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Exam2_practice3 - F301 Exam 2 Practice Problems Solutions...

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F301 Exam 2 Practice Problems Solutions are in bold. 1. To calculate the change in net working capital, which of the following would be considered a cash outflow? a. An increase in sales b. A decrease in sales c. A decrease in accounts receivable due to a decrease in sales d. A decrease in accounts payable e. An increase in accounts payable 2. If the marginal tax rate goes up, what happens to the value of the depreciation tax shield in the future? The value of the tax shield goes up. 3. If a project’s first cash flow is a cash outflow, and if all the rest of the forecast cash flows are positive, then the cash flows are: 4. You discover that the successful diesel engine oil additive your scientists developed three years ago also makes a great cooking oil, when a suitably strong fragrance is added to it. You must prepare a capital budgeting analysis to help decide whether to go into production on the proposed new cooking oil product. In your analysis of this proposal, how should you treat the $30,000 spent by your R&D department to develop the original diesel additive? (Assume the research has no value to any other firm.) Ignore the $30,000. It is a sunk cost. F301 JCS
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5. Consider a project with the following expected cash flows: Year Cash Flow 0 –22,000 1 6,000 2 7,000 3 8,000 4 9,000 5 10,000 a. What is the IRR? 21.59% b. What is the NPV at a discount rate of 10%? $7,606.52 6. You find the following numbers on a firm’s balance sheet: Accounts receivable=75. Inventory=350. Property & equipment=1,000. Accounts payable=60. Long-term debt=510.
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