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Unformatted text preview: practice questions for final Key 1. This chapter introduced three new methods for calculating project operating cash flow (OCF). Under what circumstances is each method appropriate? Three additional formulations of OCF provided in this chapter are the bottom-up, top-down, and tax- shield approaches. The first is useful when the analyst has prepared pro forma income statements for a project (since OCF is equal to net income plus depreciation). The top-down approach defines OCF as sales minus costs minus taxes, and is useful if one has reliable estimates of the relevant dollar costs (perhaps in a situation where fixed and variable costs are the focus of the analysis). Finally, the tax-shield approach separately illustrates the project benefits associated with after-tax gross profit (revenue gains and/or cost reductions) and with the depreciation tax shield. Ross - Chapter 06 #85 Topic: OPERATING CASH FLOW Type: ESSAYS 2. Your firm purchased a warehouse for $335,000 six years ago. Four years ago, repairs were made to the building which cost $60,000. The annual taxes on the property are $20,000. The warehouse has a current book value of $268,000 and a market value of $295,000. The warehouse is totally paid for and solely owned by your firm. If the company decides to assign this warehouse to a new project, what value, if any, should be included in the initial cash flow of the project for this building? A. $0 B. $268,000 C. $295,000 D. $395,000 E. $515,000 Opportunity cost = $295,000 Difficulty level: Easy Ross - Chapter 06 #44 Topic: OPPORTUNITY COST Type: PROBLEMS & 3. You own a house that you rent for $1,200 a month. The maintenance expenses on the house average $200 a month. The house cost $89,000 when you purchased it several years ago. A recent appraisal on the house valued it at $210,000. The annual property taxes are $5,000. If you sell the house you will incur $20,000 in expenses. You are deciding whether to sell the house or convert it for your own use as a professional office. What value should you place on this house when analyzing the option of using it as a professional office? A. $89,000 B. $120,000 C. $185,000 D. $190,000 E. $210,000 Opportunity cost = $210,000 - $20,000 = $190,000 Difficulty level: Medium Ross - Chapter 06 #45 Topic: OPPORTUNITY COST Type: PROBLEMS 4. Big Joe's owns a manufacturing facility that is currently sitting idle. The facility is located on a piece of land that originally cost $129,000. The facility itself cost $650,000 to build. As of now, the book value of the land and the facility are $129,000 and $186,500, respectively. Big Joe's received an offer of $590,000 for the land and facility last week. The firm rejected this offer even though it was told that it is a reasonable offer in today's market. If Big Joe's were to consider using this land and facility in a new project, what cost, if any, should it include in the project analysis?...
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This note was uploaded on 02/27/2012 for the course BUSI 407 taught by Professor Bowen during the Spring '11 term at UNC.
- Spring '11