exam 3 - EXAM 3 Student: _ 1. Adding depreciation expense...

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EXAM 3 Student: ___________________________________________________________________________ 1. Adding depreciation expense to net profit equals: A. profit before tax. B. total revenues. C. the depreciation tax shield. D. cash flows from operations. 2. The rationale for not including sunk costs in capital budgeting decisions is that they: A. are usually small in magnitude. B. revert at the end of the investment. C. have no incremental effect. D. reduce the estimated NPV. 3. Which of the following represents a common reason for increases in net working capital with new projects? A. Inventory can now be held at lower levels. B. Accounts receivable are often not paid on time. C. Inventory increases more than accounts payable increase. D. Accounts payable must be increased. 4. What is the undiscounted cash flow in the final year of an investment, assuming: $10,000 after-tax cash flows from operations, the fully depreciated machine is sold for $1,000, the project had required $2,000 in additional working capital, and a 35% tax rate? A. $8,450 B. $12,600 C. $12,650 D. $14,000 5. What effect is expected at the end of the life of a project that initially required a $20,000 increase in net working capital? A. The $20,000 must now be paid by the firm. B. The firm receives a $20,000 cash inflow. C. Taxable income is reduced by $20,000. D. No effects are expected from sunk costs.
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6. If a project's cash flows exceed the project's incremental cash flows, it is likely that the: A. project interacts with other aspects of the firm. B. project must have high depreciation expense. C. opportunity cost of capital must be high. D. project will have a negative NPV. 7. The value of a proposed capital budgeting project depends upon the: A. total cash flows produced. B. incremental cash flows produced. C. accounting profits produced. D. increase in total sales produced. 8. A firm generates sales of $250,000, depreciation expense of $50,000, taxable income of $50,000, and has a 35% tax rate. By how much does net cash flow deviate from net income? A. $17,500 B. $50,000 C. $67,500 D. $82,500 9. In capital budgeting analysis, an increase in working capital can be shown as: A. A cash inflow at the beginning of the project. B. An outflow at the beginning and an equal inflow at the end of the project. C. An inflow at the beginning and an equal outflow at the end of the project. D. A decrease in the initial amount invested. 10. Assume your firm has an unused machine that originally cost $75,000, has a book value of $20,000, and is currently worth $25,000. Ignoring taxes, the correct opportunity cost for this machine in capital budgeting decisions is: A. $75,000 B. $25,000 C. $20,000 D. $5,000
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11. What is the NPV of a project that costs $100,000, provides $23,000 in cash flows annually for six years, requires a $5,000 increase in net working capital, and depreciates the asset straight line over six years while ignoring the half-year convention? The discount rate is 14%. A. -$15,561
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This note was uploaded on 11/18/2009 for the course MGMT 440 taught by Professor Tyler during the Spring '09 term at Ball State.

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exam 3 - EXAM 3 Student: _ 1. Adding depreciation expense...

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