chap09 - Depreciation expense plays a key role when...

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Unformatted text preview: Depreciation expense plays a key role when projecting cash flows because: a. it reduces the net income available to investors. b. it impairs the productivity of an asset. c. it is a non-cash expense that reduces taxable income, and therefore reduces tax outflows. d. all of the above. status: not answered () correct: c your answer: -------------------------------------------------------------------------------- 2 To a financial analyst the relevant measure of inflows and outflows is: a. accrual based. b. cash based. c. calendar year based. d. fiscal year based. status: not answered () correct: b your answer: -------------------------------------------------------------------------------- 3 The Dinosaur Company purchased $200,000 worth of equipment 5-years ago. The equipment is expected to have a depreciable life of 10-years and the firm planned on using straight-line depreciation on the asset. The equipment is being depreciated to an ending book value of $20,000. If Dinosaur sells the equipment at the end of year 6 for $100,000 then what is tax effect if the firm is subject to the 35% marginal tax rate? a. $2,800 effectual tax rebate b. $2,800 taxes owed c. $7,500 taxes owed d. none of the above status: not answered () correct: b your answer: -------------------------------------------------------------------------------- 4 Noble Products is considering buying a dough machine to help out in its bread products line. The machine will cost $100,000 and will be depreciated using straight-line depreciation over 5 years to a zero ending book value. The machine will increase revenues by $30,000 per year with no change in expense levels. At the end of the fifth year, Noble expects to sell the dough machine for $10,000. Noble is subject to the 34% marginal tax rate. Assume a 10% cost of capital. What is the present value of all of the cash flows from the end of the 5 year period? Round to the nearest dollar. a. $32,809 b. $20,615 c. $28,711 d. none of the above status: not answered () correct: b your answer: -------------------------------------------------------------------------------- 5 Mike's Manufacturing is considering a project to manufacture a new product. The product can be manufactured in a currently unoccupied building that the firm owns. Which of the following is the correct characterization of the rent that Mike's will forego if it uses the building to manufacture the product? a. The rent amount should be ignored since Mike's owns the building. b. The rent amount should be included in the analysis since it represents an opportunity cost of using the building. c. The rent amount should be ignored since rent represents a financing cost. d. None of the above is correct. status: not answered () correct: b your answer: -------------------------------------------------------------------------------- 6 Noble Products is considering buying a dough machine to help out in its bread products line. The machine will cost $100,000 and will be depreciated using straight-line depreciation over 5 years to a zero ending book value. The machine will increase revenues by $30,000 per year with no change in expense levels. At the end of the fifth year, Noble expects to sell the dough machine for $10,000. Noble is subject to the 34% marginal tax rate. Assume a 10% cost of capital. What is the annual increase (for years one through four) in cash flow if the project is taken? a. $50,000 b. $39,800 c. $26,600 d. $19,800 status: not answered () correct: c your answer: -------------------------------------------------------------------------------- 7 Generic Pharmaceuticals is considering a project that will cost the firm $200,000. In addition the firm has already spent $10,000 on training costs. What is the relevant cost to the firm for taking this project? The firm is in the 40% marginal tax rate. a. $210,000 b. $206,000 c. $204,000 d. $200,000 status: not answered () correct: d your answer: -------------------------------------------------------------------------------- 8 Financing costs are ignored in the calculation of cash flows in capital budgeting analysis because: a. in effect, those costs are included in the opportunity costs imbedded in the cost of capital calculations. b. capital is treated as a non- cash item for capital budgeting analysis. c. it is more important to measure the risk inherent in a project. d. all of the above. status: not answered () correct: a your answer: -------------------------------------------------------------------------------- 9 The Dinosaur Company purchased $200,000 worth of equipment 5-years ago. The equipment is expected to have a depreciable life of 10-years and the firm planned on using straight-line depreciation on the asset. The equipment is being depreciated to an ending book value of $20,000. What is the book value of the equipment at the end of year 6? a. $108,000 b. $92,000 c. $80,000 d. none of the above status: not answered () correct: b your answer: -------------------------------------------------------------------------------- 10 Two firms have identical EBITDA but Firm A has $100 of depreciation expense while Firm B has $50 of depreciation expense. If both firms are subject to a 40% marginal tax rate, which of the following describes Firm A's cash flow advantage over that of Firm B? a. -$50 b. -$20 c. $20 d. $50 status: not answered () correct: c your answer: -------------------------------------------------------------------------------- 11 Which of the following would affect the level of a firm's net working capital? a. Increase in long term debt. b. Increase in accounts payable. c. Increase in buildings and equipment. d. Increase in retained earnings. status: not answered () correct: b your answer: -------------------------------------------------------------------------------- 12 O'Donnels Restaurants is coming out with an O'Rib Sandwich. The product is expected to generate cash flows of $8,000,000 per year. However, the O'Rib Sandwich is expected to reduce cash flows from the Big O Sandwich by $2,000,000 per year. What is the relevant cash flow for the O'Rib Sandwich if the firm is in the 40% marginal tax rate? a. $8,000,000 b. $6,800,000 c. $6,000,000 d. none of the above status: not answered () correct: c your answer: -------------------------------------------------------------------------------- 13 Two firms have identical EBITDA but Firm A has $100 of depreciation expense while Firm B has no depreciation expense. If both firms are subject to a 40% marginal tax rate, which of the following describes Firm A's cash flow advantage over that of Firm B? a. -$100 b. -$40 c. $40 d. $100 status: not answered () correct: c your answer: -------------------------------------------------------------------------------- 14 When capital rationing occurs then: a. managers cannot always invest in every project that offers a postive NPV. b. managers must invest in every project that offers a positive NPV. c. projects cannot have a positive NPV. d. none of the above. status: not answered () correct: a your answer: -------------------------------------------------------------------------------- 15 ShowLow Co. is evaluating a 4-year project that has a $1,000,000 net present value. If the cost of capital is 13%, what is the equivalent annual annuity for the project? a. $743,618 b. $336,194 c. $250,000 d. $84,049 status: not answered () correct: b your answer: -------------------------------------------------------------------------------- 16 Noble Products is considering buying a dough machine to help out in its bread products line. The machine will cost $100,000 and will be depreciated using straight-line depreciation over 5 years to a zero ending book value. The machine will increase revenues by $30,000 per year with no change in expense levels. At the end of the fifth year, Noble expects to sell the dough machine for $10,000. Noble is subject to the 34% marginal tax rate. Assume a 10% cost of capital. What present value of the annual increase (for years one through four) in cash flow if the project is taken? Assume the cost of capital is 10%. Round to the nearest dollar. a. $158,493 b. $126,161 c. $84,318 d. $62,763 status: not answered () correct: c your answer: -------------------------------------------------------------------------------- 17 CJ Nickel Co. is evaluating a 5-year project that has a $250,000 net present value. If the cost of capital is 15%, what is the equivalent annual annuity for the project? a. $167,608 b. $74,579 c. $50,000 d. $24,579 status: not answered () correct: b your answer: -------------------------------------------------------------------------------- 18 Noble Products is considering buying a dough machine to help out in its bread products line. The machine will cost $100,000 and will be depreciated using straight-line depreciation over 5 years to a zero ending book value. The machine will increase revenues by $30,000 per year with no change in expense levels. At the end of the fifth year, Noble expects to sell the dough machine for $10,000. Noble is subject to the 34% marginal tax rate. Assume a 10% cost of capital. What is the amount of the initial outlay for the dough machine? a. $100,000 b. $80,000 c. $40,000 d. $66,000 status: not answered () correct: a your answer: -------------------------------------------------------------------------------- 19 Noble Products is considering buying a dough machine to help out in its bread products line. The machine will cost $100,000 and will be depreciated using straight-line depreciation over 5 years to a zero ending book value. The machine will increase revenues by $30,000 per year with no change in expense levels. At the end of the fifth year, Noble expects to sell the dough machine for $10,000. Noble is subject to the 34% marginal tax rate. Assume a 10% cost of capital. What is the annual increase in cash flow due to increased revenue? a. $30,000 b. $19,800 c. $10,200 d. $6,800 status: not answered () correct: b your answer: -------------------------------------------------------------------------------- 20 Two firms have identical EBITDA but Firm A has $70 more cash flow than Firm B. Both firms are subject to the same 35% marginal tax rate. If the difference between the two cash flows is related to differing depreciation expense levels, which of the following is a possibility for the difference? a. Firm B has depreciation expense of $200 and Firm A has depreciation expense of $0. b. Firm A has depreciation expense of $200 and Firm B has depreciation expense of $0. c. Firm A has depreciation expense of $250 and Firm B has depreciation expense of $50. d. Both b and c are possibilities. status: not answered () correct: d your answer: -------------------------------------------------------------------------------- 21 OSSE, Inc. has a project that it believes that the cash flows from the project will remain constant commencing at the end of year 10. That is, OSSE believes that the project will produce $3 million of cash flow per year commencing at the end of year 10. If OSSE uses an 8% cost of capital what is the value of that cash flow today? Round to the nearest dollar. a. $37,500,000 b. $18,759,336 c. $17,369,756 d. none of the above status: not answered () correct: b your answer: -------------------------------------------------------------------------------- 22 Noble Products is considering buying a dough machine to help out in its bread products line. The machine will cost $100,000 and will be depreciated using straight-line depreciation over 5 years to a zero ending book value. The machine will increase revenues by $30,000 per year with no change in expense levels. At the end of the fifth year, Noble expects to sell the dough machine for $10,000. Noble is subject to the 34% marginal tax rate. Assume a 10% cost of capital. What is the cash flow from the sale of the dough machine at the end of the 5 year period? a. $10,000 b. $6,600 c. $3,400 d. none of the above status: not answered () correct: b your answer: -------------------------------------------------------------------------------- 23 Noble Products is considering buying a dough machine to help out in its bread products line. The machine will cost $100,000 and will be depreciated using straight-line depreciation over 5 years to a zero ending book value. The machine will increase revenues by $30,000 per year with no change in expense levels. At the end of the fifth year, Noble expects to sell the dough machine for $10,000. Noble is subject to the 34% marginal tax rate. Assume a 10% cost of capital. What is the present value of the cash flow from the sale of the dough machine at the end of the 5 year period? Round to the nearest dollar. a. $6,209 b. $4,098 c. $2,111 d. none of the above status: not answered () correct: b your answer: -------------------------------------------------------------------------------- 24 Terp Shampoo is coming out with the 23rd version of its product. The new version is expected to generate cash flows of $5,000,000 per year. However, the 23rd version is expected to reduce sales of the 22nd version by $1,000,000 per year. What is the relevant annual cash flow for the 23rd version if the firm is in the 35% marginal tax rate? a. $5,000,000 b. $4,350,000 c. $4,000,000 d. none of the above status: not answered () correct: c your answer: -------------------------------------------------------------------------------- 25 The Dinosaur Company purchased $200,000 worth of equipment 5-years ago. The equipment is expected to have a depreciable life of 10-years and the firm planned on using straight-line depreciation on the asset. The equipment is being depreciated to an ending book value of $20,000. If Dinosaur sells the equipment at the end of year 6 for $100,000 then what is the gain or loss on the sale? a. $8,000 loss b. $8,000 gain c. $20,000 gain d. none of the above status: not answered () correct: b your answer: -------------------------------------------------------------------------------- 26 When evaluating a project, a financial analyst should focus on: a. the total cash flows of the project. b. the incremental cash flows of the project. c. the early cash flows of the project. d. none of the above status: not answered () correct: b your answer: -------------------------------------------------------------------------------- 27 Noble Products is considering buying a dough machine to help out in its bread products line. The machine will cost $100,000 and will be depreciated using straight-line depreciation over 5 years to a zero ending book value. The machine will increase revenues by $30,000 per year with no change in expense levels. At the end of the fifth year, Noble expects to sell the dough machine for $10,000. Noble is subject to the 34% marginal tax rate. Assume a 10% cost of capital. What is the annual increase in cash flow due to increased depreciation? a. $20,000 b. $13,200 c. $10,200 d. $6,800 status: not answered () correct: d your answer: -------------------------------------------------------------------------------- 28 Two firms have identical EBITDA but Firm A has $80 more cash flow than Firm B. Both firms are subject to the same 32% marginal tax rate. If the difference between the two cash flows is related to differing depreciation expense levels, which of the following is a possibility for the difference? a. Firm B has depreciation expense of $250 and Firm A has depreciation expense of $0. b. Firm A has depreciation expense of $250 and Firm B has depreciation expense of $0. c. Firm A has depreciation expense of $300 and Firm B has depreciation expense of $50. d. both b and c are possibilities status: not answered () correct: d your answer: -------------------------------------------------------------------------------- 29 Which of the following should be ignored when evaluating a project's cash flows? a. depreciation expense b. tax expense c. financing costs d. none of the above status: not answered () correct: c your answer: -------------------------------------------------------------------------------- 30 MoonDollars Tea Corp. is considering a project that will cost the firm $300,000. In addition the firm has already spent $18,000 on taste tests. What is the relevant cost to the firm for taking this project? The firm is in the 34% marginal tax rate. a. $318,000 b. $300,000 c. $288,120 d. $282,000 status: not answered () correct: b ...
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