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48. The likely effect of discounting nominal cash flows with real interest rates will be to:
49. Your forecast shows $500,000 annually in sales for each of the next 3 years. If your
second and third year predictions have failed to incorporate the 3% expected annual inflation,
how far off in total dollar sales is your 3-year forecast?
50. Which one of the following would be more apt to make an unacceptable project appear
acceptable?
51. Capital budgeting proposals should be evaluated as if the project were financed:
52. For an all-equity firm, adding depreciation expense to net profit equals:
53. The recovery of an additional investment in working capital is assumed to:
54. In what manner does depreciation expense affect investment projects?
55. Given a positive discount rate, which one of the following changes would increase the
NPV of a project?
56. What is the annual depreciation tax shield for a profitable firm in the 30% marginal tax
bracket with $100,000 of annual depreciation expense?
57. What is the amount of the annual depreciation tax shield for a firm with $200,000 in net
income, $75,000 in depreciation expense, and a 35% marginal tax rate?
58. What is the amount of the operating cash flow for a firm with $500,000 profit before tax,
$100,000 depreciation expense, and a 35% marginal tax rate?
59. A tax shield is equal to the reduction in a firm's:
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, $2,000
initial requirement for additional working capital, and a 35% tax rate?
72. At current prices and a 13% cost of capital, a project's NPV is $100,000. By what
minimum amount must the initial cost of the project decrease before you would wait 2 years to
invest? Assume all else is held constant.
73. Which one of the following statements is most likely to be correct for a project in which
the NPV is negative when the cash inflows are based on net income?
74. A new, more efficient machine will last 4 years and allow inventory levels to decrease by
$100,000 over its life. At a cost of capital of 13%, how does the net working capital change affect
the project's NPV?
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. Assume that a project's sales revenues are expected to increase more rapidly than
product costs, but the project's cash flows have been represented as a fixed annuity when
calculating NPV. Which one of the following problems might exist within this analysis?
79. A project anticipates net cash inflows of $10,000 at the end of year 1, with that amount
increasing at the expected 4% rate of inflation over the subsequent 4 years. The initial project
cost is $12,800. Calculate the real present value of this 5-year cash stream if 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 project that costs $100,000, provides $23,000 in cash flows annually
for 6 years, requires a $5,000 increase in net working capital, and depreciates the asset straight-
line over 6 years while ignoring the half-year convention? The discount rate is 14%.
83. The income statement of an all-equity firm reflects sales of $250,000, depreciation
expense of $50,000, taxable income of $50,000, and an average tax rate of 18%. By how much
does operating cash flow deviate from net income?
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?
