Question 1

The top-down approach to computing the operating cash flow:
A) ignores all noncash items.
B) applies only if a project produces sales.
C) can only be used if the entire cash flows of a firm are included.
D) is equal to sales-costs-taxes + depreciation.
E) includes the interest expense related to a project.

Accepted Answer

A

Question 2

The cash flow in dollars received in year 3 is expected to be $12,372. The firm uses a real discount rate of 4% and the inflation rate is expected to be 2.5%. What is the real cash flow for year 3?
A) $13,916.82.
B) $11,488.63.
C) $10,998.66.
D) $10,242.15.
E) $14,944.75

Accepted Answer

To find the real cash flow for year 3, we need to adjust the nominal cash flow ($12,372) for inflation to see what its value would be in today's dollars. The formula to adjust for inflation is: Real Cash Flow = Nominal Cash Flow / (1 + inflation rate)^number of years. Here, the inflation rate is 2.5% or 0.025 as a decimal, and the number of years is 3. So, the calculation is $12,372 / (1 + 0.025)^3 = $12,372 / 1.077 = $11,488.63.

Question 3

Peter's Boats has sales of $760,000 and a profit margin of 5%. The annual depreciation expense is $80,000. What is the amount of the operating cash flow if the company has no long-term debt?
A) $34,000
B) $86,400
C) $118,000
D) $120,400
E) $123,900

Accepted Answer

C

Question 4

The QT Company is generating cashflow of $333,000 per year. If they invest in a new press they expect to increase their cashflow to $400,000 per year. The cash outflow for the new press is $250,000; to accept or reject the investment they have to consider:
A) the press cost of $250,000 and total cashflow of $400,000
B) the change in cashflow of $67,000 versus the price cost of $250,000
C) the current cashflow of $333,000 and the price cost of $250,000
D) the opportunity cost of the facility of $333,000.

Accepted Answer

To make the best decision, we need to look at the incremental cash flow generated by the investment, which is the difference between the cash flows with the investment and without it. In this case, the incremental cash flow is $400,000 - $333,000 = $67,000 per year.

We then need to compare this incremental cash flow with the cost of the investment, which is $250,000. The best choice is to accept the investment if the incremental cash flow is greater than the cost, and reject it if it is not.

In this case, the incremental cash flow of $67,000 is less than the cost of $250,000, so the investment should be rejected. Therefore, the best choice is B, as it takes into account the relevant cash flows and costs.

Question 5

A reduction in the sales of an existing product caused by the introduction of a new product is an example of a(n):
A) sunk cost.
B) opportunity cost.
C) erosion cost.
D) fixed cost.

Accepted Answer

Erosion cost refers to the reduction in sales of an existing product caused by the introduction of a new product. Sunk cost refers to costs that have already been incurred and cannot be recovered. Opportunity cost refers to the cost of the next best alternative foregone. Fixed cost is a cost that remains constant regardless of changes in output or sales.

Question 6

Which of the following is not a relevant consideration for evaluating new projects?
A) The change in the firm's fixed costs.
B) The change in the firm's variable costs.
C) The change in the firm's depreciation expense.
D) The change in the firm's overhead expense.
E) All of the above are relevant.

Accepted Answer

All of the options listed are relevant considerations for evaluating new projects. Evaluating the change in fixed costs, variable costs, depreciation expense, and overhead expenses is essential in determining the profitability and feasibility of a new project.

Question 7

What is the inflation rate given a nominal interest rate is 13% when the real rate is 6%?
A) 19.00%.
B) 6.60%.
C) 7.00%.
D) 19.78%.

Accepted Answer

The inflation rate can be approximated using the Fisher equation, which is (1 + nominal rate) = (1 + real rate) * (1 + inflation rate). Plugging in the given values, (1 + 0.13) = (1 + 0.06) * (1 + inflation rate), solving for the inflation rate gives approximately 6.60%.

Question 8

Interest expense is typically excluded in the project cashflow because:
A) all projects are always financed only by equity
B) taxes can not be adjusted for the correct debt rate
C) the discount rate or WACC reflects the cost of debt
D) the analysis is too crude to handle debt impacts

Accepted Answer

The discount rate or WACC already includes the cost of debt, so there is no need to separately include interest expense in the project cashflow.

Question 9

Ben's Border Café is considering a project which will produce sales of $16,000 and increase cash expenses by $10,000. If the project is implemented, taxes will increase from $23,000 to $24,500 and depreciation will increase from $4,000 to $5,500. What is the amount of the operating cash flow using the top-down approach?
A) $4,000
B) $4,500
C) $6,000
D) $7,500
E) $8,500

Accepted Answer

The answer of Ben's Border Café is considering a project...

Question 10

What is the nominal rate of interest given a real rate of interest of 5% and an inflation rate of 7%?
A) 12.0%.
B) 2.0%.
C) 12.35%.
D) 1.90%.

Accepted Answer

Nominal interest rate = Real interest rate + Inflation rate
Nominal interest rate = 5% + 7%
Nominal interest rate = 12%.
Therefore, the nominal interest rate is 12%, which is option C.

Question 11

Ronnie's Coffee House is considering a project which will produce sales of $6,000 and increase cash expenses by $2,500. If the project is implemented, taxes will increase by $1,300. The additional depreciation expense will be $1,000. An initial cash outlay of $2,000 is required for net working capital. What is the amount of the operating cash flow using the top-down approach?
A) $200
B) $1,500
C) $2,200
D) $3,500
E) $4,200

Accepted Answer

The top-down approach for calculating operating cash flow is:

Operating Cash Flow = EBIT + Depreciation − Taxes

Given the data:

Sales = $6,000
Cash Expenses = $2,500
Additional Depreciation = $1,000
Initial cash outlay for net working capital = $2,000
Taxes = $1,300

EBIT = Sales – Cash Expenses – Additional Depreciation
= $6,000 – $2,500 – $1,000
= $2,500

Therefore, Operating Cash Flow = EBIT + Depreciation – Taxes
= $2,500 + $1,000 – $1,300
= $2,200

Hence, the correct answer is C) $2,200

Question 12

A firm purchases a new truck for $30,000. It will be depreciated over 5 years at $6,000 per year. If the tax rate is 30% what is the time 0 cashflow.
A) -6,000
B) -21,000
C) -30,000
D) -28,200

Accepted Answer

The time 0 cashflow is the initial investment, which is the price of the truck, $30,000. It is not affected by the depreciation or tax rate, so the correct answer is C.

Question 13

Sales for year 2 of the new project are expected to increase by 10%. Current assets are expected to increase by 17% for every dollar increase in sales while accounts payable are expected to increase by 6%. For year 2 the change in cashflows due to working capital will be:
A) +10% of sales
B) -10% of sales
C) +1.1% of sales
D) -1.1% of sales

Accepted Answer

The change in cash flows due to working capital is calculated by the increase in current assets minus the increase in accounts payable for every dollar increase in sales. With a 17% increase in current assets and a 6% increase in accounts payable for every dollar increase in sales, the net effect is an 11% increase in working capital needs for every dollar increase in sales. However, since this is an additional cost or use of cash, it results in a negative impact on cash flows, hence -11% of sales. Given the question specifies a 10% increase in sales, the change in cash flows due to working capital would be -1.1% of sales (10% of the 11% increase).

Question 14

The bottom-up approach to computing the operating cash flow applies only when:
A) both the depreciation expense and the interest expense are equal to zero.
B) the interest expense is equal to zero.
C) the project is a cost-cutting project.
D) no fixed assets are required for the project.
E) taxes are ignored and the interest expense is equal to zero.

Accepted Answer

The bottom-up approach to computing the operating cash flow involves adding up all the individual cash inflows and outflows associated with the project, including changes in working capital, revenue, and expenses. This approach only works when the interest expense is equal to zero because the calculation of operating cash flow does not take into account financing activities or the cost of debt. If interest expense is present, it needs to be accounted for separately in the calculation of net cash flow.

Question 15

The value of a previously purchased building used by a proposed project is an example of a(n):
A) sunk cost.
B) opportunity cost.
C) erosion cost.
D) fixed cost.

Accepted Answer

The answer of The value of a previously purchased building...

Question 16

The cash flow in dollars received in year 3 is expected to be $12,372. The firm uses a real discount rate of 4% and the inflation rate is expected to be 2.5%. What is the present value of the year 3 cash flow?
A) $10,213.35.
B) $12,372.00.
C) $9,777,77.
D) $9,105.23.
E) $13,285.83.

Accepted Answer

To find the present value of the year 3 cash flow, we need to discount it back to the present using the real discount rate. The formula for the present value (PV) is PV = FV / (1 + r)^n, where FV is the future value ($12,372), r is the real discount rate (4%), and n is the number of years (3). The real discount rate already accounts for inflation, so we don't need to adjust the cash flow for inflation. Plugging the numbers into the formula gives us PV = $12,372 / (1 + 0.04)^3 = $10,213.35.

Question 17

You spent $500 last week fixing the transmission in your car. Now, the brakes are acting up and you are trying to decide whether to fix them or trade the car in for a newer model. In analyzing the brake situation, the $500 you spent fixing the transmission is a(n) _____ cost.
A) opportunity
B) fixed
C) incremental
D) sunk

Accepted Answer

The $500 spent fixing the transmission is a sunk cost, meaning it is a cost that has already been incurred and cannot be recovered. It should not be considered in the decision-making process for whether to fix the brakes or trade in the car. The decision should be based on the current cost and value of fixing the brakes compared to the cost and value of trading in the car for a newer model.

Question 18

Le Place has sales of $439,000, depreciation of $32,000, and net working capital of $56,000. The firm has a tax rate of 34% and a profit margin of 6%. The firm has no interest expense. What is the amount of the operating cash flow?
A) $49,384
B) $52,616
C) $54,980
D) $58,340
E) $114,340

Accepted Answer

The answer of Le Place has sales of $439,000, depreciation...

Question 19

One of the key differences between corporate finance and financial accounting courses is:
A) the focus on cashflows instead of earnings.
B) the focus on marginal tax rates versus average tax rates.
C) the role of total income flow versus incremental flows.
D) the focus on corporate avarice versus stewardship.

Accepted Answer

Corporate finance courses are typically focused on analyzing and managing cashflows, while financial accounting courses are focused on reporting financial information, including earnings. Understanding cashflows is essential for making investment and financing decisions, while earnings are primarily used for financial reporting and analysis purposes.

Question 20

Money that the firm has already spent or is committed to spend regardless of whether a project is taken is called a(n):
A) sunk cost.
B) opportunity cost.
C) erosion cost.
D) fixed cost.

Accepted Answer

Sunk costs are those costs that have already been incurred and cannot be recovered. These costs should not be considered when making decisions about whether to proceed with a project, as they are irrelevant to the future costs and benefits of the project.

Quiz 8: Net Present Value and Capital Budgeting

The top-down approach to computing the operating cash flow:

The cash flow in dollars received in year 3 is expected to be $12,372. The firm uses a real discount rate of 4% and the inflation rate is expected to be 2.5%. What is the real cash flow for year 3?

Peter's Boats has sales of $760,000 and a profit margin of 5%. The annual depreciation expense is $80,000. What is the amount of the operating cash flow if the company has no long-term debt?

The QT Company is generating cashflow of $333,000 per year. If they invest in a new press they expect to increase their cashflow to $400,000 per year. The cash outflow for the new press is $250,000; to accept or reject the investment they have to consider:

A reduction in the sales of an existing product caused by the introduction of a new product is an example of a(n) :

Which of the following is not a relevant consideration for evaluating new projects?

What is the inflation rate given a nominal interest rate is 13% when the real rate is 6%?

Interest expense is typically excluded in the project cashflow because:

What is the nominal rate of interest given a real rate of interest of 5% and an inflation rate of 7%?

A firm purchases a new truck for $30,000. It will be depreciated over 5 years at $6,000 per year. If the tax rate is 30% what is the time 0 cashflow.

Sales for year 2 of the new project are expected to increase by 10%. Current assets are expected to increase by 17% for every dollar increase in sales while accounts payable are expected to increase by 6%. For year 2 the change in cashflows due to working capital will be:

The bottom-up approach to computing the operating cash flow applies only when:

The value of a previously purchased building used by a proposed project is an example of a(n) :

The cash flow in dollars received in year 3 is expected to be $12,372. The firm uses a real discount rate of 4% and the inflation rate is expected to be 2.5%. What is the present value of the year 3 cash flow?

You spent $500 last week fixing the transmission in your car. Now, the brakes are acting up and you are trying to decide whether to fix them or trade the car in for a newer model. In analyzing the brake situation, the $500 you spent fixing the transmission is a(n) _____ cost.

Le Place has sales of $439,000, depreciation of $32,000, and net working capital of $56,000. The firm has a tax rate of 34% and a profit margin of 6%. The firm has no interest expense. What is the amount of the operating cash flow?

One of the key differences between corporate finance and financial accounting courses is:

Money that the firm has already spent or is committed to spend regardless of whether a project is taken is called a(n) :