60.
Which one of the following categories would be least likely to require annual adjustments in a capital budgeting analysis due
to the effects of inflation?
61.
Methods of accelerated depreciation:
62.
Why is accelerated depreciation often favored for the corporation’s set of tax books?
63.
The modified accelerated cost recovery system (MACRS) allows an increase:
64.
Under the MACRS:
65.
A firm plans to purchase a $50,000 asset that will be depreciated straight-line over a 5-year life to a zero salvage value. What
is the present value of the resulting depreciation tax shield if the tax rate is 35% and the discount rate is 10%?
66.
The present value of the depreciation tax shield at any given discount rate is:
67.
When the real rate of interest is less than the nominal rate of interest, then:
68.
When a depreciable asset is ultimately sold, the sales price is:
69.
Which one of the following statements regarding depreciation is correct?
70.
The statement “We’ve got too much invested in that project to pull out now” possibly illustrates the need to:
71.
What is the undiscounted cash flow in the final year of an investment, assuming $10,000 after–tax cash flows from
operations, $1,000 from the sale of a fully depreciated machine, a $2,000 investment in working capital, and a 35% tax rate?
72.
At a 13% cost of capital, a project’s NPV is $100,000 if you invest today. By what amount must the initial cost of the project
decrease before you would wish to wait 2 years before investing? Assume all else is held constant.
73.
Which of the following correctly adjusts for depreciation when calculating a project’s operating cash flow?
74.
A new inventory system will immediately reduce inventory levels by $100,000. If this reduction is permanent and the cost of
capital is 13%, how does the net working capital change affect company value?
75.
The opportunity cost of a resource should be considered in project analysis, unless:
76.
A new project requires an increase in both current assets and current liabilities of $125,000 each. What is the overall impact
on the net working capital investment?
77.
The primary difficulty in the allocation of overhead costs to prospective projects is that the:
78.
If inflation is forecast to increase, which of the company’s following cash flows is most likely to change?
79.
A project costs $12,800 and is expected to provide a real cash inflow of $10,000 at the end of each of years 1 through 5.
Calculate the net present value of this project if inflation is expected to be 4% in each year and the firm employs a nominal
discount rate of 10.76%.
80.
An investment today of $25,000 promises to return $10,000 annually for the next 3 years. What is the real rate of return on
this investment if inflation averages 6% annually during the period?
81.
What nominal annual return is required on an investment for an investor to experience a 12% gain in purchasing power?
Assume inflation is 4%.
82.
What is the NPV of a 6-year project that costs $100,000, has annual revenues of $50,000 and costs of $15,000? Assume the
investment can be depreciated for tax purposes straight-line over 6 years, the corporate tax rate is 35%, and the discount rate
is 14%.
83.
An investment of $120,000 can be depreciated for tax purposes straight line over 6 years. The corporate tax rate is 40%.
When calculating cash flow:
84.
A project that increased sales was accompanied by a $50,000 increase in inventory, a $20,000 increase in accounts
receivable, and a $25,000 increase in accounts payable. Assuming these amounts remain constant, by how much has net
working capital increased?
85.
Which of the following costs probably should not be allocated to the investment needed for a new project?
86.
A parcel of corporate land was recently chosen as the new plant site. What cost allocation should the land receive, based on
the following: original cost of $200,000, highest market value during time of ownership of $300,000, net book value of
$200,000, a recent offer to purchase for $250,000?
87.
Which of the following is true of the depreciation tax shield?
88.
Assuming an asset has been fully depreciated according to its MACRS class life, which one of the following statements is
correct?
89.
New projects can have multiple effects on a firm. Which one of the following appears to be a positive indirect effect?
90.
New projects or products can provide positive indirect effects as well as negative effects. Which one of the following appears
to be a negative indirect effect?
91.
Lew’s Metals has a machine sitting idle in its warehouse. The machine originally cost $213,000, has a current book value of
$32,300, has a scrap metal value of $13,000, and a market value of $46,900. The machine is totally paid for. What value
should be placed on this machine if it is used for a new project?
92.
A project requires an additional commitment of $100,000 in net working capital in each of years 1 to 4. These extra
investments can be recovered in year 5 when the project comes to an end. What is the effect on NPV?
93.
The additional inventory investment that is often required for new projects is partially offset by:
94.
What rate of nominal growth is expected in sales if they are currently $1,000,000 and are expected to reach $1,600,000 in 5
years? Assume an inflation rate of 3.5%.
95.
What is the effect of using MACRS rather than straight-line depreciation?
96.
In the MACRS depreciation schedules, the depreciation percentage is lower in the first year than in the second year. This is
due to the fact that:
97.
A firm invests $10 million in a new stamping machine. It depreciates it straight line for tax purposes over 5 years. The tax
rate is 30%, inflation is 4% a year, and the discount rate is 8%. What is the PV of the depreciation tax shield?
98.
Capital budgeting projects typically assume that all cash flows transpire at the end of the year. The reason for this is that:
99.
Which one of the following is not accurate in depicting the cash flows from operations for an all-equity firm?
100.
Which of the following typically results from using straight-line depreciation rather than MACRS in the set of books for
shareholders?
101.
When you evaluate a proposed project you should:
102.
Which one of the following formulas is incorrect?
103.
Which one of these statements is incorrect?
104.
Which of the following statements regarding investment in working capital is incorrect?
Chapter 09 Test bank – Static Summary
Category
# of Questions
AACSB: Analytical Thinking
18
AACSB: Communication
4
AACSB: Reflective Thinking
82
Accessibility: Keyboard Navigation
104
Blooms: Analyze
14
Blooms: Apply
56
Blooms: Remember
9
Blooms: Understand
25
Difficulty: 1 Easy
28
Difficulty: 2 Medium
71
Difficulty: 3 Hard
5
Gradable: automatic
104
Learning Objective: 09–01 Identify the cash flows from a proposed new project.
61
Learning Objective: 09–02 Calculate the cash flows of a project from standard financial statements.
2
Learning Objective: 09–03 Understand how the company’s tax bill is affected by depreciation and how
this affects project value.
24
Learning Objective: 09–04 Understand how changes in working capital affect project cash flows.
17
Topic: Cash flows
31
Topic: Depreciation
21
Topic: Fixed and variable costs
1
Topic: Income statement
1
Topic: Net working capital
18
Topic: Nominal and real rates
12
Topic: Operating cash flow
5
Topic: Pro forma statements
1
Topic: Project analysis and evaluation
13
Topic: Sales forecasts
1