Question 1

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 cash flows 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 2

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.
D) fixed cost.

Accepted Answer

Sunk costs are those that have already been incurred and cannot be recovered, regardless of whether the project is undertaken or not. Therefore, it is not relevant to decision making and should not be considered in determining whether to undertake a project or not. Option B refers to the cost of the best alternative forgone, Option C refers to the decline in revenue of existing products due to the introduction of a new product, and Option D refers to the cost that does not vary with the level of production.

Question 3

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 4

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 5

One of the key differences between corporate finance and financial accounting courses is:
A) the focus on cash flows 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 focus on analyzing and managing the cash flows of a company, while financial accounting courses focus on recording and reporting earnings and financial statements. Therefore, the key difference between the two is the focus on cash flows versus earnings.

Question 6

The QT Company is generating cash flow of $333,000 per year.If they invest in a new press they expect to increase their cash flow 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 cash flow of $400,000.
B) the change in cash flow of $67,000 versus the price cost of $250,000.
C) the current cash flow of $333,000 and the price cost of $250,000.
D) the opportunity cost of the facility of $333,000.

Accepted Answer

The best choice is to consider the change in cash flow of $67,000 versus the price cost of $250,000. This is because the decision to invest in the new press should be based on whether the increase in cash flow justifies the cost of the investment. In this case, the increase in cash flow is $67,000 ($400,000 - $333,000), while the cost of the investment is $250,000. Therefore, the decision should be based on the net present value of $67,000, which can be calculated using a discounted cash flow analysis.

Question 7

Bluedo's has sales of $435,000,depreciation of $35,000,and net working capital of $56,000.The firm has a tax rate of 34% and a profit margin of 8%.The firm has no interest expense.What is the amount of the operating cash flow?
A) $46,068
B) $57,968
C) $69,800
D) $322,100
E) $114,340

Accepted Answer

Operating cash flow (OCF) can be calculated using the formula: EBIT(1-Tax rate) + Depreciation - ∆NWC 
EBIT = Sales - Cost of goods sold
Cost of goods sold = Sales x (1 - Profit Margin)

Plugging in the given values, we get:
Cost of goods sold = $435,000 x (1 - 0.08) = $400,200
EBIT = $435,000 - $400,200 = $34,800
Tax rate = 34%
Depreciation = $35,000
Change in net working capital (∆NWC) = $56,000 (given)

OCF = $34,800(1-0.34) + $35,000 - $56,000 = $69,800

Therefore, the best choice is C, $69,800.

Question 8

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.
D) fixed cost.

Accepted Answer

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

Question 9

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

The answer of Peter's Boats has sales of $760,000 and...

Question 10

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 11

A project's operating cash flow will increase when:
A) the depreciation expense increases.
B) the sales projections are lowered.
C) the interest expense is lowered.
D) the net working capital requirement increases.
E) the earnings before interest and taxes decreases.

Accepted Answer

Depreciation expense is a non-cash expense that is added back to net income when calculating operating cash flow. Therefore, an increase in depreciation expense will result in an increase in operating cash flow.

Question 12

What is the nominal rate of interest given a real rate of interest of 5% and an inflation rate of 7%?
A) 12.00%
B) 2.00%
C) 12.35%
D) 1.90%

Accepted Answer

The nominal rate of interest can be calculated using the formula: (1 + real rate of interest) × (1 + inflation rate) - 1. Plugging in the values, we get (1 + 0.05) × (1 + 0.07) - 1 = 12.35%. Therefore, the best choice is C.

Question 13

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.
D) fixed cost.

Accepted Answer

Erosion refers to the reduction in sales or market share of an existing product caused by the introduction of a new product. A sunk cost is a cost that has already been incurred and cannot be recovered, an opportunity cost is the cost of foregoing the next best alternative, and a fixed cost remains constant regardless of changes in sales or production.

Question 14

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 of...

Question 15

Changes in the net working capital:
A) can affect the cash flows of a project every year of the project's life.
B) only affect the initial cash flows of a project.
C) are included in project analysis only if they represent cash outflows.
D) are generally excluded from project analysis due to their irrelevance to the total project.
E) affect the initial and the final cash flows of a project but not the cash flows of the middle years.

Accepted Answer

Changes in net working capital can affect the cash flows of a project every year of the project's life. This is because net working capital represents the difference between a company's current assets and current liabilities, which can fluctuate throughout the life of a project. As the project requires more or less investment in inventory, accounts receivable, or accounts payable, the net working capital will either increase or decrease, affecting the project's cash flows every year.

Question 16

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 on fixing the transmission is a sunk cost, meaning it is a cost that has already been incurred and cannot be recovered. It should not factor into the decision of whether to fix the brakes or trade in the car. The decision should be based on the potential costs and benefits of each option moving forward.

Question 17

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 18

A project will produce an operating cash flow of $7,300 a year for three years.The initial cash investment in the project will be $11,600.The net after-tax salvage value is estimated at $3,500 and will be received during the last year of the project's life.What is the net present value of the project if the required rate of return is 11%?
A) $8,798.29
B) $9,896.87
C) $10,072.72
D) $13,353.41
E) $20,398.29

Accepted Answer

The answer of A project will produce an operating cash...

Question 19

Interest expense is typically excluded in the project cash flow because:
A) all projects are always financed only by equity.
B) taxes cannot 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 weighted average cost of capital (WACC) already reflects the cost of debt, so including interest expense separately would be double counting it.

Question 20

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 cash flow?
A) -$6,000
B) -$21,000
C) -$30,000
D) -$28,200

Accepted Answer

The time 0 cash flow is the initial investment, which is the purchase price of the truck. Therefore, the time 0 cash flow is -$30,000. The depreciation expense will be taken into account for tax purposes, but it does not affect the initial investment in the truck.

Quiz 8: Net Present Value and Capital Budgeting

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 cash flows due to working capital will be:

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

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

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

The QT Company is generating cash flow of $333,000 per year.If they invest in a new press they expect to increase their cash flow 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:

Bluedo's has sales of $435,000,depreciation of $35,000,and net working capital of $56,000.The firm has a tax rate of 34% and a profit margin of 8%.The firm has no interest expense.What is the amount of the operating cash flow?

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

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 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 project's operating cash flow will increase when:

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

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

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?

Changes in the net working capital:

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.

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?

Interest expense is typically excluded in the project cash flow because:

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 cash flow?