University of Texas, Permian Basin

FINA 6320

Quiz 3

1)In actual practice, managers may use the:

1. 1. IRR because the results are easy to communicate and understand.
   2. payback because of its simplicity.
   3. net present value because it is considered by many to be the best method of analysis.

2. The primary reason that company projects with positive net present values are considered acceptable is that:
3.  

4. You are considering the following two mutually exclusive projects that will not be repeated. The required rate of return is 11.25% for project A and 10.75% for project B. Which project should you accept and why?

7. It will cost $3,000 to acquire a small ice cream cart. Cart sales are expected to be $1,400 a year for three years. After the three years, the cart is expected to be worthless as that is the expected remaining life of the cooling system. What is the payback period of the ice cream cart?

8. Which of the following should be included in the analysis of a project?
   1. sunk costs
   2. opportunity costs
   3. erosion costs
   4. incremental costs

9. The changes in a firm's future cash flows that are a direct consequence of accepting a project are called _________ cash flows.

10. A pro forma financial statement is one that:

11. The cash flow tax savings generated as a result of a firm's tax-deductible depreciation expense is called the:

12. Schroeder Electronics is considering a project which will require the purchase of $5 million in new equipment. The equipment will be depreciated straight-line to a zero book value over the 5-year life of the project. Schroeder's expects to sell the equipment at the end of the project for 10% of its original cost. Annual sales from this project are estimated at $2.3 million. Net working capital equal to 10% of sales will be required to support the project. All of the net working capital will be recouped at the end of the project. Schroeder desires a 12% rate of return on this project. The tax rate is 40%. What is the value of the depreciation tax shield in year 2 of the project?
13. Sun Lee's Furniture just purchased some fixed assets classified as 5-year property for MACRS. The assets cost

$24,000. What is the amount of the depreciation expense for the third year? MACRS 5-year property