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
 A project requires an initial investment in equipment and machinery of $10 million. The equipment is expected to have a 5year lifetime with no salvage value and will be depreciated on a straightline 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
 A project requires an initial investment in equipment and machinery of $10 million. The equipment is expected to have a 5year lifetime with no salvage value and will be depreciated on a straightline 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%
 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
 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 6year useful life and machine B has a 3year useful life. Both machines have zero salvage value. Assume the firm will continue to replace wornout machines with similar machines, and the discount rate is 7%. Which machine should the firm purchase?

 Machine A
 Machine B
 The firm is indifferent to the two machines
 Can't tell from the given information
 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
 An increase in net working capital represents:
 a cash inflow.
 a cash outflow.
 an increase in fixed assets.
 a decrease in fixed assets.
 Gamma Electronics is considering the purchase of testing equipment that will cost
$500,000. The equipment has a 5year lifetime with no salvage value. Assume the new machine will generate aftertax 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
 A project requires an initial investment in equipment and machinery of $10 million. The equipment is expected to have a 5year lifetime with no salvage value and will be depreciated on a straightline 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
 Accountants measure inflows and outflows of business operations on:
 a cash basis.
 a profit basis.
 an accrual basis.
 an expense basis.
 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.
 sunk cost
 opportunity cost
 fixed cost
 cannibalization cost
 Thompson Manufacturing must choose between two types of furnaces to install. Model A has a 6year life, and an NPV of
$5,000. Model B has a 5year 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?

 Model B; $1,165
 Model B; $840
 Model A; $833
 Model A; $1,216
 Capital budgeting must be placed on an incremental basis. This means that must be ignored and must be considered.
 sunk cost; opportunity cost
 sunk cost; financing cost
 cannibalization; opportunity cost
 opportunity cost; net working capital
 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
 None of the above
 Net working capital decreases when
 inventory falls, accounts receivable falls, or accounts payable increases
 inventory increases, accounts receivable increases, or accounts payable falls
 cost of goods sold falls, or interest rate falls
 operating expenses fall, or current assets increase
 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
 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 straightline 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
 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.
 fixed cost
 opportunity cost
 sunk cost
 cannibalization cost
 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?
 Cost of increasing shelf space at grocery stores
 Lost revenue from its frozen pizza sales since some customers will switch to purchase the new frozen pasta
 Cost of advertising the new product
 Market research funds the company has spent on testing the viability of the new product
 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?

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