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86. A parcel of corporate land was recently dedicated 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 one of the following is representative of how depreciation expense is handled in
the face of inflation?
88. Assuming an asset has been fully depreciated according to its MACRS class life, which
one of the following statements is correct concerning the current value of the asset?
89. New projects or products can have multiple effects on a firm. Which one of the following
appears to be a potentially 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 5-year project requires an additional commitment of $100,000 in net working capital.
What is the opportunity cost associated with this investment?
93. The additional inventory investment that is often required for new projects can be
partially funded 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. Why is it likely that new firms use straight-line depreciation methods for reporting to
shareholders?
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. Why is it fairly easy to fall into the trap of discounting real cash flows with nominal
rates?
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
?
105. What are the three methods of calculating operating cash flow?
106. It is easy to imagine that a financial manager would be reluctant to abandon a project in
which large sums of money have been invested with no cash return. Discuss the important
concept here that should be the manager's guiding policy.
107. Discuss the statement, "Changes in working capital necessitated by a project represent
only an opportunity cost to the firm."
108. Although the rule seems very straightforward, why is it stated that financial managers
often make the mistake of discounting real cash flows with nominal rates? Mention one common
example, and state the effect that this has on project evaluation.
109. Calculate the NPV for the following capital budgeting proposal: $100,000 initial cost for
equipment, straight-line depreciation over 5 years to a zero book value, $5,000 pre-tax salvage
value of equipment, 35% tax rate, $45,000 additional annual revenues, $15,000 additional annual
cash expenses, $8,000 initial investment in working capital to be recouped at project end, and a
cost of capital of 11%. Should the project be accepted or rejected? (Show your work computing
the NPV.)
110. How do changes in working capital affect project cash flows?
111. Calculate the present value of the depreciation tax shield for an asset in the 3-year class
life costing $100,000. Three-year class percentages are 33.33%, 44.45%, 14.81%, and 7.41%,
respectively for years 1 through 4. The firm has a 35% tax rate and a 10% cost of capital.
Compare this present value to that calculated for straight-line depreciation with no salvage
value.
112. Offer examples to confirm that firms do experience opportunity costs, even when cash
payments are not explicitly made.
113. Determine the change in net working capital that appears warranted for the following
proposed project: Inventory levels will increase 20% from their current value of $500,000; cash
will increase by $25,000; wage accruals will increase by $60,000; machinery will increase by
$75,000; accounts receivable—because of a new collection system—will increase by only
$15,000; accounts payable will increase by $45,000. What happens to net working capital at the
end of the project's life?
114. Describe how adding depreciation expense to net income can approximate cash flow
from operations. Does depreciation expense really reflect a cash flow?
115. How should the value of a proposed new project be calculated?
Here is a checklist to bear in mind when forecasting a project's cash flows:
116. How can the cash flows of a project be computed from standard financial statements?
117. How is the company's tax bill affected by depreciation and how does this affect project
value?
