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The net working capital invested in a project is generally:
 
a. recouped in the first year of the project
b. a sunk cost.
c. recouped at the end of the project.
d. an opportunity cost.
e. depreciated to a zero balance over the life of the project.
   
Consider a three-year project with the following information:
initial fixed asset investment = $347,600
straight-line depreciation to zero over the three-year life zero salvage value
price per unit = $49.99
variable costs per unit = $30.82
fixed costs per year = $187,000
quantity sold per year = 65,500 units
tax rate = 35 percent.
How sensitive is OCF to an increase of one unit in the quantity sold?
 
$13.40
$11.67
$8.67
$12.46
$9.08
 
(1) ($49.99 - $30.82) (1 - .35) = 12.46
   
The pro forma income statements for a proposed investment should include all of the following except:
taxes.
 
changes in net working capital
depreciation expense.
forecasted sales.
fixed costs.
   
Which one of the following refers to the option to expand into related businesses in the future?
 
Contingency option
Capital rationing option
Soft rationing
Hard rationing
Strategic option
   
A project will reduce costs by $62,750 but increase depreciation by $14,812.
What is the operating cash flow of this project based on the tax shield approach if the tax rate is 34 percent?
 
$42,006.20
$41,415.00
$31,639.08
$38,211.19
$46,451.08
 
 [$62750 × (1 - .34)] + [$14812 × .34]
   
The Sausage Hut is looking at a new sausage system with an installed cost of $187,400.
This cost will be depreciated straight-line to zero over the project's four-year life,
at the end of which the sausage system can be scrapped for $25,000.
The sausage system will save the firm $69,000 per year in pretax operating costs,
and the system requires an initial investment in net working capital of $9,000,
which will be recouped at project end.
If the tax rate is 34 percent and the discount rate is 12 percent, what is the NPV of this project?
 
$560.24
$6,508.54
-$320.81
$8,211.15
$1,410.10
   
The Corner Market has decided to expand its retail store by building on a vacant lot it currently owns.
This lot was purchased four years ago at a cost of $299,000, which the firm paid in cash.
To date, the firm has spent another $38,000 on land improvements, all of which was also paid in cash.
Today, the lot has a market value of $329,000.
What value should be included in the analysis of the expansion project for the cost of the land?
 
The sum of the cash paid to date for both the lot and the improvements
The current market value of the land
The current market value of the land plus the cash paid for the improvements
Zero because the land and the improvements were previously purchased with cash
The original purchase price only
   
Contingency planning focuses on the:
 
economic effects on a project's profitability.
managerial options implicit in a project
opportunity costs involved with a project.
optional capital requirements of a project.
sunk costs related to a project.
   
The amount by which a firm's tax bill is reduced as a result of the depreciation expense is referred to as the depreciation: credit.
 
adjustment.
erosion.
opportunity cost.
tax shield
   
Any changes to a firm's projected future cash flows that are caused by adding a new project are referred to as:
 
eroded cash flows.
deviated projections.
incremental cash flows.
directly impacted flows.
opportunity cash flows.
   
A cost that should be ignored when evaluating a project because that cost has already been incurred and
cannot be recouped is referred to as a(n):
 
fixed cost.
forgotten cost.
variable cost.
opportunity cost.
sunk cost.
   
Which one of the following terms refers to the best option that was foregone when a particular investment is selected?
 
Side effect
Erosion
Sunk cost
Opportunity cost
Marginal cost
   
The amount by which a firm's tax bill is reduced as a result of the depreciation expense is referred to as the depreciation:
 
tax shield.
credit.
erosion.
opportunity cost.
adjustment.
   
Jamie is analyzing the estimated net present value of a project under various conditions by revising the sales quantity,
sales price, and the cost estimates. The type of analysis that Jamie is doing is best described as:
 
sensitivity analysis.
erosion planning.
scenario analysis.
benefit planning.
opportunity evaluation
   
Kate is analyzing a proposed project to determine how changes in the sales quantity would affect the project's net present value.
What type of analysis is being conducted?
 
Sensitivity analysis
Erosion planning
Scenario analysis
Benefit-cost analysis
Opportunity cost analysis
   
The Shoe Box is considering adding a new line of winter footwear to its product lineup.
When analyzing the viability of this addition,
the company should include all of the following in its analysis with the exception of:
 
any expected changes in the sales levels of current products caused by adding the new product line.
cost of new display counters for the additional winter footwear.
increased taxes from winter footwear profits.
the research and development costs to produce the current winter footwear samples.
the expected revenue from winter footwear sales.
   
Lake City Plastics currently produces plastic plates and silverware.
The company is considering expanding its product offerings to include plastic serving trays.
All of the following are relevant costs to this project with the exception of:
 
the cost of additional utilities required to operate the serving tray production operation.
any change in the expected sales of plates and silverware gained from offering trays also.
a percentage of the current operating overhead.
the additional plastic raw materials that would be required.
the cost to acquire the forms needed to mold the trays.
a percentage of the current operating overhead.
   
The Corner Market has decided to expand its retail store by building on a vacant lot it currently owns.
This lot was purchased four years ago at a cost of $299,000, which the firm paid in cash. To date, the firm has
spent another $38,000 on land improvements, all of which was also paid in cash.
Today, the lot has a market value of $329,000.
What value should be included in the analysis of the expansion project for the cost of the land?
 
The sum of the cash paid to date for both the lot and the improvements
The original purchase price only
The current market value of the land plus the cash paid for the improvements
The current market value of the land
Zero because the land and the improvements were previously purchased with cash
The current market value of the land
   
Weston Steel purchased a new coal furnace six years ago at a cost of $2.2 million. Last year,
the government changed the emission requirements and this furnace cannot meet those standards.
Thus, the company can no longer use the furnace, nor has it been able to locate anyone willing to purchase the furnace.
Given the current situation, the furnace is best described as which type of cost?
 
Erosion
Book
Sunk
Market
Opportunity
   
CrossTown Builders is considering remodeling an old building it currently owns.
The building was purchased ten years ago for $1.2 million. Over the past ten years, the firm rented out the building and
used the rent to pay off the mortgage. The building is now owned free and clear and has a current market value of $1.9 million.
The company is considering remodeling the building into industrial-type apartments at an estimated cost of $1.6 million.
The estimated present value of the future income from these apartments is $4.1 million.
Which one of the following defines the opportunity cost of the remodeling project?
 
Present value of the future income
Cost of the remodeling
Current market value of the building
Initial cost of the building plus the remodeling costs
Current market value of the building plus the remodeling costs
   
Bruce Moneybags owns several restaurants and hotels near a local interstate. One restaurant,
Beef and More, originally cost $1.8 million, is currently fully paid for, but needs modernized.
Bruce is trying to decide whether to accept an offer and sell Beef and More, as is,
for the offer price of $1.1 million or renovate the restaurant himself. The projected renovation cost is $1.3 million.
The restaurant would need to be shut down completely during the renovation which would cause an After
tax net loss of $90,000 in today's dollars. The estimated present value of the cash inflows from the renovated
restaurant is $3.2 million. When analyzing the renovation project, what cost, if any, should be
included for the current restaurant?
 
$0
$1.1 million
$1.1 million + $90,000
$1.8 million + 1.3 million + 90,000
$3.2 million -($1.8 million + 1.3 million + 90,000)
$1.1 million
   
Ed owns a store that caters primarily to men. Each of the answer options represents an item related to a planned
store expansion. Each of these items should be included in the expansion analysis with the exception of the cost:
 
of the property insurance premium increase.
of the exterior landscaping that will be required once the expansion is complete.
of the additional sales person that will be required.
of the inventory required to fill the additional retail space.
of the blueprints that have been drawn of the expansion area.
   
Thrill Rides is considering adding a new roller coaster to its amusement park.
The addition is expected to increase its overall ticket sales.
In particular, the company expects to sell more tickets for its current roller coaster and experience
extremely high demand for its new coaster. Sales for its boat ride are expected to decline but food and beverage
sales are expected to increase significantly. All of the following are side effects associated with the new roller
coaster with the exception of the:
 
A-increased food sales.
additional sales for the existing coaster.
increased food costs.
reduced sales for the boat ride.
ticket sales for the new coaster.
   
The analysis of a new project should exclude:
 
tax effects.
erosion effects.
side effects.
sunk costs.
opportunity costs.
   
The net working capital invested in a project is generally:
 
a sunk cost.
an opportunity cost.
recouped in the first year of the project.
recouped at the end of the project.
depreciated to a zero balance over the life of the project.
   
A proposed project will increase a firm's accounts payables. This increase is generally:
 
treated as an erosion cost.
treated as an opportunity cost.
a sunk cost and should be ignored.
a cash outflow at Time zero and a cash inflow at the end of the project.
a cash inflow at Time zero and a cash outflow at the end of the project.
   
Which of the following create cash inflows from net working capital?
 
Decrease in accounts payable and increase in accounts receivable
Decrease in both accounts receivable and accounts payable
Increase in accounts payable and decrease in inventory
Increase in both accounts receivable and inventory
Increase in inventory and decrease in cash
   
The pro forma income statements for a proposed investment should include all of the following except:
 
fixed costs.
forecasted sales.
depreciation expense.
taxes.
changes in net working capital.
   
Assume an all-equity firm has positive net earnings. The operating cash flow of this firm:
 
ignores both depreciation and taxes.
is unaffected by the depreciation expense.
must be negative.
increases when the tax rate decreases.
is equal to net income minus depreciation.
   
The tax shield approach to computing the operating cash flow, given a tax-paying firm:
 
ignores both interest expense and taxes.
separates cash inflows from cash outflows.
considers the changes in net working capital resulting from a new
project.
ignores all noncash expenses and their effects.
recognizes that depreciation creates a cash inflow.
   
Which one of the following will increase the operating cash flow as computed using the tax shield approach?
 
Decrease in depreciation
Decrease in sales
Increase in variable costs
Decrease in fixed costs
Increase in the tax rate
Decrease in fixed costs
   
Which one of the following is a correct value to use if you are
conducting a best-case scenario analysis?
Sales price that is most likely to occur
Lowest expected level of sales quantity
Lowest expected salvage value
Highest expected need for net working capital
Lowest expected value for fixed costs
   
The Green Tomato purchased a parcel of land six years ago for $389,900.
At that time, the firm invested $128,000 grading the site so that it would be usable.
Since the firm wasn't ready to use the site itself at that time, it decided to lease the land for $48,000 a year.
The Green Tomato is now considering building a hotel on the site as the rental lease is expiring.
The current value of the land is $415,000. The firm has no loans or mortgages secured by the property.
What value should be included in the initial cost of the hotel project for the use of this land?
 
$0
$389,900
$415,000
$229,000
$101,900
   
Assume that last year, Isaac earned 13.6 percent on his investments while U.S. Treasury bills yielded
2.7 percent, and the inflation rate was 2.2 percent. What real rate of return did he earn on his investments last year?

11.15 percent
11.63 percent
13.56 percent
10.39 percent
12.24 percent

(1.136/1.022) - 1 = .1115, or 11.15 percent
   
One year ago, you purchased 600 shares of stock for $14 a share.
The stock pays $.41 a share in dividends each year. Today, you sold your shares for $15.30 a share.
What is your total dollar return on this investment?

$780
$815
$7,43
$1,026
$1,222

600 × (15.30 -14 + .41) = 1,026
   
Rock Haven has a proposed project that will generate sales of 1,840 units annually at a selling price of $31 each.
The fixed costs are $13,400 and the variable costs per unit are $7.47. The project requires $32,000 of fixed assets that will be
depreciated on a straight-line basis to a zero book value over the four-year life of the project. The salvage value of the fixed
assets is $8,500 and the tax rate is 35 percent. What is the operating cash flow for Year 4?

$17,258.4
$22,231.88
$16,970.16
$16,347.78
$22,416.67

{[1,840 × ($31 - 7.47] - $13,400} × {1 - .35} + {$32,000 / 4 × .35} = $22,231.88
   
The Green Tomato purchased a parcel of land six years ago for $389,900.
At that time, the firm invested $128,000 grading the site so that it would be usable.
Since the firm wasn't ready to use the site itself at that time, it decided to lease the land for $48,000 a year.
The Green Tomato is now considering building a hotel on the site as the rental lease is expiring.
The current value of the land is $415,000. The firm has no loans or mortgages secured by the property.
What value should be included in the initial cost of the hotel project for the use of this land?

$0
$415,000
$229,000
$389,900
$101,900

The relevant cost is the opportunity cost of $415,000.

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