Professional Documents
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Practice8 10
Practice8 10
Which of the following is a legitimate reason the valuation of common stock is generally harder
than the valuation of bonds?
I. Future cash flows on stocks are not known in advance.
II. Common stocks don't have a maturity date.
III. Common stock valuation is sensitive to estimates of the dividend growth rate.
A) I only
B) I and II only
C) I and III only
D) II and III only
E) I, II, and III
Ans: E Level: Basic Subject: Stock & Bond Valuation Type: Concepts
36. Which of the following is true about the differences between debt and common stock?
A) Debt is ownership in a firm but equity is not.
B) Creditors have voting power while stockholders do not.
C) Periodic payments made to either class of security are tax deductible for the issuer.
D) Interest payments are promised while dividend payments are not.
E) Bondholders can also own equity, but not vice versa.
37. You are considering investing in a firm and wish to place a value on the common stock. The
dividend on the firm's stock has not changed in the last five years. Absent any information
suggesting future changes in the dividend rate, the most appropriate stock valuation model would
be the ___________ model.
A) zero growth
B) supernormal growth
C) nonconstant growth
D) growing perpetuity
E) bond pricing
38. Over the past four years, a company has paid dividends of $1.00, $1.10, $1.20, and $1.30,
respectively. This pattern is expected to continue into the future. This is an example of a
company paying a:
A) Dividend that grows by 10% each year.
B) Dividend that grows at a constant rate.
C) Dividend that grows by a decreasing amount.
D) Dividend that grows at a decreasing rate.
E) Preferred stock dividend.
41. You are attempting to value a stock in an industry where firms are generating exceptional dividend
growth, but this growth is expected to slow to an equilibrium growth rate in about five years. Of
the stock valuation models studied, the most appropriate is the _______________.
A) perpetuity model
B) constant growth model
C) supernormal growth model
D) perpetual growth model
E) preferred stock model
42. As illustrated using the dividend growth model, the total return on a share of common stock is
comprised of a ________________.
A) capital gains yield and a dividend growth rate
B) capital gains growth rate and a dividend growth rate
C) dividend payout ratio and a required rate of return
D) dividend yield and the present dividend
E) dividend yield and a capital gains yield
Ans: D Level: Basic Subject: Common Stock vs. Preferred Type: Concepts
61. Which of the following would be considered a violation of the rights of one or more classes of a
firm's stakeholders?
A) Common dividends are paid even though preferred dividends are in arrears.
B) Preferred stockholders are paid before common shareholders in a liquidation.
C) Common stockholders are able to place members on the board of directors to represent their
interests in opposition to the board candidates backed by preferred shareholders.
D) Common shareholders are able to vote by proxy even when they are unable to attend a
shareholders' meeting in person.
E) Debt is repaid before preferred shareholders are paid anything in a liquidation.
81. Given constant earnings per share, an increase in dividends will generally:
A) Increase the dividend yield as well as the capital gains yield.
B) Decrease the growth rate of the corporation and increase the current yield.
C) Increase the dividend yield and decrease the current yield.
D) Have no effect on either the capital gains yield or the total return.
E) Have no effect on either the total return or the current yield.
85. A stock that pays a constant dividend of $2.50 forever currently sells for $20. What is the required
rate of return?
A) 11.0%
B) 11.5%
C) 12.0%
D) 12.5%
E) 13.0%
Ans: D Level: Basic Subject: Zero Growth Stock Return Type: Problems
86. Suppose NoGro, Inc. has just issued a dividend of $2.90 per share. Subsequent dividends will
remain at $2.90 indefinitely. Returns on the stock of firms like NoGro are currently running 15%.
What is the value of one share of stock?
A) $2.90
B) $13.65
C) $19.33
D) $31.25
E) $39.70
87. ABC Company's preferred stock is selling for $25 a share. If the required return is 12%, what will
the dividend be two years from now?
A) $2.39
B) $2.50
C) $3.00
D) $3.30
E) $3.76
132. Alhandro, Inc. just paid an annual dividend of $1.03. They have been increasing their dividends by
4% annually and are expected to continue doing so. How much can they expect to receive for each
new share of stock offered if investors require an 11% rate of return?
A) $9.36
B) $9.74
C) $14.71
D) $15.30
E) $15.91
134. The Brown Company just announced that they will be increasing their annual dividend to $1.68
next year and that future dividends will be increased by 2.5% annually. How much would you be
willing to pay for one share of the Brown Company stock if you require a 12% rate of return?
A) $14.35
B) $14.63
C) $17.68
D) $18.13
E) $19.81
135. The MIKO Corp. paid $0.84 in dividends last year. They have just announced that they expect to
increase their dividends by 2% each year for the foreseeable future. Currently, MIKO stock is
priced at $21.32 per share. What is the rate of return on MIKO stock?
A) 4.01%
B) 4.96%
C) 5.86%
D) 5.94%
E) 6.02%
136. Swanson Brothers expects to pay a $2.20 dividend next year which is an increase of 3.25% over
the prior year. After next year, dividends are projected to grow at a steady rate of 2.5%. Shares of
Swanson stock are currently selling at $15.80 per share. What is the rate of return on Swanson
stock?
A) 14.27%
B) 16.42%
C) 16.77%
D) 17.17%
E) 23.66%
140. MDK, Inc. is a high growth firm that has never paid a dividend. The company just issued a press
release stating that next year they plan on paying an annual dividend of $0.34. They also stated
that dividends are expected to increase by 40% a year for each of the following four years and
then increase by 4% annually thereafter. The required rate of return on this stock is 15%. What is
the expected price per share of MDK stock six years from now?
A) $9.12
B) $9.42
C) $12.35
D) $12.84
E) $14.14
141. Mahenterin Inc. is expecting to pay $1.23, $0.99, and $1.13 in annual dividends for the next three
years respectively. After that, they project that dividends will increase by 1.5% annually. Andy is
in the 25% marginal tax bracket and wants to earn 6% after-tax on his investments. How much is
Andy willing to pay today for one share of Mahenterin Inc. stock?
A) $16.90
B) $17.04
C) $17.31
D) $17.36
E) $17.81
142. Michael's Inc. 9% preferred stock is currently priced at $124.30. If Michaels wishes to sell some
new preferred stock at par, what rate should they assign to the new shares?
A) 6.76%
B) 7.24%
C) 8.05%
D) 9.00%
E) 11.19%
Ans: B Level: Intermediate Subject: Preferred Stock Rate Of Return Type: Problems
38. _________ quantifies, in dollar terms, how stockholder wealth will be affected by undertaking a
project.
A) Discounted payback analysis
B) The average accounting return
C) The internal rate of return
D) Net present value
E) The profitability index
41. You run a small bagel shop and are considering replacing your four employees with automated
machines that allow customers to buy their bagels without any human interaction. Of the
following, the most difficult task you face in computing the NPV of this change is
A) estimation of the reduction in wages you will have from the decrease in work force
B) estimation of the reduction in taxes you will get from the increase in depreciation
C) estimation of the cost of purchasing the new equipment
D) estimation of the cost of installing the new equipment
E) estimation of the total change in sales that will result from the change
42. A financial manager who consistently underestimates the ___________ will tend to incorrectly
reject projects that would actually create wealth for the stockholders.
A) marginal income tax rate
B) initial cost of projects
C) future cash outlays associated with projects
D) required return on projects
E) future cash inflows associated with projects
43. Which of the following decision rules is best for evaluating projects for which cash flows beyond
a specified point in time, and the time value of money, can both be ignored?
A) Payback
B) Net present value
C) Average accounting return
D) Profitability index
E) Internal rate of return
46.Which of the following uses an arbitrary cutoff number in its decision rule?
I. Payback period
II. AAR
III. IRR
A) I only
B) II only
C) III only
D) I and II only
E) II and III only
47. Which capital investment evaluation technique is described by the following characteristics? (1)
Easy to understand; (2) Biased towards liquidity; (3) Requires an arbitrary cutoff point; (4) Ignores
the time value of money.
A) NPV
B) IRR
C) Profitability index
D) Payback period
E) Discounted payback
48. For which capital investment evaluation technique is the following a complete list of its
disadvantages when compared to NPV analysis? (1) Ignores cash flows beyond the cutoff date; (2)
Requires an arbitrary cutoff point; (3) Biased against long-term projects; (4) May reject positive
NPV projects.
A) NPV
B) IRR
C) AAR
D) Payback period
E) Discounted payback
52. Which of the following is considered to be a redeeming feature of average accounting return
analysis?
A) It incorporates time value of money.
B) Estimation of the appropriate cutoff rate is straightforward and easy.
C) Calculation relies on net income and not cash flows or asset values.
D) Calculation relies on book values and not market values or cash flows.
E) It is relatively easy to calculate.
53. Which of the following does NOT incorporate discounted cash flow (DCF) valuation in its
calculation?
A) Discounted payback
B) Profitability index
C) Net present value
D) Internal rate of return
E) Average accounting return
55. Which capital investment evaluation technique offers the following advantages? (1) Easy to
calculate; (2) Needed information will usually be available.
A) NPV
B) IRR
C) AAR
D) Payback period
E) Discounted payback
81. According to the capital budgeting surveys cited in the text, in general, most financial managers of
large Canadian firms:
A) Prefer to rely exclusively on payback analysis to evaluate projects.
B) Use the AAR as their primary method of evaluating capital budgeting projects.
C) Who use payback analysis use it only in conjunction with some other type of analysis.
D) Prefer to use NPV or IRR to analyze their investment projects.
E) Make use of payback analysis more heavily than discounted cash flow methods.
82. The internal rate of return on a project is 11.24%. Which of the following (is) are true if the project
is assigned a 9.5% discount rate?
I The project will have a negative net present value.
II The profitability index will be greater than 1.0.
III The initial investment is less than the market value of the project.
IV The project will have a positive effect on shareholders if it is accepted.
A) I only
B) II and IV only
C) I and III only
D) II and III only
E) II, III, and IV only
Ans: E Level: Challenge Subject: Net Present Value And Internal Rate Of Return
Type: Concepts
83. The primary idea behind the net present value rule is that an investment:
A) Is worthwhile if it creates value for the owners.
B) Must have total cash flows that equal zero.
C) Should be accepted if it enhances management's position.
D) Should break-even from an accounting point of view.
E) Should earn a rate of return that is less than the discount rate.
109. You are going to choose between two investments. Both cost $80,000, but investment A pays
$35,000 a year for four years while investment B pays $30,000 a year for five years. If your
required return is 13%, which should you choose?
A) A because it pays back sooner.
B) A because its IRR exceeds 13%.
C) A because it has a higher IRR.
D) B because its IRR exceeds 13%.
E) B because it has a higher NPV.
Ans: E Level: Basic Subject: Net Present Value Rule Type: Problems
111. For a project with an initial investment of $40,000 and cash inflows of $11,000 a year for five
years, calculate NPV given a required return of 11.65%.
A) -$1,205
B) -$1,103
C) -$1.23
D) $567
E) $1,218
114. A project costs $475 and has cash flows of $100 for the first three years and $75 in each of the
project's last five years. What is the payback period of the project?
A) The project never pays back
B) 4.75 years
C) 5.00 years
D) 5.33 years
E) 6.00 years
119. Suppose a firm invests $600 in a project. The initial cost is depreciated straight-line to zero over 3
years. Net income from the project is $100, $125, and $140 in each of the three years of the
project's life. What is the average accounting return?
A) 18.25%
B) 20.28%
C) 35.49%
D) 40.56%
E) 60.83%
121. Suppose a project costs $300 and produces cash flows of $100 over each of the following six
years. What is the IRR of the project?
A) There is not enough information; a discount rate is required
B) 10.0%
C) 24.3%
D) 34.9%
E) 38.1%
123. What is the IRR of an investment that costs $77,500 and pays $27,500 a year for four years?
A) 16%
B) 18%
C) 20%
D) 22%
E) 24%
124. You are evaluating two mutually exclusive projects, A and B. Project A costs $350 and has cash
flows of $250 in each of the next two years. Project B costs $300 and generates cash flows of
$300 and $100 for the next two years, respectively. What is the crossover rate for these projects?
A) 26.38%
B) 27.47%
C) 30.28%
D) 61.80%
E) 83.48%
Bill plans to open a do-it-yourself dog bathing centre in a storefront. The bathing equipment will cost
$160,000. Bill expects the after-tax cash inflows to be $40,000 annually for seven years, after which he
plans to scrap the equipment and retire to the beaches of Jamaica.
134. Assume the required return is 10%. What is the project's NPV?
A) $14,111
B) $27,322
C) $32,556
D) $34,737
E) $45,001
136. Assume the required return is 10%. What is the project's discounted payback period?
A) three years
B) four years
C) five years
D) six years
E) seven years
137. Assume the required return is 17%. What is the project's IRR? Should it be accepted?
A) 12.2%; yes
B) 12.2%; no
C) 16.3%; yes
D) 16.3%; no
E) 17.0%; indifferent
138. Assume the required return is 15%. What is the project's PI? Should it be accepted?
A) 0.88; yes
B) 0.88; no
C) 1.00; indifferent
D) 1.04; yes
E) 1.04; no
You need to borrow $2,000 quickly, and the local pawn shop will give it to you if you promise to repay
them $200.92 monthly over the next year.
139. Suppose that the pawn shop's cost of funds is 12%, compounded monthly. From their viewpoint,
what is the NPV of this deal?
A) $44.11
B) $111.01
C) $226.17
D) $261.37
E) $292.01
140. From the pawn shop's viewpoint, what is the IRR of this transaction?
A) 1.0% per month
B) 1.7% per month
C) 2.0% per month
D) 2.5% per month
E) 3.0% per month
141. From your viewpoint, what is the percentage cost of this transaction?
A) 1.0% per month
B) 1.7% per month
C) 2.0% per month
D) 2.5% per month
E) 3.0% per month
142. Suppose the pawn shop has more customers than funds. Which capital budgeting technique would
allow them to rank their potential customers in order to maximize current wealth?
A) AAR
B) Payback period
C) Profitability index
D) NPV
E) Discounted payback
Floyd Clymer is the CFO of Bonavista Mustang, a manufacturer of parts for classic automobiles. Floyd is
considering the purchase of a two-ton press which will allow the firm to stamp out auto fenders. The
equipment costs $250,000. The project is expected to produce after-tax cash flows of $60,000 the first
year, and increase by $10,000 annually; the after-tax cash flow in year 5 will reach $100,000. Liquidation
of the equipment will net the firm $10,000 in cash at the end of five years, making the total cash flow in
year five $110,000.
143. What is the payback period for the proposed investment?
A) 2.0 years
B) 2.4 years
C) 3.0 years
D) 3.4 years
E) The investment doesn't pay back
144. Assume that sale of the equipment at the end of five years would net the firm $200,000, rather
than $10,000. Now what is the payback period for the proposed investment?
A) 2.0 years
B) 2.4 years
C) 3.0 years
D) 3.4 years
E) The investment doesn't pay back
145. Assume the required return is 15%. What is the project's discounted payback period?
A) two years
B) three years
C) four years
D) five years
E) Longer than the project's life.
146. Assume the required return is 15%. What is the project's net present value?
A) The NPV is negative
B) $12,001
C) $12,623
D) $13,853
E) $15,226
147. Assuming a required return is 15%, what is the project's profitability index?
A) 0.98
B) 1.01
C) 1.06
D) 1.12
E) 1.28
153. Sal is considering a project that costs $15,000. The project produces cash inflows of $3,000,
$5,000, $7,000, and $3,000 respectively for the next four years. Sal wants to recoup his money
within 3 years after applying a 6% discount rate. Sal should:
A) Accept the project because it produces $15,534 on a discounted payback basis.
B) Accept this project because the discounted payback period is 2.78 years.
C) Accept this project because the payback period is exactly 3 years.
D) Reject this project because the payback period is 2.78 years.
E) Reject this project because the discounted payback period is 3.78 years.
154. Atlantic, Inc. is considering a project that is expected to produce the following cash flows over the
next five years: $22,500, $27,900, $41,800, $33,000, and $15,000 respectively. Atlantic has
$98,000 available, which is the amount needed to initiate the project. Should Atlantic accept this
project if the required rate of return is 12%? Why or why not?
A) No; Atlantic would lose $2,407 in today's dollars if they accept the project.
B) No; The IRR is 13.47%, which is greater than the required return.
C) No; The PI is 1.04, which is considered a reject signal.
D) Yes; Atlantic will make $3,567 in today's dollars if they accept the project.
E) Yes; The PI is .96, which is considered an acceptance signal.
155. Stuart is reviewing a project that costs $13,500 to start. The project is expected to produce cash
inflows of $3,000, $5,000, $6,000, and $4,000 over the next four years, respectively. If Stuart
invests in this project, he wants to earn at least 9% and recoup his money on a discounted basis
within 3 years. Should Stuart invest in this project? Why or why not?
A) Yes; The project has a net present value of $927.50 and pays back within 3 years.
B) Yes; The project has a net present value of $1,906.21 and pays back within 3 years.
C) No; The project has a net present value of $927.50 but does not pay back within 3 years.
D) No; The project meets the payback requirement but has a net present value of -$1,906.21.
E) No; The project does not meet either requirement.
26. When we employ ________________ we are evaluating a project on the basis of its incremental
cash flows, thereby ignoring the other cash flows of the firm.
A) the stand-alone principle
B) the equivalence theorem
C) the law of one price
D) Bell's theorem
E) the equivalent annual cost procedure
28. Your company currently sells oversized golf clubs. The Board of Directors wants you to look at
replacing them with a line of supersized clubs. Which of the following is NOT relevant?
A) A reduction in revenues of $300,000 from terminating the oversized line of clubs.
B) Land you own with a market value of $750,000 that may be used for the project.
C) $200,000 spent on research and development last year on oversized clubs.
D) $350,000 you will pay to Fred Singles to promote your new clubs.
E) $125,000 you will receive by selling the existing production equipment which must be
upgraded if you produce the new supersized clubs.
Ans: D Level: Basic Subject: Relevant Project Cash Flows Type: Concepts
30. Which of the following describe(s) relevant cash flows for the purpose of performing capital
budgeting analysis?
I. Cash flows must be incremental
II. Cash flows must be after-tax
III. NI + D
IV. Additions to net working capital
A) I and III only
B) I, II, and III only
C) I and IV only
D) II, III, and IV only
E) I, II, III, and IV
31. The government has been trying to decide whether or not to purchase any of the new, advanced
missiles it has developed. One of the arguments in favour of purchasing the missiles is that since
so much money has been spent on their development it would be a waste of money not to buy
them now. What is the major problem with this argument?
A) It includes erosion costs in the decision-making process.
B) It includes sunk costs in the decision-making process.
C) It includes opportunity costs in the decision-making process.
D) It includes net working capital changes in the decision-making process.
E) It includes financing costs in the decision-making process.
32. You discover the engine-oil additive your scientists developed three years ago makes a great men's
after-shave once diluted properly using certain chemicals. How should you treat the original
$125,000 of R&D expenditures that went into developing the engine-oil additive for your present
decision regarding whether or not to begin production of the after-shave?
A) Treat it as a cash outflow three years ago for the current project; that is, find the future value
today of the $125,000 spent three years ago.
B) The full $125,000 should be treated as an initial investment today.
C) As a cash inflow since the formula has obviously increased in value over the years.
D) As an opportunity cost if the formula cannot presently be sold to another manufacturer.
E) As a sunk cost since the R&D expenditure has no bearing on today's decision.
43. Which of the following projects would increase net working capital the most?
A) Financing a land purchase for a new manufacturing plant via a sale of new stock.
B) Decreasing the amount of sales your firm makes on credit.
C) Decreasing the number of product lines your firm carries.
D) Changing your production schedule so that you produce goods only after a customer order.
E) Using long-term bank credit to reduce payables.
45. _________________ would usually represent a net cash inflow at the beginning of a project and
an equal net cash outflow upon completion of the project.
A) An increase in payables
B) An increase in inventory
C) An increase in receivables
D) An increase in fixed assets
E) An increase in receivables, coupled with an identical increase in payables
48. If a firm moves into a higher tax bracket, one would expect its depreciation tax shield to be which
of the following, all else the same?
A) More valuable.
B) Less valuable.
C) Unchanged, since depreciation doesn't change.
D) Unchanged, because changes in tax rates don't matter once a project is in place.
E) It is impossible to tell how it will change, if at all, without more information.
54. Which of the following describes the "tax shield" approach to defining operating cash flow?
A) EBIT + D - Taxes
B) NI + D
C) (S - C) (1 - TC) + DTc
D) S - C - Taxes
E) EBIT + DTc
55. You are to calculate operating cash flow using the following information: sales, net income,
depreciation, and net initial investment. If interest expenses are zero, then it would likely be
easiest for you to use the _______________________ approach.
A) conventional
B) tax shield
C) bottom-up
D) top-down
E) depreciation first
57. If the only project income statement items known to you are net income and depreciation, which
of the following methods for calculating project OCF would you use?
I. Bottom-up approach
II. Top-down approach
III. Tax-shield approach
A) I only
B) II only
C) III only
D) I and II only
E) I and III only
58. Which of the following methods for calculating project operating cash flow do (does) NOT require
you to add back noncash deductions such as depreciation?
I. Bottom-up approach
II. Top-down approach
III. Tax-shield approach
A) I only
B) II only
C) III only
D) II and III only
E) I, II, and III
87. You purchase a machine for $22,000 which belongs in a 30% CCA class. What is the present
value of the CCA tax shield on the machine if it is sold at the end of the third year for $6,000, your
tax rate is 34%, and the appropriate discount rate is 15%?
A) $1,014
B) $3,510
C) $5,011
D) $5,623
E) $6,994
89. The machinery required for a three year project costs $20,000, belongs in a 15% CCA class, and
will require a net working capital investment of $5,000 up-front. The project generates after-tax
operating income of $11,500. The fixed assets will be sold for $2,000 at the end of the project. If
the firm has a tax rate of 34% and a required return of 10%, what is the project NPV?
A) $10,724
B) $11,033
C) $12,446
D) $13,426
E) $15,942
90. A firm purchases Class 8 equipment for $1,000,000 (CCA Rate 20%) for a 10 year project. What
will be the CCA tax shield in year 3? The tax rate is 35%.
A) $144,000
B) $50,400
C) $201,600
D) $63,000
E) $35,000
91. Consider a $12,000 machine that will reduce after-tax operating costs by $2,500 per year over a
five-year period. Assume no changes in net working capital and a salvage value of zero. Further
assume that the machine belongs in a 20% CCA class, a marginal tax rate of 34%, and a required
return of 10%. The project NPV is:
A) $73
B) $449
C) $689
D) $827
E) $1,235
93. Given the following information and assuming straight-line depreciation to zero, what is the IRR
of this project? Initial investment = $400,000; life = four years; cost savings = $125,000 per year;
salvage value = $20,000 in year 5; tax rate = 34%; discount rate = 12%.
A) 6.25%
B) 7.51%
C) 8.15%
D) 9.43%
E) 10.24%
94. Given the following project information and assuming straight-line depreciation to zero, what is
the discounted payback period? Initial investment = $500,000; life = five years; cost savings =
$160,000 per year; salvage value = $30,000 in year 5; tax rate = 34%; discount rate = 13%.
A) two years
B) three years
C) four years
D) five years
E) The discounted payback period is greater than the project's life.
95. Given the following information and assuming straight-line depreciation to zero, what is the
payback period for this project? Initial investment = $500,000; life = five years; cost savings =
$160,000 per year; salvage value = $30,000 in year 5; tax rate = 34%; discount rate = 13%.
A) 2.5 years
B) 3.6 years
C) 3.9 years
D) 4.4 years
E) The payback period is greater than the project's life.
97. Given the following information and assuming a CCA rate of 30% (Class 10), what is the NPV for
this project? Initial investment in fixed assets = $800,000; initial investment in net working
capital = $200,000; life = four years; pre-tax cost savings = $400,000 per year; salvage = $10,000
in year 4; tax rate = 35%; discount rate = 12%.
A) $50,000
B) $0
C) -$37,059
D) $110,866.55
E) $400,000
98. Given the following information and assuming a 20% CCA class, what is the NPV for this
project? Initial investment in fixed assets = $800,000; initial investment in net working capital =
$200,000; life = four years; after-tax cost savings = $250,000 per year; salvage value = $30,000;
tax rate = 35%; discount rate = 16%.
A) $95,101
B) $105,967
C) $147,261
D) $187,098
E) $418,198
You are evaluating a project for The Ultimate recreational tennis racket, guaranteed to correct that wimpy
backhand. You estimate the sales price of The Ultimate to be $400 and sales volume to be 1,000 units in
year 1, 1,250 units in year 2, and 1,325 units in year 3. The project has a three year life. Variable costs
amount to $225 per unit and fixed costs are $100,000 per year. The project requires an initial investment of
$165,000 which is depreciated straight-line to zero over the three year project life. The actual market value
of the initial investment at the end of year 3 is $35,000. Initial net working capital investment is $75,000
and NWC will maintain a level equal to 20% of sales each year thereafter. The tax rate is 34% and the
required return on the project is 10%.
111. What is EBIT for the project in the first year?
A) $13,200
B) $15,000
C) $20,000
D) $44,000
E) $52,000
Ans: C Level: Intermediate Subject: Earnings Before Interest & Taxes Type: Problems
112. Given the $75,000 initial investment in NWC, what change occurs for NWC during year 1?
A) There is no change in NWC.
B) There is a $5,000 increase in NWC.
C) There is a $5,000 decrease in NWC.
D) There is an $80,000 increase in NWC.
E) There is an $80,000 decrease in NWC.
Ans: B Level: Basic Subject: Additions To Net Working Capital Type: Problems
113. What is the operating cash flow for the project in year 2?
A) $26,400
B) $68,200
C) $97,075
D) $101,210
E) $105,738
114. What is the effect of the $35,000 salvage value on year 2 cash flows?
A) There is no effect; the salvage value is a noncash event.
B) Cash flows are increased $11,900.
C) Cash flows are increased $23,100.
D) Cash flows are increased $35,000.
E) Salvage value does not affect incremental cash flow until year 3.
115. What is the total cash flow for the project in year 3?
A) $126,461
B) $178,156
C) $194,945
D) $234,838
E) $239,100
Ans: D Level: Intermediate Subject: Cash Flow From Assets Type: Problems
You are considering investing in a piece of equipment to implement a cost-cutting proposal. The pre-tax
cost reduction is expected to equal $41.67 for each of the three years of the project's life. The equipment
has an initial cost of $125 and belongs in a 20% CCA class. Assume a 34% tax bracket, a discount rate of
15%, and a salvage value of zero.
116. What is the value of the annual depreciation tax shield for year 2 of the project?
A) $6.80
B) $7.65
C) $14.17
D) $27.50
E) $41.67
117. What is the annual after-tax cost reduction for the project?
A) $14.17
B) $27.50
C) $41.67
D) $63.14
E) $69.17
118. If the equipment is sold to another company at the end of year 3 for $20, what is the NPV?
A) $-33.56
B) $-28.91
C) $0
D) $28.91
E) $33.56
119. If the equipment is sold to another company at the end of year 3 for $20, what is the PI?
A) 0.31
B) 0.46
C) 0.77
D) 1.09
E) 1.31
137. The Whilst Co. is analyzing a project that has projected sales of $189,400 and costs of $102,300.
The project requires an investment in inventory of $15,000 plus another $28,000 in accounts
receivable. Fixed assets of $80,000 are needed and belong in a 30% CCA class. Accounts payable
will increase by $36,000. An interest expense of $11,000 will be incurred annually. The project has
a life of 3 years. At the end of the three years, the equipment has an estimated market value of
$26,000. The company requires a 14% rate of return and is in the 34% marginal tax bracket. What
is the net present value of this project?
A) $65,887
B) $68,023
C) $81,921
D) $91,425
E) $93,608