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7 Question CHAPTER 1 0 out of 5 points Which one of the following is the best example of two mutually exclusive projects? Selected Answer: Correct Answer: Question 2 buying sufficient equipment to manufacture both desks and chairs simultaneously using an empty warehouse for storage or renting it entirely out to another firm 5 out of 5 points A project has an initial cost of $8,500 and produces cash inflows of $2,600, $4,900, and $1,500 over the next three years, respectively. What is the discounted payback period if the required rate of return is 7 percent? Correct Answer: never 5 out of 5 points The profitability index is closely related to: Selected Answer: Correct Answer: net present value. net present value. Question 3 Question 4 5 out of 5 points The length of time required for a project's discounted cash flows to equal the initial cost of the project is called the: Correct Answer: discounted payback period. Question 5 5 out of 5 points Larry's Lanterns is considering a project which will produce sales of $240,000 a year for the next five years. The profit margin is estimated at 6 percent. The project will cost $290,000 and be depreciated straight-line to a book value of zero over the life of the project. Larry's has a required accounting return of 8 percent. This project should be _____ because the AAR is _____ Selected Answer: Correct Answer: accepted; 9.93 percent. accepted; 9.93 percent. Question 6 5 out of 5 points A project has average net income of $2,100 a year over its 4-year life. The initial cost of the project is $65,000 which will be depreciated using straight-line depreciation to a book value of zero over the life of the project. The firm wants to earn a minimal average accounting return of 8.5 percent. The firm should _____ the project based on the AAR of _____ Selected Answer: Correct Answer: reject; 6.46 percent. reject; 6.46 percent. Question 7 0 out of 5 points You are considering the following two mutually exclusive projects. Both projects will be depreciated using straight-line depreciation to a zero book value over the life of the project. Neither project has any salvage value. Required rate of return 10 % 13 % Required payback period 2.0 years 2.0 years Required accounting return 8 % 11 % Reference: 07_02 Based upon the payback period and the information provided in the problem, you should: Selected Answer: Correct Answer: Question 8 accept both project A and project B. reject both project A and project B. 5 out of 5 points An investment's average net income divided by its average book value defines the average: Selected Answer: Correct Answer: accounting return. accounting return. 5 out of 5 points The payback period rule: Selected Answer: Correct Answer: None of the above. None of the above. Question 9 Question 10 5 out of 5 points What is the net present value of a project that has an initial cash outflow of $12,670 and the following cash inflows? The required return is 11.5 percent. Selected Answer: Correct Answer: Question 11 $218.68 $218.68 5 out of 5 points A project has an initial cost of $1,900. The cash inflows are $0, $500, $900, and $700 over the next four years, respectively. What is the payback period? Selected Answer: Correct Answer: 3.71 years 3.71 years Question 12 5 out of 5 points A project will produce cash inflows of $1,750 a year for four years. The project initially costs $10,600 to get started. In year five, the project will be closed and as a result should produce a cash inflow of $8,500. What is the net present value of this project if the required rate of return is 13.75 percent? Selected Answer: Correct Answer: Question 13 -$1,011.40 -$1,011.40 5 out of 5 points You are analyzing a project and have prepared the following data: Required payback period 2.5 years Required AAR 7.25 percent Required return 8.50 percent Reference: 07_01 Based on the internal rate of return of _____for this project, you should _____ the project. Selected Answer: Correct Answer: Question 14 10.75 percent; accept 10.75 percent; accept 5 out of 5 points When two projects both require the total use of the same limited economic resource, the projects are generally considered to be: Selected Answer: Correct Answer: mutually exclusive. mutually exclusive. Question 15 5 out of 5 points You are considering the following two mutually exclusive projects. Both projects will be depreciated using straight-line depreciation to a zero book value over the life of the project. Neither project has any salvage value. Required rate of return 10 % 13 % Required payback period 2.0 years 2.0 years Required accounting return 8 % 11 % Reference: 07_02 Based upon the internal rate of return (IRR) and the information provided in the problem, you should: Selected Answer: Correct Answer: Question 16 ignore the IRR rule and use another method of analysis. ignore the IRR rule and use another method of analysis. 5 out of 5 points Yancy is considering a project which will produce cash inflows of $900 a year for 4 years. The project has a 9 percent required rate of return and an initial cost of $2,800. What is the discounted payback period? Correct Answer: 3.82 years 5 out of 5 points The discounted payback period rule: Selected Answer: considers the time value of money. 0 out of 5 points If a project is assigned a required rate of return equal to zero, then: Selected Answer: Correct Answer: whether the project is accepted or rejected will depend on the timing of the cash flows. the timing of the project's cash flows has no bearing on the value of the project. 0 out of 5 points The internal rate of return tends to be: Selected Answer: Correct Answer: ignored by most financial analysts. easier for managers to comprehend than the net present value. 0 out of 5 points All else constant, the net present value of a project increases when: Selected Answer: Correct Answer: the discount rate increases. the rate of return decreases Question 17 Question 18 Question 19 Question 20 Question 1 Modified internal rate of return: Selected Answer: Correct Answer: Question 2 0 out of 5 points handles the multiple IRR problem by combining cash flows until only one change in sign change remains. Both A and B. 5 out of 5 points You are considering the following two mutually exclusive projects. Both projects will be depreciated using straight-line depreciation to a zero book value over the life of the project. Neither project has any salvage value. Required rate of return 10 % 13 % Required payback period 2.0 years 2.0 years Required accounting return 8 % 11 % Reference: 07_02 Based upon the payback period and the information provided in the problem, you should: Selected Answer: Correct Answer: Question 3 Net present value: Selected Answer: Correct Answer: Question 4 is more useful to decision makers than the internal rate of return when comparing different sized projects. is more useful to decision makers than the internal rate of return when comparing different sized projects. reject both project A and project B. reject both project A and project B. 5 out of 5 points 5 out of 5 points A project will produce cash inflows of $1,750 a year for four years. The project initially costs $10,600 to get started. In year five, the project will be closed and as a result should produce a cash inflow of $8,500. What is the net present value of this project if the required rate of return is 13.75 percent? Selected Answer: Correct Answer: -$1,011.40 -$1,011.40 5 out of 5 points No matter how many forms of investment analysis you do: Question 5 Selected Answer: Correct Answer: Question 6 the actual results from a project may vary significantly from the expected results. the actual results from a project may vary significantly from the expected results. 5 out of 5 points The average accounting return is determined by: Selected Answer: Correct Answer: Question 7 The internal rate of return for a project will increase if: Selected Answer: Correct Answer: Question 8 Analysis using the profitability index: Selected Answer: Correct Answer: Question 9 is useful as a decision tool when investment funds are limited. is useful as a decision tool when investment funds are limited. the initial cost of the project can be reduced. the initial cost of the project can be reduced. 5 out of 5 points dividing the average net income by the average investment. dividing the average net income by the average investment. 5 out of 5 points 0 out of 5 points What is the profitability index for an investment with the following cash flows given a 9 percent required return? Selected Answer: Correct Answer: Question 10 .98 1.02 0 out of 5 points If there is a conflict between mutually exclusive projects due to the IRR, one should: Selected Answer: Correct Answer: spend more money on gathering information. depend on the NPV as it will always provide the most value. Question 11 5 out of 5 points The payback period rule accepts all investment projects in which the payback period for the cash flows is: Selected Answer: Correct Answer: less than the cutoff point. less than the cutoff point. Question 12 5 out of 5 points You are considering two independent projects with the following cash flows. The required return for both projects is 10 percent. Given this information, which one of the following statements is correct? Selected Answer: Correct Answer: Question 13 You should accept both projects if the funds are available to do so since both NPV's are > 0. You should accept both projects if the funds are available to do so since both NPV's are > 0. 5 out of 5 points A project has average net income of $2,100 a year over its 4-year life. The initial cost of the project is $65,000 which will be depreciated using straight-line depreciation to a book value of zero over the life of the project. The firm wants to earn a minimal average accounting return of 8.5 percent. The firm should _____ the project based on the AAR of _____ Selected Answer: Correct Answer: reject; 6.46 percent. reject; 6.46 percent. 5 out of 5 points You are analyzing a project and have prepared the following data: Question 14 Required payback period 2.5 years Required AAR 7.25 percent Required return 8.50 percent Reference: 07_01 Based on the profitability index of _____ for this project, you should _____ the project. Selected Answer: Correct Answer: Question 15 The payback period rule: Selected Answer: requires an arbitrary choice of a cutoff point. 1.05; accept 1.05; accept 5 out of 5 points Correct Answer: Question 16 requires an arbitrary choice of a cutoff point. 5 out of 5 points Which one of the following statements concerning net present value (NPV) is correct? Selected Answer: Correct Answer: An investment should be accepted if the NPV is positive and rejected if it is negative. An investment should be accepted if the NPV is positive and rejected if it is negative. Question 17 5 out of 5 points The present value of an investment's future cash flows divided by the initial cost of the investment is called the: Selected Answer: Correct Answer: profitability index. profitability index. Question 18 5 out of 5 points Jack is considering adding toys to his general store. He estimates that the cost of inventory will be $4,200. The remodeling expenses and shelving costs are estimated at $1,500. Toy sales are expected to produce net cash inflows of $1,200, $1,500, $1,600, and $1,750 over the next four years, respectively. Should Jack add toys to his store if he assigns a three-year payback period to this project? Selected Answer: Correct Answer: no; because the payback period is 3.80 years no; because the payback period is 3.80 years Question 19 5 out of 5 points Given that the net present value (NPV) is generally considered to be the best method of analysis, why should you still use the other methods? Selected Answer: Correct Answer: The other methods help validate whether or not the results from the net present value analysis are reliable. The other methods help validate whether or not the results from the net present value analysis are reliable. Question 20 5 out of 5 points The primary reason that company projects with positive net present values are considered acceptable is that: Selected Answer: Correct Answer: they create value for the owners of the firm. they create value for the owners of the firm. CHAPTER 8 Question 1 0 out of 5 points Lottie's Boutique needs to maintain 20% of its sales in net working capital. Lottie's is considering a 3-year project which will increase sales from their current level of $110,000 to $130,000 the first year and $145,000 a year for the following two years. What amount should be included in the project analysis for the last year of the project in regards to the net working capital? Selected Answer: Correct Answer: $35,000 $7,000 Feedback: NWC recovery = ($145,000 - $110,000) .20 = $7,000 Question 2 5 out of 5 points Margarite's Enterprises is considering a new project. The project will require $325,000 for new fixed assets, $160,000 for additional inventory and $35,000 for additional accounts receivable. Short-term debt is expected to increase by $100,000 and long-term debt is expected to increase by $300,000. The project has a 5-year life. The fixed assets will be depreciated straight-line to a zero book value over the life of the project. At the end of the project, the fixed assets can be sold for 25% of their original cost. The net working capital returns to its original level at the end of the project. The project is expected to generate annual sales of $554,000 and costs of $430,000. The tax rate is 35% and the required rate of return is 15%. Reference: 08_01 What is the amount of the after-tax cash flow from the sale of the fixed assets at the end of this project? (Round your answer to whole dollars) Selected Answer: Correct Answer: $52,813 $52,813 Feedback: After-tax salvage value = .25 $325,000 (1-.35) = $52,812.50 = $52,813 (rounded) Question 3 5 out of 5 points A project which is designed to improve the manufacturing efficiency of a firm but will generate no additional sales is referred to as a(n) _____ project. Selected Answer: Correct Answer: Question 4 cost-cutting cost-cutting 5 out of 5 points You just purchased some equipment that is classified as 5-year property for MACRS. The equipment cost $67,600. What will the book value of this equipment be at the end of three years should you decide to resell the equipment at that point in time? Selected Answer: Correct Answer: Question 5 $19,468.80 $19,468.80 5 out of 5 points Ernie's Electrical is evaluating a project which will increase sales by $50,000 and costs by $30,000. The project will cost $150,000 and be depreciated straight-line to a zero book value over the 10 year life of the project. The applicable tax rate is 34%. What is the operating cash flow for this project? Selected Answer: Correct Answer: $18,300 $18,300 Question 6 5 out of 5 points An increase in which one of the following will increase the operating cash flow? Selected Answer: Correct Answer: equipment depreciation equipment depreciation Question 7 5 out of 5 points The depreciation method currently allowed under US tax law governing the accelerated writeoff of property under various lifetime classifications is called _____ depreciation. Selected Answer: Correct Answer: MACRS MACRS Question 8 0 out of 5 points Toni's Tools is comparing machines to determine which one to purchase. The machines sell for differing prices, have differing operating costs, differing machine lives, and will be replaced when worn out. These machines should be compared using: Selected Answer: Correct Answer: net present value only. their effective annual costs. 5 out of 5 points 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 Selected Answer: II, III, and IV only Question 9 Correct Answer: Question 10 II, III, and IV only 0 out of 5 points Jackson & Sons uses packing machines to prepare their product for shipping. One machine costs $136,000 and lasts about 4 years before it needs replaced. The operating cost per machine is $6,000 a year. What is the equivalent annual cost of one packing machine if the required rate of return is 12%? (Round your answer to whole dollars) Selected Answer: Correct Answer: $154,224 $50,776 Question 11 5 out of 5 points You spent $500 last week fixing the transmission in your car. Now, the brakes are acting up and you are trying to decide whether to fix them or trade the car in for a newer model. In analyzing the brake situation, the $500 you spent fixing the transmission is a(n) _____ cost. Selected Answer: Correct Answer: sunk sunk 5 out of 5 points The cash flows of a project should: Selected Answer: Correct Answer: include all incremental costs, including opportunity costs. include all incremental costs, including opportunity costs. 5 out of 5 points Project analysis is focused on _____ costs. Selected Answer: Correct Answer: incremental incremental Question 12 Question 13 Question 14 0 out of 5 points Margarite's Enterprises is considering a new project. The project will require $325,000 for new fixed assets, $160,000 for additional inventory and $35,000 for additional accounts receivable. Short-term debt is expected to increase by $100,000 and long-term debt is expected to increase by $300,000. The project has a 5-year life. The fixed assets will be depreciated straight-line to a zero book value over the life of the project. At the end of the project, the fixed assets can be sold for 25% of their original cost. The net working capital returns to its original level at the end of the project. The project is expected to generate annual sales of $554,000 and costs of $430,000. The tax rate is 35% and the required rate of return is 15%. Reference: 08_01 What is the initial cost of this project? Selected Answer: Correct Answer: $520,000 $420,000 Feedback: Initial cash outflow = $325,000 + $160,000 + $35,000 - $100,000 = $420,000 Question 15 0 out of 5 points LiCheng's Enterprises just purchased some fixed assets that are classified as 3-year property for MACRS. The assets cost $1,900. What is the amount of the depreciation expense for year 2? Selected Answer: Correct Answer: $633.27 $844.36 Feedback: Depreciation for year 2 = $1,900 .4444 = $844.36 Question 16 5 out of 5 points RP&A, Inc. purchased some fixed assets four years ago at a cost of $19,800. They no longer need these assets so are going to sell them today at a price of $3,500. The assets are classified as 5-year property for MACRS. What is the current book value of these assets? Selected Answer: Correct Answer: Question 17 $3,421.44 $3,421.44 0 out of 5 points A project is expected to create operating cash flows of $22,500 a year for three years. The initial cost of the fixed assets is $50,000. These assets will be worthless at the end of the project. An additional $3,000 of net working capital will be required throughout the life of the project. What is the project's net present value if the required rate of return is 10%? Selected Answer: Correct Answer: $5,954.17 $5,208.11 5 out of 5 points A pro forma financial statement is one that: Selected Answer: Correct Answer: projects future years' operations. projects future years' operations. Question 18 Question 19 5 out of 5 points Le Place has sales of $439,000, depreciation of $32,000, and net working capital of $56,000. The firm has a tax rate of 34% and a profit margin of 6%. The firm has no interest expense. What is the amount of the operating cash flow? Selected Answer: Correct Answer: $58,340 $58,340 Feedback: OCF = ($439,000 .06) + $32,000 = $58,340 Question 20 5 out of 5 points Ronnie's Coffee House is considering a project which will produce sales of $6,000 and increase cash expenses by $2,500. If the project is implemented, taxes will increase by $1,300. The additional depreciation expense will be $1,000. An initial cash outlay of $2,000 is required for net working capital. What is the amount of the operating cash flow using the topdown approach? Selected Answer: Correct Answer: $2,200 $2,200 Feedback: OCF = $6,000 - $2,500 - $1,300 = $2,200 Question 1 5 out of 5 points Lottie's Boutique needs to maintain 20% of its sales in net working capital. Lottie's is considering a 3-year project which will increase sales from their current level of $110,000 to $130,000 the first year and $145,000 a year for the following two years. What amount should be included in the project analysis for the last year of the project in regards to the net working capital? Selected Answer: Correct Answer: $7,000 $7,000 Feedback: NWC recovery = ($145,000 - $110,000) .20 = $7,000 Question 2 The cash flow from projects for a company is computed as the: Selected Answer: Correct Answer: Question 3 sum of the incremental operating cash flow, capital spending, and net working capital expenses incurred by the project. sum of the incremental operating cash flow, capital spending, and net working capital expenses incurred by the project. 5 out of 5 points Which of the following are examples of erosion? (I.) the loss of sales due to increased competition in the product market (II.) the loss of sales because your chief competitor just opened a store across the street from your store (III.) the loss of sales due to a new product which you recently introduced (IV.) the loss of sales due to a new product recently introduced by your competitor Selected Answer: Correct Answer: Question 4 III only III only 5 out of 5 points 5 out of 5 points The Wolf's Den Outdoor Gear is considering replacing the equipment it uses to produce tents. The equipment would cost $1.4 million and lower manufacturing costs by an estimated $215,000 a year. The equipment will be depreciated using straight-line depreciation to a book value of zero. The life of the equipment is 8 years. The required rate of return is 13% and the tax rate is 34%. What is the net income from this proposed project? Selected Answer: Correct Answer: $26,400 $26,400 Question 5 5 out of 5 points Ben's Border Caf is considering a project which will produce sales of $16,000 and increase cash expenses by $10,000. If the project is implemented, taxes will increase from $23,000 to $24,500 and depreciation will increase from $4,000 to $5,500. What is the amount of the operating cash flow using the top-down approach? Selected Answer: Correct Answer: $4,500 $4,500 Feedback: OCF = $16,000 - $10,000 - ($24,500 - $23,000) = $4,500 Question 6 0 out of 5 points Tax shield refers to a reduction in taxes created by: Selected Answer: Correct Answer: Question 7 a project's incremental expenses. noncash expenses. 0 out of 5 points All of the following are anticipated effects of a proposed project. Which of these should be included in the initial project cash flow related to net working capital? (I.) an inventory decrease of $5,000 (II.) an increase in accounts receivable of $1,500 (III.) an increase in fixed assets of $7,600 (IV.) a decrease in accounts payable of $2,100 Selected Answer: Correct Answer: I and III only I, II, and IV only Question 8 5 out of 5 points The most valuable investment given up if an alternative investment is chosen is a(n): Selected Answer: Correct Answer: opportunity cost. opportunity cost. 5 out of 5 points A project's operating cash flow will increase when: Selected Answer: Correct Answer: the depreciation expense increases. the depreciation expense increases. 5 out of 5 points Changes in the net working capital: Selected Answer: Correct Answer: can affect the cash flows of a project every year of the project's life. can affect the cash flows of a project every year of the project's life. 5 out of 5 points A company which uses the MACRS system of depreciation: Selected Answer: Correct Answer: will write off the entire cost of an asset over the asset's class life. will write off the entire cost of an asset over the asset's class life. Question 9 Question 10 Question 11 Question 12 0 out of 5 points Winslow, Inc. is considering the purchase of a $225,000 piece of equipment. The equipment is classified as 5-year MACRS property. The company expects to sell the equipment after four years at a price of $50,000. What is the after-tax cash flow from this sale if the tax rate is 35%? Selected Answer: Correct Answer: $38,880 $46,108 Feedback: Book value at the end of year 4 = $225,000 (1 - .2 - .32 - .192 - .1152) = $38,880Tax on sale = ($50,000 - $38,880) .35 = $3,892After-tax cash flow = $50,000 - $3,892 = $46,108 Question 13 5 out of 5 points Louie's Leisure Products is considering a project which will require the purchase of $1.4 million in new equipment. The equipment will be depreciated straight-line to a zero book value over the 7-year life of the project. Louie's expects to sell the equipment at the end of the project for 20% of its original cost. Annual sales from this project are estimated at $1.2 million. Net working capital equal to 20% of sales will be required to support the project. All of the net working capital will be recouped at the end of the project. The firm desires a minimal 14% rate of return on this project. The tax rate is 34%. Reference: 08_02 What is the value of the depreciation tax shield in year 2 of the project? Selected Answer: Correct Answer: $68,000 $68,000 Feedback: Depreciation tax shield = $1,400,000 7 .34 = $68,000 Question 14 Net working capital: Selected Answer: Correct Answer: Question 15 is the only expenditure where at least a partial recovery can be made at the end of a project. is frequently affected by the additional sales generated by a new project. 0 out of 5 points 5 out of 5 points The annual annuity stream of payments with the same present value as a project's costs is called the project's _____ cost. Selected Answer: Correct Answer: equivalent annual equivalent annual Question 16 5 out of 5 points The bottom-up approach to computing the operating cash flow applies only when: Selected Answer: the interest expense is equal to zero. Correct Answer: Question 17 the interest expense is equal to zero. 5 out of 5 points A pro forma financial statement is one that: Selected Answer: Correct Answer: Question 18 Which one of the following is an example of an incremental cash flow? Selected Answer: Correct Answer: Question 19 the rent on some new machinery that is required for an upcoming project the rent on some new machinery that is required for an upcoming project projects future years' operations. projects future years' operations. 5 out of 5 points 5 out of 5 points A project which is designed to improve the manufacturing efficiency of a firm but will generate no additional sales is referred to as a(n) _____ project. Selected Answer: Correct Answer: cost-cutting cost-cutting Question 20 5 out of 5 points Jamestown Ltd. currently produces boat sails and is considering expanding its operations to include awnings for homes and travel trailers. The company owns land beside its current manufacturing facility that could be used for the expansion. The company bought this land ten years ago at a cost of $250,000. Today, the land is valued at $425,000. The grading and excavation work necessary to build on the land will cost $15,000. The company currently has some unused equipment which it currently owns valued at $60,000. This equipment could be used for producing awnings if $5,000 is spent for equipment modifications. Other equipment costing $780,000 will also be required. What is the amount of the initial cash flow for this expansion project? Selected Answer: Correct Answer: $1,285,000 $1,285,000 Feedback: CF0 = $425,000 + $15,000 + $60,000 + $5,000 + $780,000 = $1,285,000 CHAPTER 9 Question 1 In a decision tree, the NPV to make the yes/no decision is dependent on Selected Answer: Correct Answer: Question 2 all cash flows and probabilities. all cash flows and probabilities. 5 out of 5 points 5 out of 5 points The Adept Co. is analyzing a proposed project. The company expects to sell 2,500 units, give or take 10 percent. The expected variable cost per unit is $8 and the expected fixed costs are $12,500. Cost estimates are considered accurate within a plus or minus 5 percent range. The depreciation expense is $4,000. The sale price is estimated at $16 a unit, give or take 2 percent. The company bases their sensitivity analysis on the expected case scenario. Reference: 09_02 What is the sales revenue under the optimistic case scenario? Selected Answer: Correct Answer: $44,880 $44,880 Feedback: Sales revenue for the best case = 2,500 1.1 $16 1.02 = $44,880 Question 3 Monte Carlo simulation is Selected Answer: Correct Answer: Question 4 provides a more complete analysis that sensitivity or scenario. provides a more complete analysis that sensitivity or scenario. 5 out of 5 points 0 out of 5 points Kurt Neal and Son is considering a project with a discounted payback just equal to the project's life. The projections include a sales price of $11, variable cost per unit of $8.50, and fixed costs of $4,500. The operating cash flow is $6,200. What is the break-even quantity? Selected Answer: Correct Answer: 1,800 units 4,280 units Feedback: Financial break-even point = ($4,500 + $6,200) ($11 - $8.50) = 4,280 Question 5 5 out of 5 points The Can-Do Co. is analyzing a proposed project. The company expects to sell 12,000 units, give or take 4 percent. The expected variable cost per unit is $7 and the expected fixed cost is $36,000. The fixed and variable cost estimates are considered accurate within a plus or minus 6 percent range. The depreciation expense is $30,000. The tax rate is 34 percent. The sale price is estimated at $14 a unit, give or take 5 percent. The company bases their sensitivity analysis on the expected case scenario. Reference: 09_03 What is the operating cash flow for a sensitivity analysis using total fixed costs of $32,000? Selected Answer: $44,520 Correct Answer: $44,520 Feedback: EBIT = [(12,000 ($14 - $7)] - $32,000 - $30,000 = $22,000 Tax = $22,000 .34 = $7,480 OCF = $22,000 + $30,000 - $7,480 = $44,520 Question 6 0 out of 5 points Which of the following statements are correct concerning the present value break-even point of a project? (I.) The present value of the cash inflows equals the amount of the initial investment. (II.) The payback period of the project is equal to the life of the project. (III.) The operating cash flow is at a level that produces a net present value of zero. (IV.) The project never pays back on a discounted basis. Selected Answer: Correct Answer: Question 7 I and II only I and III only 0 out of 5 points The Mini-Max Company has the following cost information on their new prospective project. Calculate the present value break-even point. Initial investment: $700 Fixed costs are $ 200 per year Variable costs: $ 3 per unit Depreciation: $ 140 per year Price: $8 per unit Discount rate: 12% Project life: 3 years Tax rate: 34% Selected Answer: Correct Answer: 68 units per year 114 units per year 5 out of 5 points Question 8 The Quick-Start Company has the following pattern of potential cash flows with their planned investment in a new cold weather starting system for fuel injected cars. Reference: 09_01 If the company has a discount rate of 17%, should they decide to invest? Selected Answer: Correct Answer: yes, NPV = $ 21.6 million yes, NPV = $ 21.6 million Feedback: NPV0 = NPV1/(1+r) C0 = ($48,632,106/1.17) $20,000,000) = $21,565,903 Question 9 5 out of 5 points The type of analysis that is most dependent upon the use of a computer is _____ analysis. Selected Answer: Correct Answer: Question 10 simulation simulation 5 out of 5 points An analysis of what happens to the estimate of net present value when only one variable is changed is called _____ analysis. Selected Answer: Correct Answer: sensitivity sensitivity Question 11 5 out of 5 points The accounting break-even production quantity for a project is 5,425 units. The fixed costs are $31,600 and the contribution margin is $6. What is the projected depreciation expense? Selected Answer: Correct Answer: $950 $950 Feedback: Depreciation at the accounting break-even = (5,425 $6) - $31,600 = $950 Question 12 In a decision tree, caution should be used in analysis because Selected Answer: Correct Answer: Question 13 Both A and C. Both A and B. 0 out of 5 points 5 out of 5 points At a production level of 5,600 units a project has total costs of $89,000. The variable cost per unit is $11.20. What is the amount of the total fixed costs? Selected Answer: Correct Answer: $26,280 $26,280 Feedback: Total fixed cost = $89,000 (5,600 $11.20) = $26,280 Question 14 0 out of 5 points At stage 2 of the decision tree it shows that if a project is successful, the payoff will be $53,000 with a 2/3 chance of occurrence. There is also the 1/3 chance of a $-24,000 payoff. The cost of getting to stage 2 (1 year out) is $44,000. The cost of capital is 15%. What is the NPV of the project at stage 1? Selected Answer: Correct Answer: Can not be calculated without the exact timing of future cash flows. $-20,232 Feedback: $-44,000 + [((2/3($53,000)) + (1/3($-24,000))) / 1.15] = $-20,232 Question 15 0 out of 5 points The Adept Co. is analyzing a proposed project. The company expects to sell 2,500 units, give or take 10 percent. The expected variable cost per unit is $8 and the expected fixed costs are $12,500. Cost estimates are considered accurate within a plus or minus 5 percent range. The depreciation expense is $4,000. The sale price is estimated at $16 a unit, give or take 2 percent. The company bases their sensitivity analysis on the expected case scenario. Reference: 09_02 The company conducts a sensitivity analysis using a variable cost of $9. The total variable cost estimate will be: Selected Answer: Correct Answer: $24,750 $22,500 Feedback: Total variable cost = $9 2,500 = $22,500 Question 16 0 out of 5 points Thompson & Son have been busy analyzing a new product. They have determined that an operating cash flow of $16,700 will result in a zero net present value, which is a company requirement for project acceptance. The fixed costs are $12,378 and the contribution margin is $6.20. The company feels that they can realistically capture 10 percent of the 50,000 unit market for this product. Should the company develop the new product? Why or why not? Selected Answer: Correct Answer: no; because the firm can not generate sufficient sales to obtain at least a zero net present value yes; because 5,000 units of sales exceeds the quantity required for a zero net present value Feedback: Financial break-even point = ($12,378 + $16,700) $6.20 = 4,690; The product should be accepted the because expected level of sales exceeds the financial break-even point. Question 17 0 out of 5 points All else constant, the accounting break-even level of sales will decrease when the: Selected Answer: Correct Answer: Question 18 contribution margin decreases. depreciation expense decreases. 0 out of 5 points Wilson's Antiques is considering a project that has an initial cost today of $10,000. The project has a two-year life with cash inflows of $6,500 a year. Should Wilson's decide to wait one year to commence this project, the initial cost will increase by 5 percent and the cash inflows will increase to $7,500 a year. What is the value of the option to wait if the applicable discount rate is 10 percent? Selected Answer: Correct Answer: $1,235.54 $1,006.76 Question 19 5 out of 5 points The Can-Do Co. is analyzing a proposed project. The company expects to sell 12,000 units, give or take 4 percent. The expected variable cost per unit is $7 and the expected fixed cost is $36,000. The fixed and variable cost estimates are considered accurate within a plus or minus 6 percent range. The depreciation expense is $30,000. The tax rate is 34 percent. The sale price is estimated at $14 a unit, give or take 5 percent. The company bases their sensitivity analysis on the expected case scenario. Reference: 09_03 What is the earnings before interest and taxes under anoptimistic case scenario? Selected Answer: Correct Answer: $37,497.60 $37,497.60 Feedback: EBIT for best case = (12,000 1.04) [($14 1.05) - ($7 .94)] ($36,000 .94) - $30,000 = $37,497.60 Question 20 0 out of 5 points The sales level that results in a project's net income exactly equaling zero is called the _____ break-even. Selected Answer: Correct Answer: present value accounting Question 1 Scenario analysis is different than sensitivity analysis Selected Answer: Correct Answer: Question 2 as several variables are changed together. as several variables are changed together. 5 out of 5 points 5 out of 5 points At a production level of 5,600 units a project has total costs of $89,000. The variable cost per unit is $11.20. What is the amount of the total fixed costs? Selected Answer: Correct Answer: $26,280 $26,280 Feedback: Total fixed cost = $89,000 (5,600 $11.20) = $26,280 Question 3 Simulation analysis is based on assigning a _____ and analyzing the results. Selected Answer: Correct Answer: Question 4 All else constant, as the variable cost per unit increases, the: Selected Answer: contribution margin decreases. wide range of values to multiple variables simultaneously wide range of values to multiple variables simultaneously 5 out of 5 points 5 out of 5 points Correct Answer: Question 5 contribution margin decreases. 5 out of 5 points A project has earnings before interest and taxes of $5,750, fixed costs of $50,000, a selling price of $13 a unit, and a sales quantity of 11,500 units. Depreciation is $7,500. What is the variable cost per unit? Selected Answer: Correct Answer: $7.50 $7.50 Feedback: [11,500 ($13.00 v)] - $50,000 - $7,500 = $5,750; v = $7.50 Question 6 Which one of the following is most likely a variable cost? Selected Answer: Correct Answer: Question 7 Variable costs Selected Answer: Correct Answer: Question 8 Variable costs: Selected Answer: Correct Answer: Question 9 Including the option to expand in your project analysis will tend to: Selected Answer: Correct Answer: Question 10 Conducting scenario analysis helps managers see the: Selected Answer: Correct Answer: Question 11 potential range of outcomes from a proposed project. potential range of outcomes from a proposed project. increase the net present value of a project. increase the net present value of a project. 5 out of 5 points change in direct relationship to the quantity of output produced. change in direct relationship to the quantity of output produced. 5 out of 5 points All of the above. All of the above. 5 out of 5 points direct labor costs direct labor costs 5 out of 5 points 5 out of 5 points 5 out of 5 points An analysis of what happens to the estimate of net present value when only one variable is changed is called _____ analysis. Selected Answer: Correct Answer: sensitivity sensitivity 5 out of 5 points Question 12 Which of the following statements are correct concerning the accounting break-even point? (I.) The net income is equal to zero at the accounting break-even point. (II.) The net present value is equal to zero at the accounting break-even point. (III.) The quantity sold at the accounting break-even point is equal to the total fixed costs plus depreciation divided by the contribution margin. (IV.) The quantity sold at the accounting break-even point is equal to the total fixed costs divided by the contribution margin. Selected Answer: Correct Answer: Question 13 In the present-value break-even the EAC is used to Selected Answer: Correct Answer: Question 14 determine the opportunity cost of investment. allocate the initial investment at its opportunity cost over the life of the project. I and III only I and III only 0 out of 5 points 5 out of 5 points The Adept Co. is analyzing a proposed project. The company expects to sell 2,500 units, give or take 10 percent. The expected variable cost per unit is $8 and the expected fixed costs are $12,500. Cost estimates are considered accurate within a plus or minus 5 percent range. The depreciation expense is $4,000. The sale price is estimated at $16 a unit, give or take 2 percent. The company bases their sensitivity analysis on the expected case scenario. Reference: 09_02 The company is conducting a sensitivity analysis on the sales price using a sales price estimate of $17. Using this value, the earnings before interest and taxes will be: Selected Answer: Correct Answer: $6,000 $6,000 Feedback: EBIT = [($17 - $8) 2,500] - $12,500 - $4,000 = $6,000 Question 15 5 out of 5 points The Adept Co. is analyzing a proposed project. The company expects to sell 2,500 units, give or take 10 percent. The expected variable cost per unit is $8 and the expected fixed costs are $12,500. Cost estimates are considered accurate within a plus or minus 5 percent range. The depreciation expense is $4,000. The sale price is estimated at $16 a unit, give or take 2 percent. The company bases their sensitivity analysis on the expected case scenario. Reference: 09_02 The company conducts a sensitivity analysis using a variable cost of $9. The total variable cost estimate will be: Selected Answer: Correct Answer: $22,500 $22,500 Feedback: Total variable cost = $9 2,500 = $22,500 Question 16 5 out of 5 points At a production level of 6,000 units a project has total costs of $120,000. The variable cost per unit is $14.50. What is the amount of the total fixed costs? Selected Answer: Correct Answer: $33,000 $33,000 Feedback: Total fixed cost = $120,000 (6,000 $14.50) = $33,000 Question 17 0 out of 5 points Margerit is reviewing a project with projected sales of 1,500 units a year, a cash flow of $40 a unit and a three-year project life. The initial cost of the project is $95,000. The relevant discount rate is 15 percent. Margerit has the option to abandon the project after one year at which time she feels she could sell the project for $60,000. At what level of sales should she be willing to abandon the project? Selected Answer: Correct Answer: Question 18 1,199 units 923 units 5 out of 5 points The Can-Do Co. is analyzing a proposed project. The company expects to sell 12,000 units, give or take 4 percent. The expected variable cost per unit is $7 and the expected fixed cost is $36,000. The fixed and variable cost estimates are considered accurate within a plus or minus 6 percent range. The depreciation expense is $30,000. The tax rate is 34 percent. The sale price is estimated at $14 a unit, give or take 5 percent. The company bases their sensitivity analysis on the expected case scenario. Reference: 09_03 What is the operating cash flow for a sensitivity analysis using total fixed costs of $32,000? Selected Answer: Correct Answer: $44,520 $44,520 Feedback: EBIT = [(12,000 ($14 - $7)] - $32,000 - $30,000 = $22,000 Tax = $22,000 .34 = $7,480 OCF = $22,000 + $30,000 - $7,480 = $44,520 Question 19 5 out of 5 points The accounting break-even production quantity for a project is 5,425 units. The fixed costs are $31,600 and the contribution margin is $6. What is the projected depreciation expense? Selected Answer: Correct Answer: $950 $950 Feedback: Depreciation at the accounting break-even = (5,425 $6) - $31,600 = $950 Question 20 5 out of 5 points Which of the following statements are correct concerning the present value break-even point of a project? (I.) The present value of the cash inflows equals the amount of the initial investment. (II.) The payback period of the project is equal to the life of the project. (III.) The operating cash flow is at a level that produces a net present value of zero. (IV.) The project never pays back on a discounted basis. Selected Answer: Correct Answer: I and III only I and III only Question 1 From the information below, calculate the accounting break-even point. Initial investment: $2,000 Fixed costs are $2,000 per year Variable costs: $6 per unit Depreciation: $250 per year Price: $20 per unit Discount rate: 10% Project life: 4 years Tax rate: 34% Selected Answer: Correct Answer: None of the above. 161 units per year 0 out of 5 points Feedback: Contribution Margin = ($20 - $6) (1 0.34) = $9.24 After tax (Fixed Cost + Depreciation) = ($2,000 + $250) (1 0.34) = $1,485 Accounting BEP = $1,485/$9.24 = 160.71 units = 161 units Question 2 Including the option to expand in your project analysis will tend to: Selected Answer: Correct Answer: Question 3 Which of the following are hidden options in capital budgeting? Selected Answer: Correct Answer: Question 4 All of the above. All of the above. increase the net present value of a project. increase the net present value of a project. 5 out of 5 points 5 out of 5 points 5 out of 5 points The Adept Co. is analyzing a proposed project. The company expects to sell 2,500 units, give or take 10 percent. The expected variable cost per unit is $8 and the expected fixed costs are $12,500. Cost estimates are considered accurate within a plus or minus 5 percent range. The depreciation expense is $4,000. The sale price is estimated at $16 a unit, give or take 2 percent. The company bases their sensitivity analysis on the expected case scenario. Reference: 09_02 What is the amount of the fixed cost per unit under the pessimistic case scenario? Selected Answer: Correct Answer: $5.83 $5.83 Feedback: Fixed cost per unit for the worst case = ($12,500 1.05) (2,500 .9) = $5.83 Question 5 Variable costs: Selected Answer: Correct Answer: Question 6 reflect the change in a variable when one more unit of output is produced. change in direct relationship to the quantity of output produced. 0 out of 5 points 5 out of 5 points Last month you introduced a new product to the market. Consumer demand has been overwhelming and appears that strong demand will exist over the long-term. Given this situation, management should consider the option to: Selected Answer: Correct Answer: expand. expand. 5 out of 5 points The investment timing decision relates to: Selected Answer: Correct Answer: the decision as to when a project should be started. the decision as to when a project should be started. Question 7 Question 8 0 out of 5 points The Mini-Max Company has the following cost information on their new prospective project. Calculate the present value break-even point. Initial investment: $700 Fixed costs are $ 200 per year Variable costs: $ 3 per unit Depreciation: $ 140 per year Price: $8 per unit Discount rate: 12% Project life: 3 years Tax rate: 34% Selected Answer: Correct Answer: None of the above. 114 units per year Question 9 5 out of 5 points Which of the following statements are correct concerning the present value break-even point of a project? (I.) The present value of the cash inflows equals the amount of the initial investment. (II.) The payback period of the project is equal to the life of the project. (III.) The operating cash flow is at a level that produces a net present value of zero. (IV.) The project never pays back on a discounted basis. Selected Answer: Correct Answer: I and III only I and III only Question 10 5 out of 5 points The Adept Co. is analyzing a proposed project. The company expects to sell 2,500 units, give or take 10 percent. The expected variable cost per unit is $8 and the expected fixed costs are $12,500. Cost estimates are considered accurate within a plus or minus 5 percent range. The depreciation expense is $4,000. The sale price is estimated at $16 a unit, give or take 2 percent. The company bases their sensitivity analysis on the expected case scenario. Reference: 09_02 The company conducts a sensitivity analysis using a variable cost of $9. The total variable cost estimate will be: Selected Answer: Correct Answer: $22,500 $22,500 Feedback: Total variable cost = $9 2,500 = $22,500 Question 11 Fixed costs: Selected Answer: Correct Answer: Question 12 reflect the change in a variable when one more unit of output is produced. are constant over the short-run regardless of the quantity of output produced. 0 out of 5 points 0 out of 5 points Which of the following statements are correct concerning the accounting break-even point? (I.) The net income is equal to zero at the accounting break-even point. (II.) The net present value is equal to zero at the accounting break-even point. (III.) The quantity sold at the accounting break-even point is equal to the total fixed costs plus depreciation divided by the contribution margin. (IV.) The quantity sold at the accounting break-even point is equal to the total fixed costs divided by the contribution margin. Selected Answer: Correct Answer: I and IV only I and III only Question 13 5 out of 5 points At a production level of 5,600 units a project has total costs of $89,000. The variable cost per unit is $11.20. What is the amount of the total fixed costs? Selected Answer: Correct Answer: $26,280 $26,280 Feedback: Total fixed cost = $89,000 (5,600 $11.20) = $26,280 Question 14 0 out of 5 points Your firm is considering a project with a five-year life and an initial cost of $120,000. The discount rate for the project is 12 percent. The firm expects to sell 2,100 units a year. The cash flow per unit is $20. The firm will have the option to abandon this project after three years at which time they expect they could sell the project for $50,000. You are interested in knowing how the project will perform if the sales forecast for years four and five of the project are revised such that there is a 50/50 chance that the sales will be either 1,400 or 2,500 units a year. What is the net present value of this project given your sales forecasts? Selected Answer: Correct Answer: $25,002 $28,746 Question 15 5 out of 5 points A firm is reviewing a project with labor cost of $8.90 per unit, raw materials cost of $21.63 a unit, and fixed costs of $8,000 a month. Sales are projected at 10,000 units over the threemonth life of the project. What are the total variable costs of the project? Selected Answer: Correct Answer: $305,300 $305,300 Feedback: Total variable costs = ($8.90 + $21.63) 10,000 = $305,300 Question 16 Given the following information, calculate the present value break-even point. Initial investment: $2,000 Fixed costs: $2,000 per year Variable costs: $6 per unit Depreciation: $ 250 per year Price: $20 per unit Discount rate: 10% Project life: 4 years Tax rate: 34% Selected Answer: Correct Answer: Question 17 In a decision tree, the NPV to make the yes/no decision is dependent on Selected Answer: Correct Answer: Question 18 all cash flows and probabilities. all cash flows and probabilities. 143 units per year 202 units per year 5 out of 5 points 0 out of 5 points 5 out of 5 points The approach that further attempts to model real word uncertainty by analyzing projects the way one might analyze gambling strategies is called Selected Answer: Correct Answer: Monte Carlo simulation. Monte Carlo simulation. 5 out of 5 points Scenario analysis is different than sensitivity analysis Selected Answer: Correct Answer: as several variables are changed together. as several variables are changed together. Question 19 Question 20 5 out of 5 points An analysis of what happens to the estimate of the net present value when you examine a number of different likely situations is called _____ analysis. Selected Answer: Correct Answer: scenario scenario CHAPTER 26 Question 1 5 out of 5 points Presto's Pizza is considering either leasing or buying a new oven. The lease payments would be $7,200 a year for 3 years. The purchase price is $20,000. The equipment has a 3-year life and then is expected to have a resale value of $2,000. Presto's Pizza uses straight-line depreciation, borrows money at 9.5 percent, and has a 34 percent tax rate. What is the net advantage to leasing? Selected Answer: Correct Answer: Feedback: Depreciation tax shield = $20,000 / 3 After-tax lease payment = $7,200 After-tax salvage value = $2,000 Discount rate = .095 (1 (1 (1 .34) = .0627 .34 = $2,266.67 .34) = $4,752 .34) = $1,320 $232 $232 Question 2 5 out of 5 points A financial lease: I. is generally a fully amortized lease. II. usually requires the lessor to insure the asset. III. is generally cancelable without penalty if the lessee provides 30 days advance notice. IV. is referred to as a capital lease by accountants. Selected Answer: Correct Answer: Feedback: correct I and IV only I and IV only Question 3 5 out of 5 points Black Hammer Tools is contemplating the acquisition of some new equipment at a cost of $94,000. The firm uses MACRS depreciation which allows for 33.33 percent, 44.44 percent, 14.82 percent, and 7.41 percent depreciation over years 1 to 4, respectively. After that time, the equipment will be worthless. The equipment can be leased for $25,000 a year for 4 years. The firm can borrow money at 8.5 percent and has a 35 percent tax rate. What is the net advantage to leasing? Selected Answer: Correct Answer: Feedback: After-tax lease payment = $25,000 (1 .35) = $16,250 $7,438 $7,438 Annual depreciation tax shield year 1 = $94,000 $10,965.57 Annual depreciation tax shield year 2 = $94,000 $14,620.76 Annual depreciation tax shield year 3 = $94,000 $4,875.78 Annual depreciation tax shield year 4 = $94,000 $2,437.89 After-tax discount rate = .085 (1 .3333 .35 = .4444 .35 = .1482 .35 = .0741 .35 = .35) = .05525 Question 4 0 out of 5 points Which one of the following correctly states one of the conditions established by the IRS for a lease to be considered valid for tax purposes? Selected Answer: Correct Answer: The term of the lease should be greater than 75 percent of the estimated economic life of the asset. The lessor must have a reasonable expectation of earning a profit without considering taxes. Feedback: incorrect Question 5 0 out of 5 points The Burger Joint is considering either leasing or buying a new freezer unit. The lessor will charge $13,300 a year for a 4-year lease. The purchase price is $38,000. The freezer has a 4year life after which time it is expected to have a resale value of $12,000. The Burger Joint uses straight-line depreciation, borrows money at 7.5 percent, and has sufficient tax loss carryovers to offset any potential taxable income the firm might have over the next 5 years. What is the net advantage to leasing? Selected Answer: Correct Answer: Feedback: Question 6 5 out of 5 points A financial lease in which the lessor is the owner for tax purposes is called a(n) _____ lease. Selected Answer: Correct Answer: Feedback: correct Question 7 5 out of 5 points Mosely Enterprises is trying to decide whether to lease or buy some new equipment. The equipment costs $57,000, has a 4-year life and will be worthless after the 4 years. The cost of tax-oriented tax-oriented $2,407 $3,735 borrowed funds is 9.5 percent and the tax rate is 35 percent. The equipment can be leased for $15,000 a year. What is the amount of the annual depreciation tax shield if the firm uses straight-line depreciation? Selected Answer: Correct Answer: Feedback: Annual depreciation tax shield = $57,000 / 4 Question 8 The relevant discount rate for evaluating a lease is the firm's: Selected Answer: Correct Answer: Feedback: incorrect Question 9 Which of the following are good reasons for leasing? I. keeping a leased asset off the balance sheet II. reducing taxes III. lowering transaction costs IV. reducing uncertainty Selected Answer: Correct Answer: Feedback: incorrect Question 10 5 out of 5 points Westover Mills is trying to decide whether to lease or buy some new equipment. The equipment costs $48,000, has a 3-year life, and will be worthless after the 3 years. The company has a tax rate of 34 percent, a cost of borrowed funds of 8.5 percent, and uses straight-line depreciation. The equipment can be leased for $16,800 a year. What is the amount of the annual depreciation tax shield? Selected Answer: Correct Answer: Feedback: Annual depreciation tax shield = $48,000 / 3 Question 11 .34 = $5,440 5 out of 5 points Nelson's Interiors is trying to decide whether to lease or buy some new equipment. The equipment costs $64,000, has a 5-year life, and will be worthless after the 5 years. The equipment will be replaced. The cost of borrowed funds is 10.5 percent and the tax rate is 35 percent. The equipment can be leased for $13,200 a year. What is the amount of the aftertax lease payment? Selected Answer: Correct Answer: $8,580 $8,580 $5,440 $5,440 I, II, III, and IV II, III, and IV only 0 out of 5 points pre-tax cost of borrowing. aftertax cost of borrowing. .35 = $4,987.50 0 out of 5 points $4,987.50 $4,987.50 Feedback: Aftertax lease payment = $13,200 Question 12 An operating lease: Selected Answer: Correct Answer: Feedback: incorrect Question 13 5 out of 5 points Boyer Services needs some equipment costing $56,000. The equipment has a 4-year life after which it will be worthless. The firm uses MACRS depreciation which allows for 33.33 percent, 44.44 percent, 14.82 percent, and 7.41 percent depreciation over years 1 to 4, respectively. The equipment can be leased for $15,100 a year. The firm can borrow money at 9.5 percent and has a 35 percent tax rate. What is the incremental annual cash flow for year 2 if the company decides to lease the equipment rather than purchase it? Selected Answer: $18,525 Correct Answer: $18,525 Feedback: CF3 = .35] = Question 14 1 $9,815 [$15,100 (1 .35)] + [$56,000 .4444 does not appear either on a financial statement nor in the footnotes. is reflected only in the footnotes of a financial statement. (1 .35) = $8,580 0 out of 5 points $8,710 = $18,525 5 out of 5 points Which of the following statements are correct concerning taxes and leasing? I. Tax-deferral is a legitimate reason for leasing. II. The lessor should be the party with the higher tax bracket. III. Leases should increase the total taxes paid. IV. If a firm has significant net operating losses, they should be the lessor in a lease. Selected Answer: Correct Answer: Feedback: correct I and II only I and II only Question 15 5 out of 5 points The net present value that is calculated when deciding whether to lease an asset or to buy it is called the: Selected Answer: Correct Answer: Feedback: correct net advantage to leasing. net advantage to leasing. Question 16 5 out of 5 points Cameron, Inc. is contemplating the acquisition of some new equipment. The purchase price is $66,000. The equipment will be depreciated based on MACRS depreciation which allows for 33.33 percent, 44.44 percent, 14.82 percent, and 7.41 percent depreciation over years 1 to 4, respectively. The equipment will be worthless at the end of that time. The equipment can be leased for $18,000 a year. The firm can borrow money at 8.5 percent and has a 34 percent tax rate. What is the amount of the depreciation tax shield in year 4? Selected Answer: Correct Answer: Feedback: Year 4 depreciation tax shield = $66,000 Question 17 .0741 .34 = $1,662.80 5 out of 5 points A firm that is very cyclical in nature and requires extra equipment only during its peak periods should consider leasing that equipment using a(n) _____ lease. Selected Answer: Correct Answer: Feedback: correct Question 18 5 out of 5 points Your firm is considering either leasing or buying some new equipment. The lessor will charge $17,500 a year for 3 years should you decide to lease. The purchase price is $61,000. The equipment has a 3-year life after which it is expected to have a resale value of $13,000. Your firm uses straight-line depreciation, borrows money at 9 percent, and has a 34 percent tax rate. What is the aftertax salvage value of the equipment? Selected Answer: Correct Answer: Feedback: After-tax salvage value = $13,000 Question 19 (1 .34) = $8,580 5 out of 5 points Whistle Farms is considering either leasing or buying some new equipment. The lessor will charge $16,000 a year for a 3-year lease. The purchase price is $46,000. The equipment has a 3-year life after which time it will be worthless. Whistle Farms uses straight-line depreciation, has a 35 percent tax rate, borrows money at 9 percent, and has sufficient tax loss carryovers to offset any potential taxable income the firm might have over the next five years. What is the net advantage to leasing? Selected Answer: Correct Answer: Feedback: Question 20 A financial lease: Selected Answer: is generally called a capital lease by accountants. 5 out of 5 points $5,499 $5,499 $8,580 $8,580 operating operating $1,662.80 $1,662.80 Correct Answer: Feedback: correct is generally called a capital lease by accountants. Question 1 0 out of 5 points Daily Enterprises is contemplating the acquisition of some new equipment. The purchase price is $47,000. The company expects to sell the equipment at the end of year 4 for $5,000. The firm uses MACRS depreciation which allows for 33.33 percent, 44.44 percent, 14.82 percent, and 7.41 percent depreciation over years 1 to 4, respectively. The equipment can be leased for $12,500 a year for 4 years. The firm can borrow money at 7.5 percent and has a 34 percent tax rate. What is the incremental annual cash flow for year 4 if the company decides to lease the equipment rather than purchase it? Selected Answer: $9,434 Correct Answer: $12,734 Feedback: CF4 = + [$5,000 $12,734 1 (1 [$12,500 .34)] = (1 8,250 .34)] + [$47,000 $1,184.12 .0741 $3,300 = .34] Question 2 5 out of 5 points The Burger Joint is considering either leasing or buying a new freezer unit. The lessor will charge $13,300 a year for a 4-year lease. The purchase price is $38,000. The freezer has a 4year life after which time it is expected to have a resale value of $12,000. The Burger Joint uses straight-line depreciation, borrows money at 7.5 percent, and has sufficient tax loss carryovers to offset any potential taxable income the firm might have over the next 5 years. What is the net advantage to leasing? Selected Answer: Correct Answer: Feedback: $3,735 $3,735 Question 3 5 out of 5 points A firm that is very cyclical in nature and requires extra equipment only during its peak periods should consider leasing that equipment using a(n) _____ lease. Selected Answer: Correct Answer: Feedback: correct operating operating Question 4 5 out of 5 points Which of the following apply to the lessee of a sale and leaseback arrangement? I. may have option to purchase asset at end of lease term II. receives cash from the sale of the asset III. maintains ownership rights IV. uses the asset Selected Answer: Correct Answer: Feedback: correct Question 5 0 out of 5 points A capital lease is recorded as an asset on the balance sheet in an amount equal to: Selected Answer: Correct Answer: the dollar amount of each lease payment multiplied by the number of lease payments per year. the lesser of the present value of the remaining lease payments or the cost of the asset. I, II, and IV only I, II, and IV only Feedback: incorrect Question 6 5 out of 5 points The net present value that is calculated when deciding whether to lease an asset or to buy it is called the: Selected Answer: Correct Answer: Feedback: correct Question 7 An operating lease has which of the following characteristics? I. lessee has responsibility for the maintenance and insurance II. lease payments cover the full cost of the asset III. economic life of the asset exceeds the lease term IV. lessee can cancel the lease prior to the expiration date Selected Answer: Correct Answer: Feedback: correct Question 8 5 out of 5 points Nelson's Interiors is trying to decide whether to lease or buy some new equipment. The equipment costs $64,000, has a 5-year life, and will be worthless after the 5 years. The equipment will be replaced. The cost of borrowed funds is 10.5 percent and the tax rate is 35 percent. The equipment can be leased for $13,200 a year. What is the amount of the aftertax lease payment? Selected Answer: Correct Answer: Feedback: Aftertax lease payment = $13,200 Question 9 (1 .35) = $8,580 5 out of 5 points The Auto Mart is trying to decide whether to lease or buy some new equipment. The equipment $8,580 $8,580 III and IV only III and IV only 5 out of 5 points net advantage to leasing. net advantage to leasing. costs $74,000, has a 3-year life, and will be worthless after the 3 years. The aftertax discount rate is 5.5 percent. The annual depreciation tax shield is $8,633 and the aftertax annual lease payment is $16,033. What is the net advantage to leasing? Selected Answer: Correct Answer: Feedback: Question 10 5 out of 5 points Which of the following statements are correct concerning taxes and leasing? I. Tax-deferral is a legitimate reason for leasing. II. The lessor should be the party with the higher tax bracket. III. Leases should increase the total taxes paid. IV. If a firm has significant net operating losses, they should be the lessor in a lease. Selected Answer: Correct Answer: Feedback: correct Question 11 0 out of 5 points Which one of the following statements is correct concerning the lease versus buy decision? Selected Answer: Correct Answer: Feedback: incorrect Question 12 5 out of 5 points Which of the following will classify a lease as a capital lease for accounting purposes? I. The lease transfers ownership of the asset to the lessee by the end of the lease. II. The lease term is 75 percent or more of the estimated economic life of the asset. III. The lessee can buy the asset at fair market value at the end of the lease. IV. The initial present value of the lease payments equals or exceeds 80 percent of the fair market value of the asset. Selected Answer: Correct Answer: Feedback: correct Question 13 5 out of 5 points A financial lease: I. is generally a fully amortized lease. II. usually requires the lessor to insure the asset. III. is generally cancelable without penalty if the lessee provides 30 days advance notice. IV. is referred to as a capital lease by accountants. Selected Answer: I and IV only I and II only I and II only If Dell Computer became a lessor of its own computers it would be engaging in direct leasing. Lessors provide a source of financing for lessees. I and II only I and II only $7,453 $7,453 Correct Answer: Feedback: correct Question 14 I and IV only 5 out of 5 points Smith Meats is trying to decide whether to lease or buy some new equipment. The equipment costs $62,000, has a 3-year life, and will be worthless after the 3 years. The pre-tax cost of borrowed funds is 9 percent and the tax rate is 35 percent. The equipment can be leased for $22,500 a year. What is the net advantage to leasing? Selected Answer: Correct Answer: Feedback: Aftertax lease payment = $22,500 (1 .35) = $14,625 .35 = $7,233 $3,411 $3,411 Annual depreciation tax shield = $62,000 / 3 After-tax discount rate = .09 (1 .35) = .0585 Question 15 0 out of 5 points A firm can either lease or buy some new equipment. The lease payments would be $21,600 a year for 4 years. The purchase price is $89,000. The equipment has a 4-year life after which it is expected to have a resale value of $7,500. The firm uses straight-line depreciation over the life of the asset, borrows money at 8.5 percent, and has a 34 percent tax rate. The company does not expect to owe any taxes for at least 6 years because it has accumulated net operating losses. What is the incremental cash flow for year 3 if the company decides to lease rather than purchase the equipment? Selected Answer: $21,821 Correct Answer: $21,600 Feedback: CF3 = 1 $21,600 = $21,600 Question 16 5 out of 5 points A longer-term, fully-amortized lease under which the lessee is responsible for insurance, taxes, and upkeep and which the lessee generally cannot cancel without incurring a penalty is called a(n) _____ lease. Selected Answer: Correct Answer: Feedback: correct financial financial Question 17 5 out of 5 points R&S is considering either leasing or buying some new equipment. The lease payments would be $9,500 a year. The purchase price is $31,000. The equipment has a 3-year life after which it is expected to have a resale value of $4,500. Your firm uses straight-line depreciation, borrows money at 8.5 percent, and has a 35 percent tax rate. What is the aftertax salvage value of the equipment? Selected Answer: Correct Answer: Feedback: After-tax salvage value = $4,500 Question 18 (1 .35) = $2,925 5 out of 5 points Door-to-Door is considering the purchase of a delivery truck costing $61,000. The truck can be leased for 3 years at $22,000 per year or it can be purchased at an interest rate of 8 percent. The estimated life of the truck is 3 years. The corporate tax rate is 35 percent. The company does not expect to owe any taxes for the next several years due to accumulated net operating losses. The firm uses straight-line depreciation. What is the net advantage to leasing? Selected Answer: Correct Answer: Feedback: Question 19 The owner of an asset in a leasing arrangement is called the: Selected Answer: Correct Answer: Feedback: correct Question 20 5 out of 5 points Mosely Enterprises is trying to decide whether to lease or buy some new equipment. The equipment costs $57,000, has a 4-year life and will be worthless after the 4 years. The cost of borrowed funds is 9.5 percent and the tax rate is 35 percent. The equipment can be leased for $15,000 a year. What is the amount of the annual depreciation tax shield if the firm uses straight-line depreciation? Selected Answer: Correct Answer: Feedback: Annual depreciation tax shield = $57,000 / 4 .35 = $4,987.50 $4,987.50 $4,987.50 lessor. lessor. 5 out of 5 points $4,304 $4,304 $2,925 $2,925 ... View Full Document