Ch 7 Exercise new with solutions.docx
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Ch 7 Exercise new with solutions.docx
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Ch7Exercisenewwithsolutions
1.Thedifferencebetweenafirm'sfuturecashflowsifitacceptsaprojectandthefirm'sfuturecashflowsifitdoesnotaccepttheprojectisreferredtoastheproject's:
A.
incrementalcashflows.
B.
internalcashflows.
C.
externalcashflows.
D.
erosioneffects.
E.
financingcashflows.
2.Whichofthefollowingshouldbeincludedintheanalysisofanewproduct?
I.moneyalreadyspentforresearchanddevelopmentofthenewproduct
II.reductioninsalesforacurrentproductoncethenewproductisintroduced
III.increaseinaccountsreceivableneededtofinancesalesofthenewproduct
IV.marketvalueofamachineownedbythefirmwhichwillbeusedtoproducethenewproduct
A.
IandIIIonly
B.
IIandIVonly
C.
I,II,andIIIonly
D.
II,III,andIVonly
E.
I,II,III,andIV
3.Thedepreciationtaxshieldisbestdefinedasthe:
A.
amountoftaxthatissavedwhenanassetispurchased.
B.
taxthatisavoidedwhenanassetissoldassalvage.
C.
amountoftaxthatisduewhenanassetissold.
D.
amountoftaxthatissavedbecauseofthedepreciationexpense.
E.
amountbywhichtheaftertaxdepreciationexpenselowersnetincome.
4.Allofthefollowingarerelatedtoaproposedproject.Whichoftheseshouldbeincludedinthecashflowattimezero?
I.purchaseof$1,400ofpartsinventoryneededtosupporttheproject
II.loanof$125,000usedtofinancetheproject
III.depreciationtaxshieldof$1,100
IV.$6,500ofequipmentneededtocommencetheproject
A.
IandIIonly
B.
IandIVonly
C.
IIandIVonly
D.
I,II,andIVonly
E.
I,II,III,andIV
5.Youareconsideringthepurchaseofanewmachine.Youranalysisincludestheevaluationoftwomachineswhichhavedifferinginitialandongoingcostsanddifferinglives.Whichevermachineispurchasedwillbereplacedattheendofitsusefullife.Youshouldselectthemachinewhichhasthe:
A.
longestlife.
B.
highestannualoperatingcost.
C.
lowestannualoperatingcost.
D.
highestequivalentannualcost.
E.
lowestequivalentannualcost.
6.Changesinthenetworkingcapitalrequirements:
A.
canaffectthecashflowsofaprojecteveryyearoftheproject'slife.
B.
onlyaffecttheinitialcashflowsofaproject.
C.
onlyaffectthecashflowattimezeroandthefinalyearofaproject.
D.
aregenerallyexcludedfromprojectanalysisduetotheirirrelevancetothetotalproject.
E.
reflectonlythechangesinthecurrentassetaccounts.
7.Whichoneofthefollowingisacorrectmethodforcomputingtheoperatingcashflowofaprojectassumingthattheinterestexpenseisequaltozero?
A.
EBIT+D
B.
EBIT-T
C.
NI+D
D.
(Sales-Costs)×(1-D)×(1-T)
E.
(Sales-Costs)×(1-T)
8.Jefferson&Sonsisevaluatingaprojectthatwillincreaseannualsalesby$145,000andannualcashcostsby$94,000.Theprojectwillinitiallyrequire$110,000infixedassetsthatwillbedepreciatedstraight-linetoazerobookvalueoverthe4-yearlifeoftheproject.Theapplicabletaxrateis32percent.Whatistheoperatingcashflowforthisproject?
A.
$11,220
B.
$29,920
C.
$43,480
D.
$46,480
E.
$46,620
OCF=($145,000-$94,000)(1-0.32)+($110,000/4)(0.32)=$43,480
9.TheLumberYardisconsideringaddinganewproductlinethatisexpectedtoincreaseannualsalesby$238,000andcashexpensesby$184,000.Theinitialinvestmentwillrequire$96,000infixedassetsthatwillbedepreciatedusingthestraight-linemethodtoazerobookvalueoverthe6-yearlifeoftheproject.Thecompanyhasamarginaltaxrateof32percent.Whatistheannualvalueofthedepreciationtaxshield?
A.
$5,120
B.
$13,160
C.
$25,840
D.
$32,560
E.
$41,840
Depreciationtaxshield=($96,000/6)×0.32=$5,120
10.PrecisionToolisanalyzingtwomachinestodeterminewhichoneitshouldpurchase.Thecompanyrequiresa15percentrateofreturnandusesstraight-linedepreciationtoazerobookvalueoverthelifeofitsequipment.MachineAhasacostof$892,000,annualoperatingcostsof$28,200,anda4-yearlife.MachineBcosts$1,118,000,hasannualoperatingcostsof$19,500,andhasa5-yearlife.Whichevermachineispurchasedwillbereplacedattheendofitsusefullife.PrecisionToolshouldpurchaseMachine_____becauseitlowersthefirm'sannualcostbyapproximately_______ascomparedtotheothermachine.
A.
A;$12,380
B.
A;$17,404
C.
B;$16,965
D.
B;$17,404
E.
B;$17,521
Differenceincosts=-$340,636.69-(-$353,016.79)=$12,380.09
11.TheBuckStoreisconsideringaprojectthatwillrequireadditionalinventoryof$216,000andwillincreaseaccountspayableby$181,000.Accountsreceivablearecurrently$525,000andareexpectedtoincreaseby9percentifthisprojectisaccepted.Whatistheproject'sinitialcashflowfornetworkingcapital?
A.
-$82,250
B.
-$12,250
C.
$12,250
D.
$36,250
E.
$44,250
NWCrequirement=-$216,000+$181,000-($525,000×0.09)=-$82,250
12.Cantheinitialcashflowattimezeroforaprojecteverbeapositivevalue?
Ifyes,giveanexample.Ifno,explainwhynot.
Theinitialcashflowcanbeapositivevalue.Forexample,ifaprojectreducednetworkingcapitalbyanamountthatexceededtheinitialcostforfixedassets,theinitialcashflowwouldbeapositiveamount.
13.Whatistheformulaforthetax-shieldapproachtoOCF?
Explainthetwokeypointstheformulaillustrates.
OCF=(Sales-Costs)×(1-T)+Depreciation×T
TheformulaillustratesthatcashincomeandexpensesaffectOCFonanaftertaxbasis.Theformulaalsoillustratesthateventhoughdepreciationisanon-cashexpenseitdoesaffectOCFbecauseofthetaxsavingsrealizedfromthedepreciationexpense.
14.Whatistheprimarypurposeofcomputingtheequivalentannualcostswhencomparingtwomachines?
Whatistheassumptionthatisbeingmadeabouteachmachine?
Theprimarypurposeistocomputetheannualcostofeachmachineonacomparablebasissothattheleastexpensivemachinecanbeidentifiedgiventhatthemachinesgenerallyhavedifferinglivesandcosts.Theassumptionisthatwhichevermachineisacquired,itwillbereplacedattheendofitsusefullife.
A.
independent.
B.
interdependent.
C.
mutuallyexclusive.
D.
economicallyscaled.
E.
operationallydistinct.
15.IfafirmacceptsProjectAitwillnotbefeasibletoalsoacceptProjectBbecausebothprojectswouldrequirethesimultaneousandexclusiveuseofthesamepieceofmachinery.Theseprojectsareconsideredtobe:
16.Whichoneofthefollowingmethodsdeterminestheamountofthechangeaproposedprojectwillhaveonthevalueofafirm?
A.
netpresentvalue
B.
discountedpayback
C.
internalrateofreturn
D.
profitabilityindex
E.
payback
17.Ifaprojecthasanetpresentvalueequaltozero,then:
A.
thetotalofthecashinflowsmustequaltheinitialcostoftheproject.
B.
theprojectearnsareturnexactlyequaltothediscountrate.
C.
adecreaseintheproject'sinitialcostwillcausetheprojecttohaveanegativeNPV.
D.
anydelayinreceivingtheprojectedcashinflowswillcausetheprojecttohaveapositiveNPV.
E.
theproject'sPImustbealsobeequaltozero.
18.Whyispaybackoftenusedasthesolemethodofanalyzingaproposedsmallproject?
A.
Paybackconsidersthetimevalueofmoney.
B.
Allrelevantcashflowsareincludedinthepaybackanalysis.
C.
Itistheonlymethodwherethebenefitsoftheanalysisoutweighthecostsofthatanalysis.
D.
Paybackisthemostdesirableofthevariousfinancialmethodsofanalysis.
E.
Paybackisfocusedonthelong-termimpactofaproject.
19.Whichofthefollowingareconsideredweaknessesintheaverageaccountingreturnmethodofprojectanalysis?
I.exclusionoftimevalueofmoneyconsiderations
II.needofacutoffrate
III.easilyobtainableinformationforcomputation
IV.basedonaccountingvalues
A.
Ionly
B.
IandIVonly
C.
IIandIIIonly
D.
I,II,andIVonly
E.
I,II,III,andIV
20.Whichoneofthefollowingstatementsrelatedtotheinternalrateofreturn(IRR)iscorrect?
A.
TheIRRyieldsthesameacceptandrejectdecisionsasthenetpresentvaluemethodgivenmutuallyexclusiveprojects.
B.
AprojectwithanIRRequaltotherequiredreturnwouldreducethevalueofafirmifaccepted.
C.
TheIRRisequaltotherequiredreturnwhenthenetpresentvalueisequaltozero.
D.
FinancingtypeprojectsshouldbeacceptediftheIRRexceedstherequiredreturn.
E.
TheaverageaccountingreturnisabettermethodofanalysisthantheIRRfromafinancialpointofview.
21.DouglassInteriorsisconsideringtwomutuallyexclusiveprojectsandhavedeterminedthatthecrossoverratefortheseprojectsis11.7percent.ProjectAhasaninternalrateofreturn(IRR)of15.3percentandProjectBhasanIRRof16.5percent.Giventhisinformation,whichoneofthefollowingstatementsiscorrect?
A.
ProjectAshouldbeacceptedasitsIRRisclosertothecrossoverpointthanisProjectB'sIRR.
B.
ProjectBshouldbeacceptedasithasthehigherIRR.
C.
Bothprojectsshouldbeacceptedasbothoftheproject'sIRRsexceedthecrossoverrate.
D.
Neitherprojectshouldbeacceptedsincebothoftheproject'sIRRsexceedthecrossoverrate.
E.
Youcannotdeterminewhichprojectshouldbeacceptedgiventheinformationprovided.
22.Whichoneofthefollowingmethodsofanalysisprovidesthebestinformationonthecost-benefitaspectsofaproject?
A.
netpresentvalue
B.
payback
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