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1. Firm A uses straight-line depreciation. Firm B uses MACRS depreciation. Both firms bought $100,000 worth of equipment two years ago. The equipment has a 7-year life. Both firms are in the 34 percent tax bracket. The operating cash flows for each firm are identical except for the depreciation effects. Given this, you know the:
A. depreciation expense for Firm A will be greater than Firm B's expense for this year.
B. equipment has a higher value on Firm B's books than on Firm A's at the end of year two.
C. operating cash flow of Firm A is less than that of Firm B for this year.
D. market value of Firm A's equipment is greater than the market value of Firm B's equipment.
E. market value of Firm B's equipment is greater than the market value of Firm A's equipment.
2. Assume a firm has positive net earnings. The operating cash flow of this firm:
A. ignores both depreciation and taxes.
B. is unaffected by the depreciation expense.
C. occurs at time zero of a project.
D. increases when tax rates decrease.
E. is equal to net income minus depreciation.
3. Scenario analysis:
A. determines the impact a $1 change in sales has on the internal rate of return.
B. determines which variable has the greatest impact on a project's net present value.
C. can be used to evaluate projects that have unconventional cash flows.
D. evaluates a project's net present value while sensitivity analysis evaluates a project's internal rate of return.
E. presents the absolute worst and absolute best outcome that could ever occur.
4. Harvest Fields is considering expanding its wine-making operations. The expansion will require new equipment costing $489,000 that would be depreciated on a straight-line basis to a zero balance over the 5-year life of the project. The estimated salvage value is $172,000. The project requires $41,000 initially for net working capital, all of which will be recouped at the end of the project. The projected operating cash flow is $201,500 a year. What is the net present value of this project if the relevant discount rate is 16 percent and the tax rate is 34 percent?
A. $183,818.52
B. $203.339.15
C. $211,661.61
D. $231,182.24
E. $237,689.09
5. Fun Land is considering adding a miniature golf course to its facility. The course would cost $52,000, would be depreciated on a straight line basis over its 4-year life, and would have a zero salvage value. The estimated income from the golfing fees would be $33,000 a year with $9,000 of that amount being variable cost. The fixed cost would be $7,200. In addition, the firm anticipates an additional $10,000 in revenue from its existing facilities if the course is added. The project will require $6,000 of net working capital, which is recoverable at the end of the project. What is the net present value of this project at a discount rate of 14 percent and a tax rate of 28 percent?
A. $8,828.91
B. $12,381.39
C. $15,407.11
D. $17,388.78
E. $19,420.15
6. A project has an initial requirement of $310,000 for fixed assets and $62,000 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 $155,000. All of the net working capital will be recouped at the end of the project. The annual operating cash flow is $345,000 and the discount rate is 18 percent. What is the project's net present value if the tax rate is 34 percent?
A. $403,618.02
B. $414,141.41
C. $446,047.36
D. $478,122.21
E. $510,197.06
7. Concord Wines is considering expanding its wine-making operations. It would need new equipment that costs $648,000 that would be depreciated on a straight-line basis to a zero balance over the 5-year life of the project. The estimated salvage value is $224,000. The project requires $46,000 initially for net working capital, all of which will be recouped at the end of the project. The projected operating cash flow is $198,500 a year. What is the internal rate of return on this project if the relevant tax rate is 37 percent?
A. 13.78 percent
B. 15.67 percent
C. 17.22 percent
D. 18.49 percent
E. 19.01 percent
8. A project has an initial requirement of $1.2 million for fixed assets and $135,000 for net working capital. The fixed assets will be depreciated to a zero book value over the 6-year life of the project and have an estimated salvage value of $320,000. All of the net working capital will be recouped at the end of the project. The expected annual operating cash flow is $285,000. What is the project's internal rate of return if the tax rate is 32 percent?
A. 12.36 percent
B. 12.49 percent
C. 13.08 percent
D. 13.41 percent
E. 13.97 percent
1. c
2. d
3.b
4. c
5. d
6. b
7. d
8. c
6 answers
At Internal rate of return Present value of cash inflows equal to Present value of cash ourflows
Cash out flows Cash inflows Teriminal cash inflows
Investment 648000
working capital 46000 46000
Salvage value 141120
Operating cash flows a year 198500
total 694000 198500 187120
Salvage value= 224000*(1-0.37)
= 141120
694000 = (198500 PFCAF 5 years at IRR) + (187120 PFV 5th year at IRR)
694000 = (198500 PFCAF 5 years at 18.5%) + (187120 PFV 5th year at 18.5%)
1 answer