practice_problems_solved_in_section

# practice_problems_solved_in_section - HAAS SCHOOL OF...

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H AAS S CHOOL OF B USINESS U NIVERSITY OF C ALIFORNIA AT BERKELEY BA 103 S UMMER 2007 A VINASH V ERMA P RACTICE P ROBLEMS 1. Cash flows for a project are estimated as: A) Cash flows after taxes B) Cash flows before taxes C) Accounting profits before taxes D) Accounting profits after taxes Answer: A Page: 113 (Page numbers refer to the 8 th edition of the text) 2. Investment in inventories includes investment in: (I) Raw material (II) Work-in-progress (III) Finished goods. A) I only B) I and II only C) I, II, and III D) III only Answer: C Page: 115 3. A firm has a general-purpose machine, which has a book value of \$400,000 and is sold for \$600,000 in the market. If the tax rate is 30%, what is the opportunity cost of using the machine in a project? A) \$600,000 B) \$540,000 C) \$400,000 D) None of the above Answer: B Page: 116 [600,000 - (600,000 – 400,000) * 0.30 = 540,000] 4. A reduction in the sales of existing products caused by the introduction of a new product is an example of: A) incidental effects B) opportunity cost C) sunk cost D) none of the above Answer: A Page: 116 5. A firm owns a building with a book value of \$150,000 and a market value of \$250,000. If the building is utilized for a project, then the opportunity cost ignoring taxes is: A) \$100,000 B) \$150,000 C) \$250,000 D) None of the above Answer: C Page: 116 6. A cash flow to be received at t=2 is expected to be \$10,816. If the real rate of interest is 4% and the inflation rate is 4%, what is the expected real cash flow at t=2? A) \$11,236 B) \$10,816 C) \$10,000 D) \$9,246 Answer: C Page: 117 [Real cash flow = 10,816/(1.04^2) = 10,000] 7. The NPV obtained by discounting nominal cash flows using the nominal discount rate is: (I) The same as the NPV obtained by discounting real cash flows using the real discount rate (II) The same as the NPV obtained by discounting real cash flows using the nominal discount rate Practice Problems with Answers 1

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H AAS S CHOOL OF B USINESS U NIVERSITY OF C ALIFORNIA AT BERKELEY BA 103 S UMMER 2007 A VINASH V ERMA (III) The same as the NPV obtained by discounting nominal cash flows using the real discount rate A) I only B) II only C) III only D) II and III only Answer: A Page: 117 8. Real cash flow occurring in year-2 is 60,000. If the inflation rate is 5% per year, calculate nominal cash flow for year-2. A) 60,000 B) 55,422 C) 66,150 D) None of the above Answer: C Page: 117 [Nominal cash flow = (60,000)(1.05)^2 = 66,150] 9. Proper treatment of inflation in the NPV calculation involves: (I) Discounting nominal cash flows using the nominal discount rate (II) Discounting real cash flows using the real discount rate (III) Discounting nominal cash flows using the real discount rates A) I only B) II only C) III only D) I and II only Answer: D Page: 117 10. Capital equipment costing \$250,000 today has 50,000 salvage value at the end of 5 years. If the straight line depreciation method is used, what is the book value of the equipment at the end of two years? A)
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practice_problems_solved_in_section - HAAS SCHOOL OF...

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