Charles Darwin University

ACCOUNTING

Week 7 Quiz 1

1)discount rate is 10% and expected inflation is 3%, what is the nominal cash flow for year 3?

a.  $112,551

b.  $106,090

c.  $109,273

d.  $122,504

 

2. A project requires an initial investment in equipment and machinery of  $10  million. The equipment is expected to have a 5-year lifetime with no salvage value and will be depreciated on a straight-line basis. The project is expected to generate revenues of

$5.1 million each year for the 5 years and have operating expenses (not including depreciation) amounting to 1/3 of revenues. The tax rate is 40%. What is the net cash flow in year 1?

a.  2.84m

b.  3.40m

c.  0.84m

d.  2.04m

 

3. A project requires an initial investment in equipment and machinery of  $10  million. The equipment is expected to have a 5-year lifetime with no salvage value and will be depreciated on a straight-line basis. The project is expected to generate revenues of

$5.1 million each year for the 5 years and have operating expenses (not including depreciation) amounting to 1/3 of revenues. Assume the tax rate is 40%, and the cost of capital is 10%. What is the present value of cash inflows from year 1 to year 5? What percentage of this present value is attributed to the tax benefits accruing from depreciation?

a.  $12.89m; 24%

b.  $10.77m; 28%

c.  3.18m; 95%

d.  7.73m; 39%

e.  $10.77m; 24%

 

1. Roger is considering the expansion of his business into a property he purchased two years ago. Which of the following  items should not be included in the analysis of this expansion?
   1. Roger can lease the property to another company for $12,000 per year.

 

5. Financial     analysts     focus    on            

evaluating potential investments.

1. 1. cash
   2. profit
   3. accruals
   4. expenses

 

when

2. Costs of hiring additional staff
3. The property was extensively renovated last year at a cost of $15,000.
4. The expansion will result in a slight increase of inventory carried.

 

2) A project will generate a real cash flow three years from now of $100,000. If the nominal

 

6. The relevant tax rate for capital budgeting

purposes is the:

1. 1. average tax rate.
   2. maximum tax rate.
   3. minimum tax rate.
   4. marginal tax rate.

7. Future Semiconductor is considering the purchase of  photolithography  equipment that will cost $3 million. The equipment requires maintenance of $5,000 at the end of each of the next five years. After  five years it will be sold for $500,000. Assume a cost of capital of 15% and no taxes. What is the present value of the cost of the equipment? What is the equivalent annual cost of the equipment?

a.  $3,016,761; $899,947

b.  $2,516,760; $750,789

c.  $2,407,106; $718,077

d.  $2,768,172; $825,789

 

8. A firm is evaluating two machines. Both machines meet the firm's quality standard. Machine A costs $40,000 initially and $1,000 per   year   to   maintain.   Machine   B   costs

$24,000 initially and $2,000 per year to maintain. Machine A has a 6-year useful life and machine B has a 3-year useful life. Both machines have zero salvage value.  Assume the firm will continue to replace worn-out machines with similar machines, and the discount rate is 7%. Which machine should the firm purchase?

1. 1. Machine A
   2. Machine B
   3. The firm is indifferent  to  the  two machines
   4. Can't tell from the given information

 

9. You are given the following information. What is the initial cash outflow?

Purchase        and       installation         of       new equipment          $12,000

Sale price of replaced equipment

$ 4,000

Book value of replaced equipment

$ 3,000

When the new equipment is installed: Inventory increase

$ 2,000

Accounts payable increase

$ 1,000

Tax rate 40%

a.  $9,400

b.  $9,000

c.  $13,000

d.  $10,600

 

10. An       increase        in       net       working        capital represents:
    1. a cash inflow.
    2. a cash outflow.
    3. an increase in fixed assets.
    4. a decrease in fixed assets.

 

11. Gamma Electronics is considering the purchase of testing equipment that will cost

$500,000. The equipment has a 5-year lifetime with no salvage value. Assume the new machine will generate after-tax savings of $100,000 per year for the five years. If the firm has a 15% cost of capital, what is the equivalent annual cost of the equipment?

a.  $32,924

b.  $42,746

c.  $49,158

d.  $37,863

 

12. A project requires an initial investment in equipment and machinery of  $10  million. The equipment is expected to have a 5-year lifetime with no salvage value and will be depreciated on a straight-line basis. The project is expected to generate revenues of

$5.1 million each year for the 5 years and have operating expenses (not including depreciation) amounting to 1/3 of revenues. Assume the tax rate is 40%, and the cost of capital is 10%. What is the net present value of the project?

a.   $2.89m

b.  $0.77m

c.  -$6.82m

d.  -$2.27m

 

13. Accountants measure inflows and outflows of business operations on:
    1. a cash basis.
    2. a profit basis.
    3. an accrual basis.
    4. an expense basis.

 

14. Paul earns $60,000 as an engineer, and he is considering quitting his job and going to graduate school. This $60,000 should be treated as a     if Paul runs an NPV analysis of his graduate degree.
    1. sunk cost
    2. opportunity cost
    3. fixed cost
    4. cannibalization cost

 

15. Thompson Manufacturing must choose between two types of furnaces to install. Model A has a 6-year life, and an NPV of

$5,000. Model B has a 5-year life, and an NPV of $4,200. The relevant discount rate is 12%. Which model should be chosen? What's the annual cash flow from that model?

1. 1. Model B; $1,165
   2. Model B; $840
   3. Model A; $833
   4. Model A; $1,216

16. Capital budgeting must be placed on an incremental basis. This means that      must be ignored and must be considered.
    1. sunk cost; opportunity cost
    2. sunk cost; financing cost
    3. cannibalization; opportunity cost
    4. opportunity cost; net working capital

 

17. Arizona Truck Company (ATC) is considering the replacement of an old truck. The old truck can be sold for $7,800 now. If it is sold in one year, the resale price will be $5,500, but ATC will spend $2,500 just before selling the truck to make it attractive to a buyer. Assume a cost of capital of 12%. What is the total cost of keeping the old truck for one more year? Express the cash flow in terms of its future value one year from now.

a.  5,121

b.  $5,736

c.   $4,800

d.  $5,376

5. None of the above

 

18. Net working capital decreases when
    1. inventory falls, accounts receivable falls, or accounts payable increases
    2. inventory increases, accounts receivable increases, or accounts payable falls
    3. cost of goods sold falls, or interest rate falls
    4. operating expenses fall, or current assets increase

 

19. Alpha Car Rental purchased 5 cars for a total of $100,000 three years ago. Now it is replacing the cars with newer vehicles. The company has depreciated 92.59% of the old cars, and sold these cars for a total of $ 25,000. Assume a tax rate of 40%. What is the cash inflow from the sale of these vehicles?

a.  $25,000

b.  $15,000

c.  $17,964

d.  $16,500

 

20. A machine costs $3 million and has zero salvage value. Assume a discount rate of 10% and a 40% tax rate. The machine is depreciated straight-line over 3 years for tax purpose. What is the present value of depreciation tax savings associated with this machine?

a.   $1,200,000

b.  $994,741

c.   $1,090,900

d.  $400,000

 

21. Fox Entertainment is evaluating the NPV of launching a new iPet product. Fox paid a market research firm $120,000 last year to test the market viability of iPet. Fox Entertainment should treat this  $120,000  as a for the capital budgeting decision now confronting the firm.
    1. fixed cost
    2. opportunity cost
    3. sunk cost
    4. cannibalization cost

 

 

22. Georgia Food is exploring the possibility of bringing new frozen pasta to the market. Which of the following items are not relevant for the project's analysis?
    1. Cost of increasing shelf space at grocery stores
    2. Lost revenue from its frozen pizza sales since some customers will switch to purchase the new frozen pasta
    3. Cost of advertising the new product
    4. Market research funds the company has spent on testing the viability of the new product

 

23. Sam's Insurance must choose between two types of printers. Both printers meet the firm's quality standard. Printer A costs

$3,500 and is expected to last 3 years with operating costs of $380 per year. Printer B costs $2,500 and is expected to last 2 years with operating costs of $400 per year. Assume a discount rate of 10%. Which printer should Sam's Insurance purchase? What is the equivalent annual cost of this machine?

1. 1. Printer B; $3,194
   2. Printer A; $1,625
   3. Printer B; $2,904
   4. Printer A; $1,787

 

24. The       cash        flows       associated         with       an investment project are as follows:

Cash Flows

Initial Outflow                      -$7,000,000

Year 1                                    $100,000

Year 2                                    $200,000

Year 3                                    $540,000

In year 4 and beyond, cash flows would continue to grow at 4 percent per year. Assume a discount rate of 10%. What is the NPV of this investment?

a.  $385,220

b.  $423,742

c.  $631,104

d.  $694,215