Question 1

Flo is considering three mutually exclusive options for the additional space she plans to add to her specialty women's store.The cost of the expansion will be $148,000.She can use this additional space to add children's clothing, an exclusive gifts department, or a home d&#233;cor section.She estimates the present value of the cash inflows from these projects are $121,000 for children's clothing, $178,000 for exclusive gifts, and $145,000 for decorator items.Which option(s), if any, should she accept?

Accepted Answer

The exclusive gifts option has a present value of cash inflows ($178,000) that exceeds the cost of the expansion ($148,000), making it the only financially viable option.

Question 2

Scenario analysis is best described as the determination of the:

Accepted Answer

Scenario analysis involves evaluating the different possible outcomes of a project by considering various scenarios, thus determining the reasonable range of project outcomes.

Question 3

Scenario analysis asks questions such as:

Accepted Answer

Scenario analysis involves evaluating the best, worst, and most likely outcomes of a project to understand the range of possible results.

Question 4

Firm A uses straight-line depreciation.Firm B uses MACRS depreciation.Both firms bought $75,000 worth of equipment last year that has a tax life of 5 years.The 5-year MACRS percentage rates, starting with Year 1, are: 20, 32, 19.2, 11.52, 11.52, and 5.76.Both firms have a marginal tax rate of 34 percent and identical operating cash flows except for the depreciation effects.Given this, you know the:

Accepted Answer

Firm A uses straight-line depreciation, which spreads the cost evenly over 5 years, while Firm B uses MACRS, which accelerates depreciation in the earlier years. By Year 3, Firm B will have recognized more depreciation, reducing its taxable income and thus increasing its operating cash flow compared to Firm A.

Question 5

Which one of the following will increase the operating cash flow as computed using the tax shield approach?

Accepted Answer

A decrease in fixed costs will increase the operating cash flow because it reduces the total expenses, thereby increasing the net operating income before taxes.

Question 6

Which one of the following is a correct value to use if you are conducting a best-case scenario analysis?

Accepted Answer

In a best-case scenario analysis, you would use the lowest expected value for fixed costs to project the most favorable financial outcome.

Question 7

Weston Steel purchased a new coal furnace six years ago at a cost of $2.2 million.Last year, the government changed the emission requirements and this furnace cannot meet those standards.Thus, the company can no longer use the furnace, nor has it been able to locate anyone willing to purchase the furnace.Given the current situation, the furnace is best described as which type of cost?

Accepted Answer

The furnace is a sunk cost because the money spent on it cannot be recovered, and it cannot be used or sold due to the new emission requirements.

Question 8

Assume an all-equity firm has positive net earnings.The operating cash flow of this firm:

Accepted Answer

Operating cash flow increases when the tax rate decreases because lower taxes result in higher after-tax earnings, which contribute to higher cash flow.

Question 9

Bruce Moneybags owns several restaurants and hotels near a local interstate.One restaurant, Beef and More, originally cost $1.8 million, is currently fully paid for, but needs modernized.Bruce is trying to decide whether to accept an offer and sell Beef and More, as is, for the offer price of $1.1 million or renovate the restaurant himself.The projected renovation cost is $1.3 million.The restaurant would need to be shut down completely during the renovation which would cause an aftertax net loss of $90,000 in today's dollars.The estimated present value of the cash inflows from the renovated restaurant is $3.2 million.When analyzing the renovation project, what cost, if any, should be included for the current restaurant?

Accepted Answer

The opportunity cost of not selling the restaurant is $1.1 million, which should be included in the analysis as the cost of keeping the current restaurant.

Question 10

The net working capital invested in a project is generally:

Accepted Answer

Net working capital is typically recouped at the end of the project when the project is completed and the working capital is no longer needed.

Question 11

A proposed project will increase a firm's accounts payables.This increase is generally:

Accepted Answer

An increase in accounts payables means the firm is delaying cash payments, effectively providing a cash inflow at Time zero. This will eventually need to be paid, resulting in a cash outflow at the end of the project.

Question 12

The pro forma income statements for a proposed investment should include all of the following except:

Accepted Answer

Changes in net working capital are not typically included in pro forma income statements; they are more relevant to cash flow statements.

Question 13

Which of the following create cash inflows from net working capital?

Accepted Answer

An increase in accounts payable means the company is delaying payments, thus retaining cash longer. A decrease in inventory means less cash is tied up in stock, both contributing to cash inflows.

Question 14

The operating cash flows of a project:

Accepted Answer

The answer of The operating cash flows of a project:
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Question 15

CrossTown Builders is considering remodeling an old building it currently owns.The building was purchased ten years ago for $1.2 million.Over the past ten years, the firm rented out the building and used the rent to pay off the mortgage.The building is now owned free and clear and has a current market value of $1.9 million.The company is considering remodeling the building into industrial-type apartments at an estimated cost of $1.6 million.The estimated present value of the future income from these apartments is $4.1 million.Which one of the following defines the opportunity cost of the remodeling project?

Accepted Answer

The answer of CrossTown Builders is considering remodeling an old...

Question 16

Valley Forge and Metal purchased a truck five years ago for local deliveries.Which one of the following costs related to this truck is the best example of a sunk cost? Assume the truck has a usable life of five years.

Accepted Answer

A sunk cost is a cost that has already been incurred and cannot be recovered. The money spent last month repairing a damaged front fender is a sunk cost because it has already been spent and cannot be changed by any future decisions.

Question 17

The analysis of a new project should exclude:

Accepted Answer

Sunk costs are costs that have already been incurred and cannot be recovered, so they should not be included in the analysis of a new project.

Question 18

The tax shield approach to computing the operating cash flow, given a tax-paying firm:

Accepted Answer

The tax shield approach recognizes that depreciation, a non-cash expense, provides a tax shield by reducing taxable income, thereby creating a cash inflow through tax savings.

Question 19

Thrill Rides is considering adding a new roller coaster to its amusement park.The addition is expected to increase its overall ticket sales.In particular, the company expects to sell more tickets for its current roller coaster and experience extremely high demand for its new coaster.Sales for its boat ride are expected to decline but food and beverage sales are expected to increase significantly.All of the following are side effects associated with the new roller coaster with the exception of the:

Accepted Answer

Ticket sales for the new coaster are not a side effect; they are a direct effect of adding the new roller coaster. Side effects refer to the indirect impacts on other areas of the business.

Question 20

Ed owns a store that caters primarily to men.Each of the answer options represents an item related to a planned store expansion.Each of these items should be included in the expansion analysis with the exception of the cost:

Accepted Answer

Blueprints are typically a one-time cost incurred during the planning phase and not directly related to the ongoing operational costs or benefits of the expansion.

Quiz 9: Making Capital Investment Decisions