Question 1
Choose smiley
Question 2
Which of the following statements is FALSE?
A.
We begin the capital budgeting process by determining the incremental earnings of a project.
B.
The marginal corporate tax rate is the tax rate the firm will pay on an incremental dollar of
preminus
tax
income.
C.
Investments in plant, property, and equipment are directly listed as expense when calculating earnings.
D.
The opportunity cost of using a resource is the value it could have provided in its best alternative use.
Question 3
Which of the following statements is FALSE?
A.
When computing the incremental earnings of an investment decision, we should include all changes between the firm's earnings with the project versus without the project.
B.
Overhead expenses are associated with activities that are not directly attributable to a single business activity but instead affect many different areas of the corporation.
C.
Because value is lost when a resource is used by another project, we should include the opportunity cost as an incremental cost of the project.
D.
Sunk costs are incremental with respect to the current decision regarding the project and should be included in its analysis.
Question 4
Which of the following costs would you consider when making a capital budgeting decision?
A.
Fixed overhead cost
B.
Opportunity cost
C.
Interest expense
D.
Sunk cost
Question 5
A decrease in the sales of a current project because of the launching of a new project is:
A.
irrelevant to the investment decision.
B.
a sunk cost.
C.
an overhead expense.
D.
cannibalization.
Question 6
Money that has been or will be paid regardless of the decision whether or not to proceed with the project is:
A.
a sunk cost.
B.
considered as part of the initial investment in the project.
C.
cannibalization.
D.
an opportunity cost.
Question 7
The value of currently unused warehouse space that will be used as part of a new capital budgeting project is:
A.
an overhead expense.
B.
irrelevant to the investment decision.
C.
an opportunity cost.
D.
a sunk cost.
Question 8
Use the information for the question(s) below.
Ford Motor Company is considering launching a new line of Plugminus in Electric SUVs. The heavy advertising expenses associated with the new SUV launch would generate operating losses of $35 million next year. Without the new SUV, Ford expects to earn preminus tax income of $80 million from operations next year. Ford pays a 30% tax rate on its preminus tax income.
The amount that Ford Motor Company will owe in taxes next year without the launch of the new SUV is closest to:
A.
$13.5 million
B.
$24.0 million
C.
$56.0 million
D.
$31.5 million
Question 9
Use the information for the question(s) below.
Ford Motor Company is considering launching a new line of Plugminus in Electric SUVs. The heavy advertising expenses associated with the new SUV launch would generate operating losses of $35 million next year. Without the new SUV, Ford expects to earn preminus tax income of $80 million from operations next year. Ford pays a 30% tax rate on its preminus tax income.
The amount that Ford Motor Company will owe in taxes next year with the launch of the new SUV is closest to:
A.
$31.5 million
B.
$24.0 million
C.
$13.5 million
D.
$56.0 million
Question 10
Use the information for the question(s) below.
Food For Less (FFL), a grocery store, is considering offering one hour photo developing in their store. The firm expects that sales from the new one hour machine will be $150,000 per year. FFL currently offers overnight film processing with annual sales of $100,000. While many of the one hour photo sales will be to new customers, FFL estimates that 60% of their current overnight photo customers will switch and use the one hour service.
The level of incremental sales associated with introducing the new one hour photo service is closest to:
A.
$150,000
B.
$120,000
C.
$60,000
D.
$90,000
Question 11
Use the information for the question(s) below.
The Sisyphean Corporation is considering investing in a new cane manufacturing machine that has an estimated life of three years. The cost of the machine is $30,000 and the machine will be depreciated straight line over its
Threeminus year life to a residual value of $0.
The cane manufacturing machine will result in sales of 2000 canes in year 1. Sales are estimated to grow by 10% per year each year through year three. The price per cane that Sisyphean will charge its customers is $18 each and is to remain constant. The canes have a cost per unit to manufacture of $9 each.
Installation of the machine and the resulting increase in manufacturing capacity will require an increase in various net working capital accounts. It is estimated that the Sisyphean Corporation needs to hold 2% of its annual sales in cash, 4% of its annual sales in accounts receivable, 9% of its annual sales in inventory, and 6% of its annual sales in accounts payable. The firm is in the 35% tax bracket, and has a cost of capital of 10%.
The depreciation tax shield for the Sisyphean Corporation's project in the first year is closest to:
A.
$8000
B.
$3500
C.
$5200
D.
$2800
Question 12
Use the information for the question(s) below.
The Sisyphean Corporation is considering investing in a new cane manufacturing machine that has an estimated life of three years. The cost of the machine is $30,000 and the machine will be depreciated straight line over its
Threeminus year life to a residual value of $0.
The cane manufacturing machine will result in sales of 2000 canes in year 1. Sales are estimated to grow by 10% per year each year through year three. The price per cane that Sisyphean will charge its customers is $18 each and is to remain constant. The canes have a cost per unit to manufacture of $9 each.
Installation of the machine and the resulting increase in manufacturing capacity will require an increase in various net working capital accounts. It is estimated that the Sisyphean Corporation needs to hold 2% of its annual sales in cash, 4% of its annual sales in accounts receivable, 9% of its annual sales in inventory, and 6% of its annual sales in accounts payable. The firm is in the 35% tax bracket, and has a cost of capital of 10%.
The amount of incremental income taxes that the Sisyphean Company will pay in the first year on this new project is closest to:
A.
$5200
B.
$2800
C.
$6300
D.
$3500
Question 13
Which of the following questions is FALSE?
A.
Earnings are an accounting measure of firm performance.
B.
Tax loss carry backs allow corporations to take losses during the current year and use them to offset income in future years.
C.
Because depreciation is not a cash flow, we do not include it in the cash flow forecast.
D.
Net Working Capital = Current Assets Minus Current Liabilities.
Question 14
Which of the following cash flows are relevant incremental cash flows for a project that you are currently considering investing in?
A.
Interest payments on debt used to finance the project
B.
The cost of a marketing survey you conducted to determine demand for the proposed project
C.
The tax savings brought about by the project's depreciation expense
D.
Research and Development expenditures you have made
Question 15
Your firm is considering building a new office complex. Your firm already owns land suitable for the new complex. The current book value of the land is $100,000, however a commercial real estate agent has informed you that an outside buyer is interested in purchasing this land and would be willing to pay $650,000 for it. When calculating the NPV of your new office complex, ignoring taxes, the appropriate incremental cash flow for the use of this land is:
A.
$0
B.
$750,000
C.
$650,000
D.
$100,000
Question 16
You are considering adding a microbrewery on to one of your firm's existing restaurants. This will entail an increase in inventory of $8000, an increase in Accounts payable of $2500, and an increase in property, plant, and equipment of $40,000. All other accounts will remain unchanged. The change in net working capital resulting from the addition of the microbrewery is:
A.
$10,500
B.
$45,500
C.
$5500
D.
$6500
Question 17
You are considering adding a microbrewery on to one of your firm's existing restaurants. This will entail an investment of $40,000 in new equipment. This equipment will be depreciated straight line over five years. If your firm's marginal corporate tax rate is 35%, then what is the value of the microbrewery's depreciation tax shield in the first year of operation?
A.
$26,000
B.
$2800
C.
$5200
D.
$14,000
Question 18
The Sisyphean Company is considering a new project that will have an annual depreciation expense of $2.5 million. If Sisyphean's marginal corporate tax rate is 40% and their average corporate tax rate is 30%, then what is the value of the depreciation tax shield on their new project?
A.
$1,750,000
B.
$1,000,000
C.
$750,000
D.
$1,500,000
Question 19
Bubba Hominus Tep Company reported net income of $300 million for the most recent fiscal year. The firm had depreciation expenses of $125 million and capital expenditures of $150 million. Although they had no interest expense, the firm did have an increase in net working capital of $20 million. What is Bubba Hominus Tep's free cash flow?
A.
$255 million
B.
$5 million
C.
$170 million
D.
$150 million
Question 20
Use the information for the question(s) below.
Shepard Industries is evaluating a proposal to expand its current distribution facilities. Management has projected the project will produce the following cash flows for the first two years (in millions).
| Year | 1 | 2 |
| Revenues | 1200 | 1400 |
| Operating Expense | 450 | 525 |
| Depreciation | 240 | 280 |
| Increase in working capital | 60 | 70 |
| Capital expenditures | 300 | 350 |
| Marginal corporate tax rate | 30% | 30% |
The depreciation tax shield for the Shepard Industries project in year one is closest to:
A.
$84
B.
$168
C.
$96
D.
$72
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