Expert answer:Financial Management Quiz Questions
Answer & Explanation:Please answer the following questions10282015.docx
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A couple of hints for Quiz 2:
“Operating Cash Flow” is same as “Annual Cash Flow”
“After-tax cash flow from the sale” is same as solving for “After-tax Salvage Value”. Note:
After-tax Salvage Value = SV -t*(SV-BV)
When the questions asks to solve for, say, “Total Cash Flow for Year 4” and Year 4 is the last
year of the project, then Cash flow in Year 4 will be “Operating Cash Flow + Terminal Cash
Flow”.
If depreciation is straight-line, then calculate depreciation each year as (Purchase Price +
Shipping and Installation and Modification Costs)/Class Life of Asset.
Unless otherwise mentioned, you can assume that class life of asset and project life is same.
QUESTION 1
A project has an annual operating cash flow of $10,817. Initially, this 4-year project required
$4,389 in net working capital, which is recoverable when the project ends. The firm also spent
$10,000 on equipment to start the project. This equipment will have a book value of $3,508 at
the end of year 4. What is the total cash flow for year 4 of the project if the equipment can be
sold for $5,377 and the tax rate is 38%?
Enter your answer rounded off to two decimal points. Do not enter $ or comma in the answer
box. For example, if your answer is $12.345 then enter as 12.35 in the answer box.
QUESTION 2
ABC has a proposed project which will generate sales of 198 units at a selling price of $200
each. The fixed costs are $20,967 and the variable costs per unit are $56. The project requires
$153,607 of machinery which will be depreciated on a straight-line basis over the 5-year life of
the project. That is, depreciation each year is $153,607/5.The tax rate is 38%. What is the
operating cash flow for year 5?
Enter your answer rounded off to two decimal points. Do not enter $ or comma in the answer
box. For example, if your answer is $12.345 then enter as 12.35 in the answer box.
QUESTION 3
A project requires $420,975 of equipment that is classified as 7-year property. What is the book
value of this asset at the end of year 3 given the following MACRS depreciation allowances,
starting with year one: 14.29, 24.49, 17.49, 12.49, 8.93, 8.92, 8.93, and 4.46 percent?
Enter your answer rounded off to two decimal points. Do not enter $ or comma in the answer
box. For example, if your answer is $12.345 then enter as 12.35 in the answer box.
QUESTION 4
ABC Company purchased $22,111 of equipment 4 years ago. The equipment is 7-year MACRS
property. The firm is selling this equipment today for $7,971. What is the aftertax cash flow from
this sale if the tax rate is 26 percent? The MACRS allowance percentages are as follows,
commencing with year one: 14.29, 24.49, 17.49, 12.49, 8.93, 8.92, 8.93, and 4.46 percent.
Enter your answer rounded off to two decimal points. Do not enter $ or comma in the answer
box. For example, if your answer is $12.345 then enter as 12.35 in the answer box.
QUESTION 5
ABC Company has a proposed project that will generate sales of 425 units annually at a selling
price of $171 each. The fixed costs are $6,602 and the variable costs per unit are $122. The
project requires $28,022 of equipment that will be depreciated on a straight-line basis to a zero
book value over the 4-year life of the project. That is, depreciation each year is $28,022/4. The
salvage value of the fixed assets is $6,900 and the tax rate is 35 percent. What is the operating
cash flow for year four?
Enter your answer rounded off to two decimal points. Do not enter $ or comma in the answer
box. For example, if your answer is $12.345 then enter as 12.35 in the answer box.
QUESTION 6
ABC Inc. has estimated the following revenues and expenses related phase I of a proposed new
housing development? Incremental sales= $600,225, total cash expenses $359,033, depreciation
$53,034, taxes 33%. What are the operating cash flows?
Enter your answer rounded off to two decimal points. Do not enter $ or comma in the answer
box. For example, if your answer is $12.345 then enter as 12.35 in the answer box.
QUESTION 7
The net working capital invested in a project is generally:
a)
b)
c)
d)
e)
recovered at the end of the project.
recovered at the start of the project.
a sunk cost.
an opportunity cost.
depreciated to a zero balance over the life of the project.
QUESTION 8
Sunk costs are a type of incremental cash flow that should be included in all capital-budgeting
decisions.
True
False
QUESTION 9
Which of the following cash flows are NOT considered in the calculation of the initial outlay for
a capital investment proposal?
a)
b)
c)
d)
e)
Increase in net working capital requirements
Equipment Cost
Cost of Installing new equipment
Interest expense related to financing a project
All of the above should be considered
QUESTION 10
1. ABC Compay has the following projections for Year 1 of a capital budgeting project.
Year 1 Incremental Projections:
Sales
$937,675
Variable Costs
$50,385
Fixed Costs
$55,644
Depreciation Expense
$118,965
Tax Rate
35%
Calculate the operating cash flow for Year 1.
Enter your answer rounded off to two decimal points. Do not enter $ or comma in the answer
box. For example, if your answer is $12.345 then enter as 12.35 in the answer box.
QUESTION 11
ABC Company purchased some new equipment 2 years ago for $329,979. Today, it is selling
this equipment for $69,441. What is the aftertax cash flow from this sale if the tax rate is 27
percent? The MACRS allowance percentages are as follows, commencing with year one: 20.00,
32.00, 19.20, 11.52, 11.52, and 5.76 percent.
Enter your answer rounded off to two decimal points. Do not enter $ or comma in the answer
box. For example, if your answer is $12.345 then enter as 12.35 in the answer box.
QUESTION 12
ABC Corporation is considering an expansion project. The necessary equipment could be
purchased for $25,083 and shipping and installation costs are another $1,487. The project will
also require an initial $5,918 investment in net working capital. The company’s tax rate is 40%.
What is the project’s initial investment outlay?
Enter your answer rounded off to two decimal points. Do not enter $ or comma in the answer
box. For example, if your answer is $12.345 then enter as 12.35 in the answer box.
QUESTION 13
A project has an initial requirement of $207,607 for new equipment and $11,178 for net working
capital. The fixed assets will be depreciated to a zero book value over the 3-year life of the
project and have an estimated salvage value of $107,381. All of the net working capital will be
recouped at the end of the project. The annual operating cash flow is $91,839 and the cost of
capital is 11% What is the project’s NPV if the tax rate is 39%?
Enter your answer rounded off to two decimal points. Do not enter $ or comma in the answer
box. For example, if your answer is $12.345 then enter as 12.35 in the answer box.
QUESTION 14
ABC Inc. has estimated the following revenues and expenses related phase I of a proposed new
housing development? Incremental sales= $5,081,953, total cash expenses $3,212,751,
depreciation $623,167, taxes 33%, interest expense, $200,000. What are the operating cash
flows?
Enter your answer rounded off to two decimal points. Do not enter $ or comma in the answer
box. For example, if your answer is $12.345 then enter as 12.35 in the answer box.
QUESTION 15
A project has an initial requirement of $235,241 for new equipment and $14,634 for net working
capital. The installation costs to get the new equipment in working condition are 8,845. The fixed
assets will be depreciated to a zero book value over the 4-year life of the project and have an
estimated salvage value of $119,594. All of the net working capital will be recouped at the end
of the project. The annual operating cash flow is $119,714 and the cost of capital is 19% What is
the project’s NPV if the tax rate is 31%?
Enter your answer rounded off to two decimal points. Do not enter $ or comma in the answer
box. For example, if your answer is $12.345 then enter as 12.35 in the answer box.
QUESTION 16
A project requires $372,827 of equipment that is classified as 7-year property. What is the book
value of this asset at the end of year 5 given the following MACRS depreciation allowances,
starting with year one: 14.29, 24.49, 17.49, 12.49, 8.93, 8.92, 8.93, and 4.46 percent?
Enter your answer rounded off to two decimal points. Do not enter $ or comma in the answer
box. For example, if your answer is $12.345 then enter as 12.35 in the answer box.
QUESTION 17
ABC Company purchased $21,775 of equipment 5 years ago. The equipment is 7-year MACRS
property. The firm is selling this equipment today for $8,025. What is the aftertax cash flow from
this sale if the tax rate is 39 percent? The MACRS allowance percentages are as follows,
commencing with year one: 14.29, 24.49, 17.49, 12.49, 8.93, 8.92, 8.93, and 4.46 percent.
Enter your answer rounded off to two decimal points. Do not enter $ or comma in the answer
box. For example, if your answer is $12.345 then enter as 12.35 in the answer box.
QUESTION 18
A project requires $329,948 of equipment that is classified as 7-year property. What is the
depreciation expense in year 3 given the following MACRS depreciation allowances, starting
with year one: 14.29, 24.49, 17.49, 12.49, 8.93, 8.92, 8.93, and 4.46 percent?
Enter your answer rounded off to two decimal points. Do not enter $ or comma in the answer
box. For example, if your answer is $12.345 then enter as 12.35 in the answer box.
…
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