MULTIPLE CHOICE
1.Gamma Electronics is considering the purchase of testing equipment that will cost $500,000. The equipment has a 5-year lifetime with no salvage value. Assume the new machine will generate after-tax savings of $100,000 per year for the five years.
If the firm has a 15% cost of capital, what is the equivalent annual cost of the equipment?
a.$32,924
b.$42,746
c.$49,158
d.$37,863
2.Thompson Manufacturing must choose between two types of furnaces to install. Model A has a 6-year life, and an NPV of $5,000. Model B has a 5-year life, and an NPV of $4,200. The relevant discount rate is 12%. Which model should be chosen? What’s the annual cash flow from that model?
a.Model B; $1,165
b.Model B; $840
c.Model A; $833
d.Model A; $1,216
3.A firm is evaluating two machines. Both machines meet the firm’s quality standard. Machine A costs $40,000 initially and $1,000 per year to maintain. Machine B costs $24,000 initially and $2,000 per year to maintain. Machine A has a 6-year useful life and machine B has a 3-year useful life. Both machines have zero salvage value. Assume the firm will continue to replace worn-out machines with similar machines, and the discount rate is 7%. Which machine should the firm purchase?
a.Machine A
b.Machine B
c.The firm is indifferent to the two machines
d.Can’t tell from the given information
4.Capital budgeting must be placed on an incremental basis. This means that ____ must be ignored and ____ must be considered.
a.sunk cost; opportunity cost
b.sunk cost; financing cost
c.cannibalization; opportunity cost
d.opportunity cost; net working capital
5.Roger is considering the expansion of his business into a property he purchased two years ago. Which of the following items should not be included in the analysis of this expansion?
a.Roger can lease the property to another company for $12,000 per year.
b.Costs of hiring additional staff
c.The property was extensively renovated last year at a cost of $15,000.
d.The expansion will result in a slight increase of inventory carried.
6.You are given the following information. What is the initial cash outflow?
Purchase and installation of new equipment$12,000
Sale price of replaced equipment$ 4,000
Book value of replaced equipment$ 3,000
When the new equipment is installed:
Inventory increase$ 2,000
Accounts payable increase$ 1,000
Tax rate40%
a.$9,400
b.$9,000
c.$13,000
d.$10,600
7.A machine costs $3 million and has zero salvage value. Assume a discount rate of 10% and a 40% tax rate. The machine is depreciated straight-line over 3 years for tax purpose. What is the present value of depreciation tax savings associated with this machine?
a.$1,200,000
b.$994,741
c.$1,090,900
d.$400,000
8.A machine costs $3 million and has zero salvage value. The machine qualifies under the 3-year MARCS category. Assume a discount rate of 10% and a 40% tax rate. What is the present value of depreciation tax savings associated with this machine? (MARCS tax depreciation schedule of a 3-year class asset: 33.33% in year 1, 44.45% in year 2, 14.81% in year 3, and 7.41% in year 4)
a.$1,090,900
b.$1,200,000
c.$994,741
d.$998,684
9.Alpha Car Rental purchased 5 cars for a total of $100,000 three years ago. Now it is replacing the cars with newer vehicles. The company has depreciated 92.59% of the old cars, and sold these cars for a total of $ 25,000. Assume a tax rate of 40%. What is the cash inflow from the sale of these vehicles?
a.$25,000
b.$15,000
c.$17,964
d.$16,500
10.Net working capital decreases when
a.inventory falls, accounts receivable falls, or accounts payable increases
b.inventory increases, accounts receivable increases, or accounts payable falls
c.cost of goods sold falls, or interest rate falls
d.operating expenses fall, or current assets increase
11.The cash flows associated with an investment project are as follows:
Cash Flows
Initial Outflow-$7,000,000
Year 1$ 100,000
Year 2$ 200,000
Year 3$ 540,000
In year 4 and beyond, cash flows would continue to grow at 4 percent per year. Assume a discount rate of 10%. What is the NPV of this investment?
a.$385,220
b.$423,742
c.$631,104
d.$694,215
12.Georgia Food is exploring the possibility of bringing a new frozen pasta to the market. Which of the following items are not relevant for the project’s analysis?
a.Cost of increasing shelf space at grocery stores
b.Lost revenue from its frozen pizza sales since some customers will switch to purchase the new frozen pasta
c.Cost of advertising the new product
d.Market research funds the company has spent on testing the viability of the new product
13.A certain investment will require an immediate cash outflow of $3 million. At the end of each of the next three years, the investment will generate cash inflows of $1.3 million. If the discount rate is 10%, what is the project’s NPV?
a.$211,734
b.-$303,886
c.$232,908
d.-$276,260
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