111, ENGR Fall 2011, Quiz 4
Nov, 2 2011
ANSWER KEY
1. A cost that has already been paid, or the liability to pay has already been incurred, is
a(n):
A. salvage value expense.
B. net working capital expense.
C. sunk cost.
D. opportunity cost.
E. erosion cost.
2. The most valuable investment given up if an alternative investment is chosen is a(n):
A. salvage value expense.
B. net working capital expense.
C. sunk cost.
D. opportunity cost.
E. erosion cost.
3. Which of the following are examples of an incremental cash flow?
I. an increase in accounts receivable
II. a decrease in net working capital
III. an increase in taxes
IV. a decrease in the cost of goods sold
A. I and III only
B. III and IV only
C. I and IV only
D. I, III, and IV only
E. I, II, III, and IV
4. Erosion can be explained as the:
A. additional income generated from the sales of a newly added product.
B. loss of current sales due to a new project being implemented.
C. loss of revenue due to employee theft.
D. loss of revenue due to customer theft.
E. loss of cash due to the expenses required to fix a parking lot after a heavy rain storm.
5. The salvage value of an asset creates an after-tax cash inflow to the firm in an amount
equal to the:
A. sales price of the asset.
B. sales price minus the book value.
C. sales price minus the tax due based on the sales price minus the book value.
D. sales price plus the tax due based on the sales price minus the book value.
E. sales price plus the tax due based on the book value minus the sales price.
6. Which of the following should be included in the analysis of a project?
I. sunk costs
II. opportunity costs
III. erosion costs
IV. incremental costs
A. I and II only
B. III and IV only
C. II and IV only
D. II, III, and IV only
E. I, II, and IV only
7. A project's operating cash flow will when:
A. increase the depreciation expense increases.
B. the sales projections are lowered.
C. the interest expense is lowered.
D. the net working capital requirement increases.
E. the earnings before interest and taxes decreases.
8. The bottom-up approach to computing the operating cash flow applies only when:
A. both the depreciation expense and the interest expense are equal to zero.
B. the interest expense is equal to zero.
C. the project is a cost-cutting project.
D. no fixed assets are required for the project.
E. taxes are ignored and the interest expense is equal to zero.
9. The equivalent annual cost method is useful in determining:
A. the annual operating cost of a machine if the annual maintenance is performed versus
when the maintenance is not performed as recommended.
B. the tax shield benefits of depreciation given the purchase of new assets for a project.
C. operating cash flows for cost-cutting projects of equal duration.
D. which one of two machines to get given equal machine lives but unequal costs.
E. which one of two machines to purchase when the machines are mutually exclusive,
have different machine lives, and will be replaced once they are worn out.
40. Marshall's & Co. purchased a corner lot in Eglon City five years ago at a cost of
$640,000. The lot was recently appraised at $810,000. At the time of the purchase, the
company spent $50,000 to grade the lot and another $4,000 to build a small building on
the lot to house a parking lot attendant who has overseen the use of the lot for daily
commuter parking. The company now wants to build a new retail store on the site. The
building cost is estimated at $1.2 million. What amount should be used as the initial cash
flow for this building project?
A. $1,200,000
B. $1,840,000
C. $1,890,000
D. $2,010,000
E. $2,060,000