1.

Award: 5.00 points

Which one of the following best describes the concept of erosion?

Expenses that have already been incurred and cannot be recovered.

Change in net working capital related to implementing a new project.

The cash ows of a new project that come at the expense of a rm's existing cash ows.

The alternative that is forfeited when a xed asset is utilized by a project.

The differences in a rm's cash ows with and without a particular project.

References

2.

Multiple Choice

Learning Objective:
10-01 How to
determine the
relevant cash ows for
a proposed project.

Diculty: Basic

Section: 10.2
Incremental Cash
Flows

Award: 5.00 points

Which one of the following is an example of a sunk cost?

$1,500 of lost sales because an item was out of stock.

$1,200 paid to repair a machine last year.

$20,000 project that must be forfeited if another project is accepted.

$4,500 reduction in current shoe sales if a store commences selling sandals.

$1,800 increase in comic book sales if a store ceases selling puzzles.

References

3.

Multiple Choice

Learning Objective:
10-01 How to
determine the
relevant cash ows for
a proposed project.

Diculty: Basic

Section: 10.2
Incremental Cash
Flows

Award: 5.00 points

Which one of the following should not be included in the analysis of a new product?

Increase in accounts payable for new product inventory purchases.

Reduction in sales for a current product once the new product is introduced.

Market value of a machine owned by the rm which will be used to produce the new product.

Money already spent for research and development of the new product.

Increase in accounts receivable needed to nance sales of the new product.

References

4.

Multiple Choice

Learning Objective:
10-01 How to
determine the
relevant cash ows for
a proposed project.

Diculty: Basic

Section: 10.2
Incremental Cash
Flows

Award: 5.00 points

All of the following are related to a proposed project. Which one of these should be included in the cash ow
at Time 0?

Loan obtained to nance the project

Initial investment in inventory to support the project

Annual depreciation tax shield

Aftertax salvage value

Net working capital recovery

References

5.

Multiple Choice

Learning Objective:
10-01 How to
determine the
relevant cash ows for
a proposed project.

Diculty: Basic

Section: 10.4 More

about Project Cash
Flow

Award: 5.00 points

The operating cash ow of a cost-cutting project:

Is equal to the depreciation tax shield.

Is equal to zero because there is no incremental sales.

Can only be analyzed by projecting the sales and costs for a rm's entire operations.

Includes any changes that occur in the current accounts.

Can be positive even though there are no sales.

References

6.

Multiple Choice

Learning Objective:
10-01 How to
determine the
relevant cash ows for
a proposed project.

Diculty: Basic

Section: 10.6 Some

Special Cases of
Discounted Cash Flow
Analysis

Award: 5.00 points

Dependable Motors just purchased some MACRS 5-year property at a cost of $216,000. The MACRS rates
are .2, .32, and .192 for years 1 to 3, respectively. Which one of the following will correctly give you the book
value of this equipment at the end of year 2?

$216,000 / (1 + .2 + .32)

$216,000 (1 - .2 - .32)

$216,000 (.20 + .32)

[$216,000 (1 - .20)] (1 - .32)

$216,000 / [(1 + .20)(1 + .32)]

References

7.

Multiple Choice

Learning Objective:
10-01 How to
determine the
relevant cash ows for
a proposed project.

Diculty: Basic

Section: 10.4 More

about Project Cash
Flow

Award: 5.00 points

Aproposednewinvestmenthasprojectedsalesof$750,000.Variablecostsare55percentofsales,and
fixedcostsare$164,000depreciationis$65,000.Prepareaproformaincomestatementassumingatax
rateof35percent.Whatistheprojectednetincome?(Inputallamountsaspositivevalues.)

Sales
Variablecosts
Fixedcosts
Depreciation

EBT
Taxes

Netincome

750000
412500
164000
65000

108500
37975

70525

References
Worksheet

LearningObjective:
1001Howto
determinethe
relevantcashflows
foraproposed
project.

Difficulty:Basic Section:10.3Pro
FormaFinancial
Statementsand
ProjectCashFlows

8.

Award: 5.00 points

Fillinthemissingnumbersforthefollowingincomestatement.(Inputallamountsaspositivevalues.)

Sales
Costs
Depreciation

EBIT
Taxes(34%)

Netincome

682,900
437,800
110,400

134700
45789

88902

CalculatetheOCF.
OCF

199302

Whatisthedepreciationtaxshield?
Depreciationtaxshield

37536

References
Worksheet

LearningObjective:
1001Howto
determinethe
relevantcashflows
foraproposed
project.

Difficulty:Basic Section:10.3Pro
FormaFinancial
Statementsand
ProjectCashFlows

9.

Award: 10.00 points

Apieceofnewlypurchasedindustrialequipmentcosts$975,000andisclassifiedassevenyearproperty
under MACRS. The MACRS depreciation schedule is shown in Table 10.7. Calculate the annual
depreciation allowances and endoftheyear book values for this equipment. (Leave no cells blank be
certaintoenter"0"whereverrequired.Roundyouranswersto2decimalplaces.(e.g.,32.16))

Year
1
2
3
4
5
6
7
8

BeginningBookValue
$
975000
$
835672.50
$
596895
$
426367.50
$
304590
$
217522.50
$
130552.50
$
43485

Depreciation
$ 139,327.50
$ 238,777.50
$ 170,527.50
$ 121,777.50
$
87,067.50
$
86,970.00
$
87,067.50
$
43,485.00

EndingBookValue
$ 835,672.50
$ 596,895.00
$ 426,367.50
$ 304,590.00
$ 217,522.50
$ 130,552.50
$
43,485.00
$
0

References
Worksheet

LearningObjective:
1001Howto
determinethe
relevantcashflows
foraproposed
project.

Difficulty:Basic Section:10.4More
aboutProjectCash
Flow

10.

Award: 5.00 points

Consider an asset that costs $640,000 and is depreciated straightline to zero over its eightyear tax life.
Theassetistobeusedinafiveyearprojectattheendoftheproject,theassetcanbesoldfor$175,000.
Iftherelevanttaxrateis35percent,whatistheaftertaxcashflowfromthesaleofthisasset?
Aftertaxsalvagevalue

197750

References
Worksheet

LearningObjective:
1001Howto
determinethe
relevantcashflows
foraproposed
project.

Difficulty:Basic Section:10.4More
aboutProjectCash
Flow

11.

Award: 5.00 points

AnassetusedinafouryearprojectfallsinthefiveyearMACRSclassfortaxpurposes.Theassethasan
acquisitioncostof$6,100,000andwillbesoldfor$1,300,000attheendoftheproject.Ifthetaxrateis35
percent, what is the aftertax salvage value of the asset? Refer to Table 10.7. (Enter your answer in
dollars,notmillionsofdollars,i.e.1,234,567.)

Aftertaxsalvagevalue

1213928

Hints
Hint#1

References
Worksheet

LearningObjective:
1001Howto
determinethe
relevantcashflows
foraproposed
project.

Difficulty:Basic Section:10.4More
aboutProjectCash
Flow

12.

Award: 5.00 points

Keiper, Inc., is considering a new threeyear expansion project that requires an initial fixed asset
investment of $2.7 million. The fixed asset will be depreciated straightline to zero over its threeyear tax
life,afterwhichtimeitwillbeworthless.Theprojectisestimatedtogenerate$2,080,000inannualsales,
withcostsof$775,000.Ifthetaxrateis35percent,whatistheOCFforthisproject?(Enteryouranswer
indollars,notmillionsofdollars,i.e.1,234,567.)
OCF

Hints

1163250

Hint#1

References
Worksheet

LearningObjective:
1001Howto
determinethe
relevantcashflows
foraproposed
project.

Difficulty:Basic Section:10.3Pro
FormaFinancial
Statementsand
ProjectCashFlows

13.

Award: 5.00 points

Keiper, Inc., is considering a new threeyear expansion project that requires an initial fixed asset
investment of $2.7 million. The fixed asset will be depreciated straightline to zero over its threeyear tax
life,afterwhichtimeitwillbeworthless.Theprojectisestimatedtogenerate$2,080,000inannualsales,
with costs of $775,000. The tax rate is 35 percent and the required return on the project is 12 percent.
WhatistheprojectsNPV?(Roundyouranswerto2decimalplaces.(e.g.,32.16))
NPV

93930.22

Hints
Hint#1

References
Worksheet

LearningObjective:
1001Howto
determinethe
relevantcashflows
foraproposed
project.

Difficulty:Basic Section:10.3Pro
FormaFinancial
Statementsand
ProjectCashFlows

14.

Award: 5.00 points

Keiper, Inc., is considering a new threeyear expansion project that requires an initial fixed asset
investment of $2.7 million. The fixed asset will be depreciated straightline to zero over its threeyear tax
life,afterwhichtimeitwillbeworthless.Theprojectisestimatedtogenerate$2,080,000inannualsales,
with costs of $775,000. The project requires an initial investment in net working capital of $300,000, and
thefixedassetwillhaveamarketvalueof$210,000attheendoftheproject.Ifthetaxrateis35percent,
what is the projects year 0 net cash flow? Year 1? Year 2? Year 3? (Negative amounts should be
indicatedbyaminussign.)

Years
Year0
Year1
Year2
Year3

CashFlow
$
3000000
$
1163250
$
1163250
$
1599750

Iftherequiredreturnis12percent,whatistheproject'sNPV?(Do not round intermediate calculations

androundyourfinalanswerto2decimalplaces.(e.g.,32.16))
NPV

104622.30

References
Worksheet

LearningObjective:
1001Howto
determinethe
relevantcashflows
foraproposed
project.

Difficulty:Basic Section:10.3Pro
FormaFinancial
Statementsand
ProjectCashFlows

15.

Award: 10.00 points

Keiper, Inc., is considering a new threeyear expansion project that requires an initial fixed asset
investmentof$2.7million.ThefixedassetfallsintothethreeyearMACRSclass.Theprojectisestimated
togenerate$2,080,000inannualsales,withcostsof$775,000.Theprojectrequiresaninitialinvestmentin
networkingcapitalof$300,000,andthefixedassetwillhaveamarketvalueof$210,000attheendofthe
project. If the tax rate is 35 percent, what is the projects year 1 net cash flow? Year 2? Year 3? (Use
MACRS) (Enter your answers in dollars, not millions of dollars, i.e. 1,234,567. Negative amounts
shouldbeindicatedbyaminussign.Donotroundintermediatecalculationsandroundyourfinal
answersto2decimalplaces.(e.g.,32.16))
Years
Year0

CashFlow
$
3000000

Year1

$
$
$

Year2
Year3

1163218.50
1268302.50
1494729.00

If the required return is 12 percent, what is the project's NPV? (Enter your answer in dollars, not
millions of dollars, i.e. 1,234,567. Do not round intermediate calculations and round your final
answerto2decimalplaces.(e.g.,32.16))
NPV

113589.51

References
Worksheet

LearningObjective:
1001Howto
determinethe
relevantcashflows
foraproposed
project.

Difficulty:Basic Section:10.4More
aboutProjectCash
Flow

16.

Award: 15.00 points

PurpleHazeMachineShopisconsideringafouryearprojecttoimproveitsproductionefficiency.Buyinga
new machine press for $470,000 is estimated to result in $190,000 in annual pretax cost savings. The
press falls in the MACRS fiveyear class, and it will have a salvage value at the end of the project of
$80,000. The press also requires an initial investment in spare parts inventory of $20,000, along with an
additional $2,500 in inventory for each succeeding year of the project. The shops tax rate is 35 percent
anditsdiscountrateis9percent.RefertoTable10.7.

Calculate the NPV of this project. (Do not round intermediate calculations and round your final
answerto2decimalplaces.(e.g.,32.16))

NPV

92537.49

Shouldthecompanybuyandinstallthemachinepress?

No
Yes

References

Worksheet

LearningObjective:
1002Howto
determineifaproject
isacceptable.

Difficulty:
Intermediate

Section:10.6Some
SpecialCasesof
DiscountedCash
FlowAnalysis