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Homework answers / question archive / 1

**1. What's the ****best**** investment criteria when dealing with mutually exclusive projects? **

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**A. Payback period **

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**B. Net present value (NPV) **

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**C. Profitability index (PI) **

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**D. Internal rate of return (IRR) **

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**2. The change in revenue that occurs when one more unit of output is sold is referred to as **

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**A. scenario revenue. **

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**B. total revenue. **

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**C. average revenue. **

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**D. marginal revenue. **

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**3. A project requires an initial investment of $1,000 and will pay only one payment of $1,160 in one year. Assuming a firm's required rate of return is 15 percent, should the firm accept the project according to the IRR rule? Why or why not? **

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**A. The firm should be indifferent toward the decision. **

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**B. There isn't enough information to determine if the project should be accepted or rejected. **

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**C. Yes, the IRR is greater than the required rate of return. **

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**D. No, the IRR is less than the required rate of return. **

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**4. PA Petroleum just purchased some equipment at a cost of $67,000. The equipment is classified as MACRS five-year property. The MACRS rates are .2, .32, .192, .1152, .1152, and .0576 for years one through six, respectively. What's the proper methodology for computing the depreciation expense for year two? **

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**A. $67,000 × (1 – 0.32) **

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**B. $67,000 × (1 – 0.20) ÷ 0.32 **

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**C. $67,000 × (1 + 0.32) **

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**D. $67,000 × 0.32 **

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**5. A disadvantage of the discounted payback period method when compared to NPV is that it **

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** A. may reject economically viable projects (positive NPV projects). **

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**B. is more difficult to understand. **

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**C. may accept negative NPV projects. **

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**D. completely ignores the time value of money. **

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**6. Assume a project has cash flows of –$51,300, $18,200, $37,300, and $14,300 for years zero to three, respectively. What's the profitability index given a required return of 12½ percent? **

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**A. .98 **

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** B. 1.09 **

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**C. 1.11 **

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**D. 1.06 **

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**7. What's an example of a variable cost? **

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**A. Cost of goods sold **

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**B. Administrative costs **

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**C. Rent **

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**D. Depreciation **

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**8. A project will require $498,000 for fixed assets and $58,000 for net working capital. The fixed assets will be depreciated straight-line to a zero book value over the five-year life of the project. At the end of the project, the fixed assets will be worthless. The net working capital returns to its original level at the end of the project. The project is expected to generate annual sales of $875,000 and costs of $640,000. The tax rate is 35 percent, and the required rate of return is 15 percent. What's the amount of the annual operating cash flow? **

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**A. $117,320 **

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**B. $147,820 **

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**C. $187,610 **

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**D. $105,000 **

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**9. Net present value is based on many estimates and forecasts. What can be done to compensate for the uncertainty of these future variables? **

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**A. Using IRR instead **

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**B. Nothing **

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**C. Decreasing the discount rate **

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**D. Sensitivity and scenario analysis **

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**10. Assume a project has a sales quantity of 8,600 units plus or minus five percent and a sales price of $69 a unit plus or minus one percent. The expected variable cost per unit is $11 plus or minus three percent, and the expected fixed costs are $290,000 plus or minus two percent. The depreciation expense is $68,000. The tax rate is 34 percent. What's the operating cash flow under the best-case scenario? **

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**A. $187,295.40 **

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**B. $175,705.93 **

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**C. $168,470.15 **

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**D. $164,208.11 **

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**11. The profitability index is calculated by **

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**A. multiplying NPV weighted by the proportion of project assets to firm assets. **

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**B. setting the NPV to zero and solving for the discount rate. **

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** C. dividing cash flows by the initial investment. **

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**D. dividing NPV by the initial investment. **

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**12. Mary has decided to get a two-year degree from a local technical school, despite being offered a job at the local hardware store for $11 dollars per hour, 40 hours per week. She quickly calculates that she would have made $45,760 in the two years she was at school. $45,760, the cost of her next best option, is considered a/an **

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**A. erosion cost. **

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**B. opportunity cost. **

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**C. sunk cost. **

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**D. cash outflow cost. **

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**13. Assume that a firm has an average net income of $120,000 and an average book value of $600,000. What's the firm's average accounting return? **

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**A. 30 percent **

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** B. 20 percent **

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**C. 35 percent **

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**D. 25 percent **

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**14. Changes in the net working capital requirements **

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**A. are generally excluded from project analysis due to their irrelevance to the total project. **

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**B. are excluded from the analysis as long as they're recovered when the project ends. **

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**C. can affect the cash flows of a project every year of the project's life. **

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**D. only affect the initial and final cash flows of a project. **

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**15. The Coffee Express has computed its fixed costs to be $.48 for every cup of coffee it sells, given annual sales of 145,000 cups. The sales price is $1.29 per cup, while the variable cost per cup is $.07. How many cups of coffee must it sell to break even on a cash basis? **

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**A. 57,049 **

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**B. 67,630 **

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**C. 46,472 **

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**D. 23,910 **

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**16. You're working on a bid to build two apartment buildings a year for the next three years. This project requires the purchase of $1,089,000 of equipment that will be depreciated using straight-line depreciation to a zero book value over the project's life. The equipment can be sold at the end of the project for $815,000. You'll also need $280,000 in net working capital over the life of the project. The fixed costs will be $528,000 a year, and the variable costs will be $1,640,000 per building. Your required rate of return is 18 percent for this project, and your tax rate is 35 percent. What's the minimal amount, rounded to the nearest $100, you should bid per building? **

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**A. $4,489,500 **

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**B. $4,233,000 **

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**C. $2,780,600 **

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**D. $2,116,200 **

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**17. A project requires an initial investment of $45,400 today. The present value of the cash inflows likely to result from this initial investment is $45,300. Should the firm proceed with the investment? Why or why not? **

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**A. Yes, because the NPV is positive. **

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**B. No, because the NPV is positive. **

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** C. No, because the NPV is negative. **

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**D. Yes, because the NPV is negative. **

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**18. Why is it important to find changes of net working capital (NWC) in developing cash flows? **

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**A. Changes in NWC have important tax implications (a tax shield), so they must be multiplied by 1 minus the tax rate to find total cash flow. **

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**B. Changes in NWC indicate capital expenditures (such as purchase of equipment). They must be subtracted from cash inflows (measured by other cash flow). **

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**C. Changes in NWC indicate cash outflows (measured by change in NWC) must be subtracted from cash inflows (measured by operating cash flow). **

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**D. Changes of NWC are unimportant. **

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**19. A new project will cause a $2,200 increase in sales, a $1,045 increase in costs, a $440 increase in depreciation, and a $243 increase in taxes. Using the bottom-up approach, what's the change to OCF? **

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** A. $912 **

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**B. $342 **

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**C. $1,155 **

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**D. $472 **

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**20. A project requires an initial investment of $950,000 today. The present value of the cash inflows likely to result from this initial investment is $1,208,293. What's the net present value of this investment? **

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**A. $950,000 **

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**B. –$950,000 **

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** C. $258,293 **

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**D. –$258,293**