,000 in the market.If the tax rate is 35%,what is the opportunity cost of using the machine in a project?
A)$500,000
B)$430,000
C)$300,000
D)$200,000

Accepted Answer

The opportunity cost is the value of the next best alternative use of the machine. In this case, the next best alternative is to sell the machine for $500,000. The tax on the sale would be $500,000 x 35% = $175,000. The after-tax proceeds from the sale would be $500,000 - $175,000 = $325,000. The opportunity cost of using the machine in the project is therefore $325,000 - $300,000 = $25,000.

Question 19

Suppose that a project has a depreciable investment of $1,000,000 and falls under the following MACRS year 5 class depreciation schedule:
Year 1: 20%; year 2: 32%; year 3: 19.2%; year 4: 11.5%; year 5: 11.5%; and year 6: 5.8%.
Calculate the depreciation tax shield for year 2 using a tax rate of 30%:
A)$224,000.
B)$60,000.
C)$96,000.
D)$300,000.

Accepted Answer

To calculate the depreciation tax shield for year 2, we need to use the MACRS year 5 depreciation schedule, which has a year 2 depreciation rate of 32%. The depreciation tax shield is calculated by multiplying the depreciable investment by the depreciation rate, which gives us:
Depreciation tax shield = $1,000,000 × 32% = $320,000
Since the tax rate is 30%, we multiply the tax shield by the tax rate to get the tax savings:
Tax savings = $320,000 × 30% = $96,000
Therefore, the correct answer is C, $96,000.

Question 20

If depreciation is $600,000 and the marginal tax rate is 35%,then the tax shield due to depreciation is:
A)$210,000.
B)$600,000.
C)$390,000.
D)cannot be determined from the information given.

Accepted Answer

The tax shield due to depreciation is calculated by multiplying the depreciation amount by the marginal tax rate: $600,000 * 35% = $210,000.

Quiz 6: Making Investment Decisions With the Net Present Value Rule

The real rate of interest is 3% and inflation is 4%.What is the nominal rate of interest?

Capital equipment costing $250,000 today has 50,000 salvage value at the end of five years.If the straight-line depreciation method is used,what is the book value of the equipment at the end of two years?

Proper treatment of inflation in NPV calculations involves: I.discounting nominal cash flows by the nominal discount rate; II.discounting real cash flows by the real discount rate; III.discounting nominal cash flows by the real discount rate

If the nominal interest rate is 7.5% and the inflation rate is 4.0%,what is the real interest rate?

The real interest rate is 3.0% and the inflation rate is 5.0%.What is the nominal interest rate?

The NPV value obtained by discounting nominal cash flows using the nominal discount rate is the same as the NPV value obtained by discounting: I.real cash flows using the real discount rate; II.real cash flows using the nominal discount rate; III.nominal cash flows using the real discount rate

Suppose that a project has a depreciable investment of $600,000 and falls under the following MACRS year 5 class depreciation schedule: Year 1: 20%; year 2: 32%; year 3: 19.2%; year 4: 11.5%; year 5: 11.5%; and year 6: 5.8%. Calculate depreciation for year 2.

A piece of capital equipment costing $400,000 today has no (zero) salvage value at the end of five years.If straight-line depreciation is used,what is the book value of the equipment at the end of three years?

For project Z,year 5 inventories increase by $6,000,accounts receivable by $4,000,and accounts payable by $3,000.Calculate the increase or decrease in working capital for year 5.

Given the following data for Project M:

If depreciation is $100,000 and the marginal tax rate is 35%,then the tax shield due to depreciation is:

Your firm expects to receive a cash flow in two years of $10,816 in nominal terms.If the real rate of interest is 2% and the inflation rate is 4%,what is the real cash flow for year 2?

For project A in year 2,inventories increase by $12,000 and accounts payable increases by $2,000.Accounts receivable remain the same.Calculate the increase or decrease in net working capital for year 2.

The real cash flow occurring in year 2 is $60,000.If the inflation rate is 5% per year and the real rate of interest is 2% per year,calculate the nominal cash flow for year 2.

Given the following data for Project M:

A firm has a general-purpose machine,which has a book value of $300,000 and is worth $500,000 in the market.If the tax rate is 35%,what is the opportunity cost of using the machine in a project?

Suppose that a project has a depreciable investment of $1,000,000 and falls under the following MACRS year 5 class depreciation schedule: Year 1: 20%; year 2: 32%; year 3: 19.2%; year 4: 11.5%; year 5: 11.5%; and year 6: 5.8%. Calculate the depreciation tax shield for year 2 using a tax rate of 30%:

If depreciation is $600,000 and the marginal tax rate is 35%,then the tax shield due to depreciation is: