Ch 7 Exercise new with solutions

1、1. The difference between a firms future cash flows if it accepts a project and the firms future cash flows if it does not accept the project is referred to as the projects:A.incremental cash flows.B.internal cash flows.C.external cash flows.D.erosion effects.E.financing cash flows.2. Which of the f

2、ollowing should be included in the analysis of a new product?I. money already spent for research and development of the new productII. reduction in sales for a current product once the new product is introducedIII. increase in accounts receivable needed to finance sales of the new productIV. market

3、value of a machine owned by the firm which will be used to produce the new productA.I and III onlyB.II and IV onlyC.I, II, and III onlyD.II, III, and IV onlyE.I, II, III, and IV3. The depreciation tax shield is best defined as the:A.amount of tax that is saved when an asset is purchased.B.tax that i

4、s avoided when an asset is sold as salvage.C.amount of tax that is due when an asset is sold.D.amount of tax that is saved because of the depreciation expense.E.amount by which the aftertax depreciation expense lowers net income.4. All of the following are related to a proposed project. Which of the

5、se should be included in the cash flow at time zero?I. purchase of $1,400 of parts inventory needed to support the projectII. loan of $125,000 used to finance the projectIII. depreciation tax shield of $1,100IV. $6,500 of equipment needed to commence the projectA.I and II onlyB.I and IV onlyC.II and

6、 IV onlyD.I, II, and IV onlyE.I, II, III, and IV5. You are considering the purchase of a new machine. Your analysis includes the evaluation of two machines which have differing initial and ongoing costs and differing lives. Whichever machine is purchased will be replaced at the end of its useful lif

7、e. You should select the machine which has the:A.longest life.B.highest annual operating cost.C.lowest annual operating cost.D.highest equivalent annual cost.E.lowest equivalent annual cost.6. Changes in the net working capital requirements:A.can affect the cash flows of a project every year of the

8、projects life.B.only affect the initial cash flows of a project.C.only affect the cash flow at time zero and the final year of a project.D.are generally excluded from project analysis due to their irrelevance to the total project.E.reflect only the changes in the current asset accounts.7. Which one

9、of the following is a correct method for computing the operating cash flow of a project assuming that the interest expense is equal to zero?A.EBIT + DB.EBIT - TC.NI + DD.(Sales - Costs) (1 - D) (1- T)E.(Sales - Costs) (1 - T)8. Jefferson & Sons is evaluating a project that will increase annual sales

10、 by $145,000 and annual cash costs by $94,000. The project will initially require $110,000 in fixed assets that will be depreciated straight-line to a zero book value over the 4-year life of the project. The applicable tax rate is 32 percent. What is the operating cash flow for this project?A.$11,22

11、0B.$29,920C.$43,480D.$46,480E.$46,620OCF = ($145,000 - $94,000)(1 - 0.32) + ($110,000/4)(0.32) = $43,4809. The Lumber Yard is considering adding a new product line that is expected to increase annual sales by $238,000 and cash expenses by $184,000. The initial investment will require $96,000 in fixe

12、d assets that will be depreciated using the straight-line method to a zero book value over the 6-year life of the project. The company has a marginal tax rate of 32 percent. What is the annual value of the depreciation tax shield?A.$5,120B.$13,160C.$25,840D.$32,560E.$41,840Depreciation tax shield =

13、($96,000/6) 0.32 = $5,12010. Precision Tool is analyzing two machines to determine which one it should purchase. The company requires a 15 percent rate of return and uses straight-line depreciation to a zero book value over the life of its equipment. Machine A has a cost of $892,000, annual operatin

14、g costs of $28,200, and a 4-year life. Machine B costs $1,118,000, has annual operating costs of $19,500, and has a 5-year life. Whichever machine is purchased will be replaced at the end of its useful life. Precision Tool should purchase Machine _ because it lowers the firms annual cost by approxim

15、ately _ as compared to the other machine.A.A; $12,380B.A; $17,404C.B; $16,965D.B; $17,404E.B; $17,521Difference in costs = -$340,636.69 - (-$353,016.79) = $12,380.0911. The Buck Store is considering a project that will require additional inventory of $216,000 and will increase accounts payable by $1

16、81,000. Accounts receivable are currently $525,000 and are expected to increase by 9 percent if this project is accepted. What is the projects initial cash flow for net working capital?A.-$82,250B.-$12,250C.$12,250D.$36,250E.$44,250NWC requirement = -$216,000 + $181,000 - ($525,000 0.09) = - $82,250

17、12. Can the initial cash flow at time zero for a project ever be a positive value? If yes, give an example. If no, explain why not.The initial cash flow can be a positive value. For example, if a project reduced net working capital by an amount that exceeded the initial cost for fixed assets, the in

18、itial cash flow would be a positive amount.13. What is the formula for the tax-shield approach to OCF? Explain the two key points the formula illustrates.OCF = (Sales - Costs) (1 - T) + Depreciation TThe formula illustrates that cash income and expenses affect OCF on an aftertax basis. The formula a

19、lso illustrates that even though depreciation is a non-cash expense it does affect OCF because of the tax savings realized from the depreciation expense.14. What is the primary purpose of computing the equivalent annual costs when comparing two machines? What is the assumption that is being made abo

20、ut each machine?The primary purpose is to compute the annual cost of each machine on a comparable basis so that the least expensive machine can be identified given that the machines generally have differing lives and costs. The assumption is that whichever machine is acquired, it will be replaced at

21、 the end of its useful life.A.independent.B.interdependent.C.mutually exclusive.D.economically scaled.E.operationally distinct.15. If a firm accepts Project A it will not be feasible to also accept Project B because both projects would require the simultaneous and exclusive use of the same piece of

22、machinery. These projects are considered to be:16. Which one of the following methods determines the amount of the change a proposed project will have on the value of a firm?A.net present valueB.discounted paybackC.internal rate of returnD.profitability indexE.payback17. If a project has a net prese

23、nt value equal to zero, then:A.the total of the cash inflows must equal the initial cost of the project.B.the project earns a return exactly equal to the discount rate.C.a decrease in the projects initial cost will cause the project to have a negative NPV.D.any delay in receiving the projected cash

24、inflows will cause the project to have a positive NPV.E.the projects PI must be also be equal to zero.18. Why is payback often used as the sole method of analyzing a proposed small project?A.Payback considers the time value of money.B.All relevant cash flows are included in the payback analysis.C.It

25、 is the only method where the benefits of the analysis outweigh the costs of that analysis.D.Payback is the most desirable of the various financial methods of analysis.E.Payback is focused on the long-term impact of a project.19. Which of the following are considered weaknesses in the average accoun

26、ting return method of project analysis?I. exclusion of time value of money considerationsII. need of a cutoff rateIII. easily obtainable information for computationIV. based on accounting valuesA.I onlyB.I and IV onlyC.II and III onlyD.I, II, and IV onlyE.I, II, III, and IV20. Which one of the follo

27、wing statements related to the internal rate of return (IRR) is correct?A.The IRR yields the same accept and reject decisions as the net present value method given mutually exclusive projects.B.A project with an IRR equal to the required return would reduce the value of a firm if accepted.C.The IRR

28、is equal to the required return when the net present value is equal to zero.D.Financing type projects should be accepted if the IRR exceeds the required return.E.The average accounting return is a better method of analysis than the IRR from a financial point of view.21. Douglass Interiors is conside

29、ring two mutually exclusive projects and have determined that the crossover rate for these projects is 11.7 percent. Project A has an internal rate of return (IRR) of 15.3 percent and Project B has an IRR of 16.5 percent. Given this information, which one of the following statements is correct?A.Pro

30、ject A should be accepted as its IRR is closer to the crossover point than is Project Bs IRR.B.Project B should be accepted as it has the higher IRR.C.Both projects should be accepted as both of the projects IRRs exceed the crossover rate.D.Neither project should be accepted since both of the projec

31、ts IRRs exceed the crossover rate.E.You cannot determine which project should be accepted given the information provided.22. Which one of the following methods of analysis provides the best information on the cost-benefit aspects of a project?A.net present valueB.paybackC.internal rate of returnD.av

32、erage accounting returnE.profitability index23. When the present value of the cash inflows exceeds the initial cost of a project, then the project should be:A.accepted because the internal rate of return is positive.B.accepted because the profitability index is greater than 1.C.accepted because the

33、profitability index is negative.D.rejected because the internal rate of return is negative.E.rejected because the net present value is negative.24. Southern Chicken is considering two projects. Project A consists of creating an outdoor eating area on the unused portion of the restaurants property. P

34、roject B would use that outdoor space for creating a drive-thru service window. When trying to decide which project to accept, the firm should rely most heavily on which one of the following analytical methods?A.profitability indexB.internal rate of returnC.paybackD.net present valueE.accounting rat

35、e of return25. Which of the following are definite indicators of an accept decision for an independent project with conventional cash flows?I. positive net present valueII. profitability index greater than zeroIII. internal rate of return greater than the required rateIV. positive internal rate of returnA.I and III onlyB.II and IV onlyC.I, II, and III onlyD.II, III, and IV onlyE.I, II, III, and IV26. Explain the differences and similarities between net pr