Question 1

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 the start of the project, which will need to be paid later, resulting in a cash outflow at the end.

Question 2

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

Accepted Answer

The tax shield approach considers the tax deduction resulting from depreciation expenses, which creates a cash inflow due to the reduction in taxes paid. Therefore, the correct statement is "recognizes that depreciation creates a cash inflow." Choices A, B, and C are incorrect because the tax shield approach considers both interest expense and taxes, separates cash inflows and outflows, and considers changes in net working capital, respectively. Choice D is incorrect because depreciation affects operating cash flow, and the tax shield approach accounts for this effect.

Question 3

Firm A uses straight-line depreciation.Firm B uses MACRS depreciation.Both firms bought $60,000 worth of equipment last year.Both firms are in the 35 percent tax bracket.The operating cash flows for each firm are identical except for the depreciation effects.Given this,you know the:

Accepted Answer

Firm A's straight-line depreciation will result in a higher depreciation expense in the early years, leading to lower taxable income and therefore lower taxes paid. On the other hand, Firm B's MACRS depreciation will result in a greater tax benefit in the early years. However, since the operating cash flows are identical except for the depreciation effects, in year 2 Firm A will have a higher taxable income and will pay more taxes than Firm B. This will result in Firm A having a lower operating cash flow than Firm B, making C the correct answer. The other answer choices are not necessarily true and are not supported by the information given in the question.

Question 4

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,Weston 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 it has already been purchased and cannot be recovered or sold. It is now worthless to Weston Steel as it cannot be used or sold.

Question 5

Isabella is considering three mutually exclusive options for the additional space she just added to her specialty women's store.The cost of the expansion was $127,000.She can use this additional space to add a fabric and quilting section,add an exclusive gifts department,or expand into imported decorator items for the home.She estimates the present value of these options at $114,000 for fabric and quilting,$163,000 for exclusive gifts,and $138,000 for decorator items.Which option(s),if any,should Isabella accept?

Accepted Answer

Isabella should only accept the option for the exclusive gifts department. This is because the present value of this option is the highest, at $163,000, which is greater than the cost of the expansion at $127,000. The other two options, fabric and quilting and decorator items for the home, have present values lower than the cost of the expansion, meaning that accepting them would result in a net loss. Therefore, option C is the best choice for Isabella.

Question 6

The managers of H.R Construction are considering remodeling plans for an old building the firm currently owns.The building was purchased eight years ago for $689,000.Over the past eight 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 $898,000.The firm is considering remodeling the building into a conference centre and sandwich bar at an estimated cost of $1.7 million.The estimated present value of the future income from this centre is $2.9 million.Which one of the following defines the opportunity cost of the remodeling project?

Accepted Answer

The opportunity cost of the remodeling project is the value of the next best alternative that must be given up in order to undertake the project. In this case, the current market value of the building represents the value of the building in its current use, which is as a rental property. Therefore, the opportunity cost of the remodeling project is the potential income that could be earned by continuing to rent out the building in its current state, which is represented by the current market value of the building. The other options (A, B, D, and E) do not accurately represent the opportunity cost of the project.

Question 7

The operating cash flows of a project:

Accepted Answer

The answer of The operating cash flows of a project:
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Question 8

Scenario analysis is best described as the determination of the:

Accepted Answer

Scenario analysis involves identifying and evaluating different possible future scenarios and their potential impact on a project. It helps determine a reasonable range of project outcomes considering various factors such as economic conditions, market trends, and competitor actions. Therefore, the best description of scenario analysis is the determination of the reasonable range of project outcomes.

Question 9

The net working capital invested in a project is generally:

Accepted Answer

The net working capital invested in a project is expected to be recouped at the end of the project, as it represents the difference between the current assets and current liabilities of the project and is required to finance the day-to-day operations. Therefore, it is not a sunk cost, an opportunity cost or recouped in the first year of the project. However, it is not depreciated to a zero balance over the life of the project either, as it is expected to be fully recovered at the end.

Question 10

Steve owns a store that caters primarily to men and their hobbies.He is contemplating greatly expanding the hunting and fishing section of the store.If he does this,he expects his fishing and hunting sales will increase,his camping gear sales will increase,and his model train sales will decrease.Which of the following should Steve include in his revenue projection for the expansion project?
I.Increase in fishing and hunting sales
II.Increase in camping gear sales
III.Decrease in model train sales

Accepted Answer

Steve should include all three factors in his revenue projection: the increase in fishing and hunting sales, the increase in camping gear sales, and the decrease in model train sales, as they all impact the overall revenue.

Question 11

Assume a firm has positive net earnings.The operating cash flow of this firm:

Accepted Answer

Operating cash flow increases when tax rates decrease because lower taxes result in higher after-tax earnings, which contribute to higher cash flow from operations.

Question 12

Which of the following are cash inflows from net working capital?
I.Increase in accounts payable
II.Increase in inventory
III.Decrease in accounts receivable
IV.Decrease in fixed assets

Accepted Answer

An increase in accounts payable and a decrease in accounts receivable both result in cash inflows, as they respectively delay cash outflows and accelerate cash inflows.

Question 13

Which of the following should be included in the analysis of a proposed investment?
I.Erosion effects
II.Opportunity costs
III.Sunk costs
IV.Side effects

Accepted Answer

All of the options should be included in the analysis of a proposed investment. Erosion effects refer to the possible decline of revenue or added expenses in other areas due to the investment. Opportunity costs refer to the potential profit or benefits that are forfeited as a result of choosing one investment over another. Sunk costs refer to expenses that have already been incurred and cannot be recovered. Side effects refer to the potential positive or negative impact of the investment on other aspects of the business or society.

Question 14

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

Accepted Answer

A best-case scenario analysis would involve using the most favorable values for all relevant variables. Therefore, we would choose the lowest expected value for fixed costs because it would result in the highest possible profits.

Question 15

Which of the following should be included when compiling pro forma statements for a proposed investment?
I.Forecasted sales
II.Start-up costs
III.Aftertax salvage value of any assets sold
IV.Anticipated changes in net working capital

Accepted Answer

Pro forma statements should include all relevant financial projections related to the investment, including forecasted sales, start-up costs, aftertax salvage value of assets sold, and anticipated changes in net working capital.

Question 16

Scenario analysis asks questions such as:

Accepted Answer

The answer of Scenario analysis asks questions such as:
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Question 17

Bruce Moneybags owns several restaurants and hotels near a local interstate.One restaurant,Beef and More,needs modernized.He 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 a net operating cash flow loss of $210,000 in today's dollars.The estimated present value of the cash inflows from the renovated restaurant are $3.2 million.When analyzing the renovation project,what opportunity cost,if any,should be included for the current restaurant? Assume the restaurant is totally paid for and any future costs will be paid in cash.

Accepted Answer

The opportunity cost is the value of the current offer to buy the restaurant, which is $1.1 million. This is the amount Bruce would forgo if he chooses to renovate instead of selling.

Question 18

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

Accepted Answer

Decrease in fixed costs will result in a decrease in operating expenses, thereby increasing the operating cash flow computed using the tax shield approach.

Question 19

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 eight years.

Accepted Answer

A sunk cost is a cost that has already been incurred and cannot be recovered. In this case, the money spent on repairing a damaged front fender is a sunk cost as it has already been spent and cannot be recovered. The other choices are not sunk costs as they represent future costs or costs that can be avoided if the truck is not used.

Question 20

Lakeside Rides is adding a new roller coaster to its amusement park.The firm expects this addition to increase its overall ticket sales and increase attendance at its park.In particular,the firm 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.Which of the following are considered side effects associated with the new roller coaster?
I.Ticket sales for the new roller coaster
II.Change in ticket sales for the existing coaster
III.Change in ticket sales for the boat ride
IV.Change in food and beverage sales

Accepted Answer

The side effects associated with the new roller coaster include:
I. Ticket sales for the new roller coaster - this is expected to generate high demand and increase overall ticket sales.
II. Change in ticket sales for the existing coaster - the firm expects to sell more tickets for its current roller coaster as well due to increased attendance.
III. Change in ticket sales for the boat ride - sales for the boat ride are expected to decline as visitors are more likely to prioritize the new and existing roller coasters.
IV. Change in food and beverage sales - food and beverage sales are expected to increase significantly as more visitors attend the park.

Quiz 9: Making Capital Investment Decisions