Missouri Southern State University

ECON 350

Financial Management Chapter 11 Quiz

1)The final step in the capital budgeting process is

1. 1. implementation.

B) follow-up monitoring.

3. re-evaluation.
4. education.

2. A $60,000 outlay for a new machine with a usable life of 15 years is called

A) capital expenditure.

2. operating expenditure.
3. replacement expenditure.
4. none of the above.

3. A conventional cash flow pattern associated with capital investment projects consists of an initial
   1. outflow followed by a broken cash series.
   2. inflow followed by a broken series.

C) outflow followed by a series of inflows.

D) inflow followed by a series of outflows.

4. Projects that compete with one another, so that the acceptance of one eliminates the others from further consideration are called
   1. independent projects.

B) mutually exclusive projects.

3. replacement projects.
4. none of the above.

5. When evaluating a capital budgeting project, the change in net working capital must be considered as part of
   1. the operating cash inflows.

B) the initial investment.

3. the incremental operating cash inflows.
4. the operating cash outflows.

6. A corporation is considering expanding operations to meet growing demand. With the capital expansion, the current accounts are expected to change. Management expects cash to increase by $20,000, accounts receivable by $40,000, and inventories by $60,000. At the same time accounts payable will increase by $50,000, accruals by $10,000, and long-term debt by $100,000. The change in net working capital is                                                .
   1. an increase of $120,000
   2. a decrease of $40,000
   3. a decrease of $120,000

D) an increase of $60,000

7. The tax treatment regarding the sale of existing assets which are sold for more than the book value but less than the original purchase price results in
   1. an ordinary tax benefit.
   2. a capital gain tax liability.

C) recaptured depreciation taxed as ordinary income.

D) a capital gain tax liability and recaptured depreciation taxed as ordinary income.

8. A corporation is selling an existing asset for $1,700. The asset, when purchased, cost $10,000, was being depreciated under MACRS using a five-year recovery period, and has been depreciated for four full years. If the assumed tax rate is 40 percent on ordinary income and capital gains, the tax effect of this transaction is

A) $0 tax liability.

2. $840 tax liability.
3. $3,160 tax liability.
4. $3,160 tax benefit.

9. A corporation has decided to replace an existing asset with a newer model. Two years ago, the existing asset originally cost $30,000 and was being depreciated under MACRS using a five-year recovery period. The existing asset can be sold for $25,000.The new asset will cost $75,000 and will also be depreciated under MACRS using a five-year recovery period. If the assumed tax rate is 40 percent on ordinary income and capital gains, the initial investment is                                                                .

A) $42,000

B) $52,440

C) $54,240 D) $50,000

10. One basic technique used to evaluate after-tax operating cash flows is to

A) add noncash charges to net income.

2. subtract depreciation from operating revenues.
3. add cash expenses to net income.
4. subtract cash expenses from noncash charges.