Operations Management: Processes and Supply Chains, 12e (Krajewski)
Supplement F Financial Analysis
1) The time value of money implies that a dollar in hand today is worth more than a dollar to be received
in the future.
2) If an invested amount and its accumulated interest is continually reinvested, its future value is the
principle multiplied by one plus the interest rate raised to the number of periods the investment
continues.
3) Discounting is the process by which interest on an investment accumulates, and then earns interest
itself for the remainder of the investment period.
4) The value of an investment at the end of the period over which interest is compounded is called the
future value of the investment.
5) The present value of an investment is the amount that must be invested now to accumulate to a certain
amount in the future at a specific interest rate.
6) The interest rate is also called the discount rate.
7) The value of an investment at the end of the period over which interest is compounded is called the:
A) time value of money.
B) present value of an investment.
C) future value of an investment.
D) None of the above.
8) The amount to be invested now to accumulate to a certain amount in the future at a specified interest
rate is called the:
A) time value of money.
B) present value of an investment.
C) future value of an investment.
D) None of the above.
9) An investor puts $10,000 in an account earning 4 percent compounded interest. At the end of three
years, the account will have a value of:
A) less than $11,000.
B) between $11,000 and $11,200.
C) between $11,200 and $11,400.
D) more than $11,400.
10) It is estimated that the cost for the first year of college at Massive University, the state school with the
best operations management program, will be $60,000 by the time your son is ready to enroll as a student.
If prevailing interest rates will average 5 percent, what amount should you invest now to pay his first
year’s tuition eight years from now?
A) less than $35,000
B) between $35,000 and $38,000
C) between $38,000 and $41,000
D) more than $41,000
11) Conhugeco is eyeing a new Plotzer 3,000, which has a list price of $12,000,000. How much should they
set aside today if they want to make their purchase one year from now and their interest-bearing
checking account pays 3% annually?
A) about $11.6 million
B) about $11.2 million
C) about $12.3 million
D) about $12.8 million
12) Conhugeco’s CEO is ready to step down and wants to sock away enough money in his offshore
Caribbean accounts to generate $150,000 per year for the next ten years. If he can secure a 4% interest rate
from the bank, how much does he need to earmark today?
A) about $1.1 million
B) about $1.2 million
C) about $1.5 million
D) about $1.4 million
13) The ________ is the concept that a dollar in hand today is worth more than a dollar to be received in
the future.
14) The process by which interest on an investment accumulates and then earns interest itself for the
remainder of the investment period is called ________.
15) The amount that must be invested now to accumulate to a certain amount in the future at a specified
interest rate is called the ________.
16) The reduction of the value of money received in the future when the interest rate is known is called
________.
17) In the formula P = the term r is ________.
18) A(n) ________ is a series of payments of a fixed amount for a specified number of years.
19) The present value factors found in Table F.1 were calculated by changing the values of ________ and
________.
20) Cash flows should be converted to ________ amounts before applying the net present value, payback,
or internal rate of return method to them.
21) Explain the time-value-of-money concept.
22) What is the future value of an investment of $10,000 at 8% interest after 10 years?
23) Nathan would have to wait until he was 35 to receive his inheritance, which was entirely too long in
light of his impressive shopping list. He had almost given up hope when he saw an interesting offer one
afternoon while watching television. In the advertisement, a company expressed a willingness to give
him cash now if he would sign over his inheritance 11 years from now. If they use a 15% interest rate,
what percentage of his inheritance will Nathan receive today?
24) Acapella University offers to lock–in a student’s tuition for a four year period. If tuition is $30,000 per
year (payable at the end of each year) and the interest rate is currently 8%, what amount of money now
would enable you to withdraw the $30,000 figure at the end of each of the next four years?
25) Jake buys a new work truck every four years regardless of the condition of his current vehicle. His
next truck will cost $45,000 and Jake estimates it will have a salvage value of $20,000 when it’s time to buy
a replacement. What is the annual depreciation?
8
Copyright © 2019 Pearson Education, Inc.
F.2 Methods of Financial Analysis
1) Depreciation is not a legitimate cash flow.
2) Straight-line depreciation is an accelerated depreciation method.
3) Straight-line depreciation is the simplest way to calculate depreciation and usually is adequate for
internal planning purposes.
4) To calculate straight-line depreciation, you divide the purchase price of the investment by the asset’s
expected economic life.
5) The net present value (NPV) method evaluates an investment by calculating the present values of all
after-tax total cash flows and then subtracting the original investment amount from their total.
6) Depreciation:
A) is not an allowance for the consumption of capital.
B) is not a legitimate cash flow.
C) does not act as a tax shield.
D) does not consider the salvage value of an item.
7) Which method of analysis does not consider the time value of money?
A) net present value (NPV)
B) internal rate of return (IRR)
C) payback
D) future value of an investment (FVI)
8) A poultry farmer is interested in purchasing an egg tester that can measure weight, albumin height,
yolk color, and Haugh units all at the touch of a button. The unit will cost $6,900 and is expected to last 10
years at which point it can be sold for $500 to a farmer in a less stringently controlled egg market. What is
the annual depreciation under the straight line method?
A) $640
B) $690
C) $50
D) $740
9) A poultry farmer is interested in purchasing an industrial egg tester that can measure weight, albumin
height, yolk color, and Haugh units all at the touch of a button. The unit will cost $6900 and is expected to
last 10 years at which point it can be sold for $1,000 to a farmer in a less stringently controlled egg market.
What is the annual depreciation for year 4 under the MACRS method? A copy of Table F.3 is appended to
your exam.
A) $862
B) $795
C) $737
D) $680
10) Which of the following is an accelerated depreciation method?
A) straight-line depreciation
B) MACRS
C) net present value
D) after-tax cash flow
11) Lisa is pondering the construction and operation of a home-based cattery. She expects it will cost
$35,000 to construct and will have a lifespan of four years before it collapses due to faulty construction
and ammonia rot. Cash flows during those four glorious years are estimated as follows:
Year
Inflow
Outflow
1
6,000
3,000
2
7,000
3,300
3
8,000
3,600
4
9,000
3,900
If the interest rate is 5%, what is the present value of the cattery project?
A) -18,800
B) -20,790
C) -26,378
D) -47,168
12) Lisa is pondering the construction and operation of a home-based cattery. She expects it will cost
$15,000 to construct and will have a lifespan of four years before it collapses due to faulty construction
and ammonia rot. Cash flows during those four glorious years are estimated as follows:
Year
Inflow
Outflow
1
7,000
3,000
2
8,000
3,300
3
9,000
3,600
4
10,000
3,900
If the interest rate is 5%, what is the present value of the cattery project?
A) 2,756
B) 3,124
C) 2,983
D) 3,277
13) Lisa is pondering the construction and operation of a home-based cattery. She expects it will cost
$25,000 to construct and will have a lifespan of four years before it collapses due to faulty construction
and ammonia rot. Cash flows during those four glorious years are estimated as follows:
Year
Inflow
Outflow
1
10,000
3,000
2
12,000
4,000
3
13,000
5,000
4
10,000
6,000
If the interest rate is 5%, what is the present value of the cattery project?
A) 8,522
B) 8,823
C) 9,124
D) 9,625
14) The NCX10 now features a coffee brewing subassembly, so Alex budgets the following cash outlays
and incomes for the next three years. If the interest rate is 25%, what is the present value of this
investment?
Period
Inflow
Outflow
0
$5,000
$20,000
1
7,000
1,000
2
8,000
1,500
3
7,000
2,000
A) -$3,264
B) -$3,397
C) -$3,422
D) -$3,480
15) The NCX10 now features a coffee brewing subassembly, so Alex budgets the following cash outlays
and incomes for the next five years. If the interest rate is 8%, what is the present value of this investment
after the second year?
Period
Inflow
Outflow
0
$5,000
$20,000
1
7,000
1,000
2
8,000
1,500
3
7,000
2,000
4
6,000
3,000
5
5,000
5,000
A) $3,264
B) $5,572
C) -$3,871
D) -$9,444
16) ________ is the cash that will flow into and out of the organization.
17) ________ are the amounts of cash that flow into and out of the organization solely because of the
project.
18) ________ is an allowance for the consumption of capital.
19) The ________ method of calculating annual depreciation is the simplest, and usually is adequate for
internal planning purposes.
20) Since 1986, the only acceptable accelerated depreciation method is the ________.
21) The cash flow from the sale or disposal of plant and equipment at the end of a project‘s life is its
________.
22) The ________ is the interest rate that is the lowest desired return on an investment.
15
23) The ________ is the discount rate that makes the NPV of a project zero.
24) The ________ is used to evaluate projects by calculating the amount of time that will elapse before the
total of after-tax cash flows will equal the initial investment.
25) The term ________ is often used to describe the common U.S. business practice of focusing on short–
term results from low-risk projects via analysis by NPV or IRR calculations.
26) Describe the basic techniques of financial analysis.
Answer: The three techniques discussed in this textbook are net present value, internal rate of return,
and payback. Net present value (NPV) calculates the present value of all future after-tax cash flows and
27) What are the different types of depreciation? What are the advantages and disadvantages of each?
Answer: The two types of depreciation discussed in the text are straight-line and accelerated. The
straight-line depreciation method of calculating annual depreciation is the simplest and usually is
28) What is payback from the financial perspective? Why would a manager choose to use this approach to
investment analysis?
Answer: The payback method determines how much time will elapse before the total of after-tax cash
flows will equal, or pay back, the initial investment. Even though it is scorned by many academics, the
29) What are the problems and advantages of managing by the numbers?
17
F.3 Using Judgment with Financial Analysis
1) What is managing by the numbers? Explain whether this is beneficial and support your position.
Answer: Managing by the numbers is a term used to describe an overreliance on easily quantifiable
courses of action that typically are realizable in the short-term (i.e., will produce results that are reflected
in quarterly reports). The precision and analytical detachment that come from using the NPV, IRR, or