93.
You are trying to pick the least expensive car for your new delivery service. You have two
choices: the Scion xA, which will cost $13,000 to purchase and which will have OCF of –
$1,200 annually throughout the vehicle’s expected life of three years as a delivery vehicle;
and the Toyota Prius, which will cost $23,000 to purchase and which will have OCF of –
$550 annually throughout that vehicle’s expected five-year life. Both cars will be worthless
at the end of their life. If you intend to replace whichever type of car you choose with the
same thing when its life runs out, again and again out into the foreseeable future, and if
your business has a cost of capital of 16 percent, what is the difference in the EAC of the
two cars?
94.
Due to rapid growth, a computer superstore is contemplating expanding by adding another
location. Which of the following items should the financial officer NOT include in
estimating the cash flow associated with this expansion?
95.
ABC Engineering just bought a new machine. All of the following are examples of
incremental cash flows EXCEPT:
96.
Which of the following statements is correct with respect to Section 179 deductions?
97.
ABC Engineering just purchased a new machine. All of the following are examples of
incremental cash flows EXCEPT:
98.
All of the following are incremental cash flows attributable to the project EXCEPT:
99.
Equipment was purchased for $45,000 plus $2,000 in freight charges. Installation costs
were $1,500 and sales tax totaled $1,000. Hiring a special consultant to provide advice
during the selection of the equipment cost $3,000. What is this asset’s depreciable basis?
100.
Equipment was purchased for $50,000 plus $2,500 in freight charges. Installation costs
were $1,500 and sales tax totaled $1,000. Hiring a special consultant to provide advice
during the selection of the equipment cost $3,000. What is this asset’s depreciable basis?
101.
All of the following can be included in the depreciable basis of an asset EXCEPT:
102.
A manufacturing firm is planning on expanding its existing operations. The expansion
project is significant and will require the firm to house the expansion in a different
location. The firm is considering building on a lot they own across town. The lot is
currently vacant and it was paid for nearly 20 years ago. Given this information, which of
the following statements is correct?
103.
A local bank is contemplating opening a new branch bank in a large superstore across
town from their main office. It is estimated that the new branch will generate $20,000 after
expenses each month. The manager wonders if all these revenues should be considered
an incremental cash flow. Given this information, which of the following statements is
correct?
104.
A local bank is contemplating adding a new ATM to their lobby. They will need another
phone line to provide communications that has a monthly cost of $50 per month. This is an
example of:
105.
The research chemists at MegaClean created a new cleaner that keeps car and truck tires
shiny and clean for one year. They believe that this product will be highly successful and
will attract customers to purchase their existing line of household cleaning products. This
is an example of:
106.
Coke is planning on marketing a new drink called
Very Berry Coke
which is a mixture of
raspberry and blackberry flavors blended to perfection and added to the highly secret
Coca-Cola formula. This new product is expected to reduce the sales of their existing
product, Cherry Coke, by $10 million dollars per year. This is an example of a:
107.
AB Mining Company just commissioned a firm to identify if an unused portion of their mine
contains any silver or gold at a cost of $125,000. This is an example of a(n):
108.
An asset’s cost plus the amounts you paid for items such as sales tax, freight charges, and
installation and testing fees is referred to as the: ___________________.
109.
The process of estimating expected future cash flows of a project using only the relevant
parts of the balance sheet and income statements is referred to as:
110.
If a firm has already paid an expense or is obligated to pay one in the future, regardless of
whether a particular project is undertaken, that expense is a(n):
Essay Questions
111.
Give an example of each of the following: (a) opportunity cost, (b) substitutionary effect,
(c) complementary effect and (d) sunk cost.
112.
Will operating cash flow typically be larger or smaller than net income? Why?
113.
How would you compute the equity flotation cost if a firm were going to use a mixture of
retained earnings and new equity to finance a project? Give an example.
114.
Everything held constant, would you rather depreciate a project with straight-line
depreciation or with DDB?
115.
In a cost-cutting proposal, what might cause you to sometimes have a negative EBIT?
116.
When calculating operating cash flow for a project, why would one treat EBIT as a
negative for tax purposes when there is an operating loss?
117.
Which of the following expenditures qualify for the Section 179 deduction?
118.
To compute and use the Equivalent Annual Cost (EAC) approach of two or more
alternative assets, what would one need?
119.
Your company has spent $200,000 on research to develop a new computer game. The firm
is planning to spend $300,000 on a machine to produce the new game. Shipping and
installation costs of the machine will be capitalized and depreciated; they total $25,000.
The machine has an expected life of three years, a $50,000 estimated resale value, and
falls under the MACRS seven-year class life. Revenue from the new game is expected to
be $400,000 per year, with costs of $150,000 per year. The firm has a tax rate of 35
percent, an opportunity cost of capital of 10 percent, and it expects net working capital to
increase by $75,000 at the beginning of the project. What will the cash flows for this three–
year project be?
120.
Explain why we use pro forma statements to analyze project cash flows.
121.
Identify which cash flows we can incrementally apply to a project and which ones we
cannot.
122.
Explain how accelerated depreciation affects project cash flows.
123.
How do replacement projects’ cash flows differ from new projects’ cash flows?
124.
How is the initial investment adjusted for flotation costs?