When calculating a project’s annual cash flows 1 When calculating a project’s annual cash flows, which of the following is not directly included? A) The reduction in taxes attributable to sale of an asset for less than its book value B) The tax incurred when the trade-in value of the old asset exceeds its book value C) The reduction in taxes attributable to depreciation charges D) Depreciation expense 2 The basic characteristics of relevant project flows include all of the following except A) After-tax flows. B) Cash flows. C) Incremental flows. D) Financing flows. 3 Project GROW will require $250,000 to purchase new machinery. Capitalized expenditures total $40,000. The new machine will require that the firm purchase some additional inventory which will result in an increase in net working capital of $50,000. What is the initial cash outflow? A) $300,000 B) $350,000 C) $270,000 D) None of the above are correct. 4 In analyzing a long-term investment proposal, A) Include opportunity costs. B) Include before-tax interest payments. C) Include after-tax interest payments. D) Include sunk costs. 5 The Pink Pussycat Lounge is considering replacing its lighting system. The new lights will cost $16,000 and can be installed for $2,500. The old light fixtures were depreciated to zero but can be sold to Secondhand Sam for $1,000. If the Pink Pussycat has a 35 percent tax rate, the initial cash outflow for the new lighting system is A) $18,500. B) $16,000. C) $17,500. D) $17,850. 6 A company is considering a project costing $50,000. The hurdle rate is 9 percent and the project is expected to yield an ordinary annuity for 10 years. The annual annuity must be at least ________ for the project to be accepted. A) $9,231 B) $8,321 C) $8,667 D) $7,791 7 Your firm is considering two mutually exclusive projects, code-named A and B, that would each require an initial cash outflow of $10,000. They would generate the following incremental, after-tax, operating cash flows: Project A Year 1 $5,000 Year 2 4,000 Year 3 3,000 Project B $3,000 4,000 6,000 If the firm’s required rate of return is 14 percent, which would you select? A) Neither project because neither adds value to the firm. B) Project A because it has the higher net present value. C) Project B because it has the higher internal rate of return. D) Project A because it has the shorter payback period. 8 A proposed investment project requires an initial cash outflow of $82,650 and has an economic life of three years, with no salvage value. It is expected to generate before tax cash flows of $45,000 for each of the three years. The firm’s tax rate is 30 percent. Which of the following is closest to the project’s internal rate of return? A) 30 percent B) 7 percent C) 40 percent D) 12 percent 9 The initial cost of a conventional project is $14,000. The present value of the project’s cash inflows, discounted at 12 percent, is $12,500. The internal rate of return is A) Less than 12 percent. B) Greater than 12 percent. C) Equal to 12 percent. D) Cannot tell without additional information 10 Hi Lighter, Inc., is considering a project with an initial investment of $25,000 that generates cash-inflows of $10,000 per year for 8 years starting today. What is the net present value of this project if the firm requires a 15% rate of return on this project? (Choose the nearest figure.) A) $22,854 B) $19,873 C) $1,152 D) $55,000
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