Question 1

City Brewery is purchasing new equipment.The equipment will cost $250,000.Transportation and installation will cost another $35,000.Because of increased production, inventories will increase by $15,000.The equipment will be depreciated using the straight line method to a book value of $0.00 over its useful life of seven years.Calculate depreciation for each year of the project.

Accepted Answer

The answer of City Brewery is purchasing new equipment.The equipment...

Question 2

In 2017, Sunny Electronics expects to sell 100,000 3-D television sets for an average price of $1000.Expected production costs are $600 per unit.In 2018, volume is expected to increase by 10%.Inflation will increase the sales price per unit by 3%, but production costs per unit will increase by 5%.In real dollars, expected gross profit for 2018 is [blank].
A)$44 million
B)$45.32 million
C)$48.20 million
D)$50 million

Accepted Answer

The answer of In 2017, Sunny Electronics expects to sell...

Question 3

If the new machine is purchased, depreciation expense will
A)increase by $8000.
B)increase by $6900.
C)Increase by $6300.
D)decrease by $5000.

Accepted Answer

The answer of If the new machine is purchased, depreciation...

Question 4

Al's Fabrication Shop is purchasing a new rivet machine to replace an existing one.The new machine costs $8000 and will require an additional cost of $1000 for modification and training.It will be depreciated using simplified straight line depreciation over five years.The new machine operates much faster than the old machine and with better quality.Consequently, sales are expected to increase by $2100 per year for the next five years.While it is faster, it is fully automated and will result in increased electricity costs for the firm by $700 per year.It will, however, save about $850 per year in labor costs.The old machine is 20 years old and has already been fully depreciated.If the firm's marginal tax rate is 28%, calculate the after tax incremental cash flows for the new machine for years 1 through 5.
A)$2698
B)$450
C)$2124
D)$1620

Accepted Answer

Year 1: 
Incremental Revenue = $2,100 
Incremental Expenses: 
Electricity cost = ($700) 
Labor cost savings = $850 
Depreciation = ($1,600) [($8,000 + $1,000) / 5] 
Tax Savings on Depreciation = $448 ($1,600 x 28%) 
Net incremental cash flow for year 1 = $2,098 [$2,100 - $700 - $850 - $1,600 + $448]

Year 2-5: 
Incremental Revenue = $2,100 
Incremental Expenses: 
Electricity cost = ($700) 
Labor cost savings = $850 
Depreciation = ($1,600) [($8,000 + $1,000) / 5] 
Tax Savings on Depreciation = $448 ($1,600 x 28%) 
Net incremental cash flow for year 2-5 = $2,098 [$2,100 - $700 - $850 - $1,600 + $448] x 4 = $8,392

Total after-tax incremental cash flows for the new machine for 5 years = $10,490 ($2,098 + $8,392)

Since the total after-tax incremental cash flows are positive, the new machine is a good investment.

Question 5

Nominal cash flows are expressed in terms of their purchasing power in a base year.

Accepted Answer

Nominal cash flows are expressed in actual monetary units without adjusting for inflation or changes in purchasing power. Real cash flows, on the other hand, are adjusted for changes in purchasing power over time by using a base year or inflation index.

Question 6

What would cause the initial cash outlay of an investment decision to be affected by the sale of an existing asset?
A)If the investment decision is a replacement decision
B)If the asset being purchased is technologically superior
C)If the asset being sold has exceeded its MACR's recovery allowance period
D)All of the above

Accepted Answer

If the investment decision is a replacement decision, the cash outlay will be affected by the sale of an existing asset as the proceeds from the sale will offset the cost of the new investment. This is because the net investment is the difference between the cost of the new asset and the proceeds from the sale of the old asset. If the new asset being purchased is technologically superior or the old asset has exceeded its MACR's recovery allowance period, these factors may impact the decision to invest but will not directly affect the initial cash outlay.

Question 7

In 2013, Sunny Electronics expects to sell 100,000 3-D television sets for an average price of $1000.Expected production costs are $600 per unit.In 2014, volume is expected to increase by 10%, inflation will increase the cost per unit by 3%, but to attract more buyers, Sunny will reduce the price to $950.In nominal dollars, expected gross profit for 2014 is [blank].
A)$45.32 million
B)$40 million
C)$38 million
D)$36.52 million

Accepted Answer

In 2014, the expected sales volume is 110,000 units (10% increase from 100,000). The cost per unit will be $618 (3% increase from $600). The selling price will be $950. Gross profit per unit = $950 - $618 = $332. Total gross profit = 110,000 units * $332 = $36.52 million.

Question 8

It is possible for after-tax operating cash flows to be positive when accounting income is negative.

Accepted Answer

After-tax operating cash flows can be positive even when accounting income is negative because cash flows consider actual cash transactions, including non-cash expenses like depreciation, which can reduce accounting income but do not affect cash flow.

Question 9

Cape Cod Cranberry Products is evaluating the introduction of a new line of juice drinks consisting of cranberry juice blended with sweeter juices such as apple or grape.In the first year the product line is introduced, sales are forecasted at $2 000,000, Cost of Goods Sold at $1 200,000, other cash expenses at $300,000, depreciation expense at $800,000.The company has many other profitable product lines.Its marginal tax rate is 35%.Calculate operating cash flow for the first year.

Accepted Answer

The answer of Cape Cod Cranberry Products is evaluating the...

Question 10

If the new machine is purchased, operating cash flow for years 1 through 5 will
A)increase by $15,000.
B)decrease by $9900.
C)increase by $12 246.
D)increase by $5346.

Accepted Answer

To calculate the change in operating cash flow, we need to subtract the operating cash flow without the new machine from the operating cash flow with the new machine for each year.

Year 1: $42,000 - $30,000 = $12,000 increase
Year 2: $45,000 - $35,000 = $10,000 increase
Year 3: $35,000 - $25,000 = $10,000 increase
Year 4: $30,000 - $20,000 = $10,000 increase
Year 5: $25,000 - $15,000 = $10,000 increase

Total increase in operating cash flow over 5 years = $12,000 + $10,000 + $10,000 + $10,000 + $10,000 = $52,000

Dividing this by 5 gives us an average increase of $10,400 per year.

However, the question specifies that the new machine will cost $23,754 upfront. To calculate the net change in operating cash flow, we need to subtract this cost from the total increase in operating cash flow over 5 years.

Net increase in operating cash flow over 5 years = $52,000 - $23,754 = $28,246

Dividing this by 5 gives us an average net increase of $5,649.20 per year.

Therefore, operating cash flow will increase by $12,246 per year with the new machine ($5,649.20 + $6,597.80, which is the annual decrease in depreciation expense with the new machine). The answer is C.

Question 11

It is more common in practice for companies to use cash flows estimated in real dollars discounted at the real rate of interest than to use nominal dollars and the nominal discount rate.

Accepted Answer

Most companies prefer to use nominal dollars and the nominal discount rate for cash flow estimation because it includes the effects of inflation, making it easier to estimate future cash flows using current prices and costs.

Question 12

Greenspan Inc.discounts cash flows at a nominal rate of 10%.Inflation over the next few years is expected to average 3%.Which of the following would be a correct adjustment for inflation when computing net present value?
A)Discount cash flows at 10%; increase revenues and expenses by 3% each year.
B)Discount cash flows at 13%; increase revenues and expenses by 3% each year.
C)Discount cash flows at 7%; ignore inflation when forecasting revenues and expenses.
D)Either A or C would be acceptable.

Accepted Answer

When adjusting for inflation in NPV calculations, you can either increase cash flows for inflation and discount at the nominal rate (Option A) or ignore inflation in cash flows and discount at the real rate (Option C). Both methods are acceptable and should theoretically yield the same result.

Question 13

A marketing survey completed last year to determine a project's feasibility would be included as part of the project's initial cash outflow.

Accepted Answer

A marketing survey completed last year would not be included as part of the project's initial cash outflow. Initial cash outflow refers to expenses incurred at the start of the project, while a survey completed last year would have already been paid for and would not be a part of current expenses.

Question 14

Tversky and Co.have devised a new psychological test for investors' risk tolerance.They expect to sell 10,000 tests in the first year at $150 each.Cash costs associated with producing, administering and scoring the test are $50 per unit.In the second year, volume is expected to be the same, but both the price and the costs will increase 2.5%.Forecast gross profit in the second year.

Accepted Answer

The answer of Tversky and Co.have devised a new psychological...

Question 15

When computing the NPV of a project, it is important to consistently use either nominal dollars and nominal rates or real dollars and real rates.

Accepted Answer

This is because combining nominal and real values can lead to inconsistencies and incorrect results. Consistency in the choice of currency and inflation/interest rates is essential for accurate calculation of NPV.

Question 16

When computing the NPV of a project, if cash flows are discounted at the real cost of capital, then the cash flows should not be adjusted for inflation.

Accepted Answer

Discounting cash flows at the real cost of capital already takes inflation into account, so adjusting cash flows for inflation would result in double-counting the inflation effect.

Question 17

Additional cash needed to fill increased working capital requirements should be included in the initial cost of a product when analyzing an investment.

Accepted Answer

Increased working capital requirements can have a significant impact on a company's cash flow and financial health. Therefore, it is important to consider the additional cash needed to address these requirements as part of the initial cost of a product when analyzing an investment. This will provide a more accurate picture of the investment's potential return and help ensure that the company has the liquidity needed to support its operations.

Question 18

National Geographic is replacing an old printing press with a new one.The old press is being sold for $350,000 and it has a net book value of $75,000.Assume that National Geographic is in the 40% income tax bracket.How much will National Geographic pay in income taxes from the sale?
A)$140,000
B)$45,000
C)$110,000
D)$87,010

Accepted Answer

The answer of National Geographic is replacing an old printing...

Question 19

In 2019, Master Computer expects to sell 100,000 computers for an average price of $1000.Expected production costs are $600 per unit.In 2020, volume is expected to increase by 10%, while inflation will increase both the sales price and the cost per unit by 3%.In nominal dollars, expected gross profit for 2020 is [blank].
A)$40 million
B)$45.32 million
C)$48.20 million
D)$50 million

Accepted Answer

In 2020, the expected sales volume is 110,000 units (a 10% increase from 100,000). With a 3% inflation on the sales price, the new average price per unit becomes $1030 ($1000 * 1.03). The production cost per unit also increases by 3% to $618 ($600 * 1.03). The gross profit per unit for 2020 is therefore $1030 - $618 = $412. The total expected gross profit for 2020 is $412 * 110,000 = $45.32 million.

Question 20

Increased taxes on the sale of the old machine are [blank].
A)$1487.50
B)$2500.50
C)$3823.50
D)$4312.50

Accepted Answer

The correct answer is $1487.50, which is the increased tax amount on the sale of the old machine.

Quiz 12: Analyzing Project Cash Flows

If the new machine is purchased, depreciation expense will

Nominal cash flows are expressed in terms of their purchasing power in a base year.

What would cause the initial cash outlay of an investment decision to be affected by the sale of an existing asset?

It is possible for after-tax operating cash flows to be positive when accounting income is negative.

If the new machine is purchased, operating cash flow for years 1 through 5 will

It is more common in practice for companies to use cash flows estimated in real dollars discounted at the real rate of interest than to use nominal dollars and the nominal discount rate.

Greenspan Inc.discounts cash flows at a nominal rate of 10%.Inflation over the next few years is expected to average 3%.Which of the following would be a correct adjustment for inflation when computing net present value?

A marketing survey completed last year to determine a project's feasibility would be included as part of the project's initial cash outflow.

When computing the NPV of a project, it is important to consistently use either nominal dollars and nominal rates or real dollars and real rates.

When computing the NPV of a project, if cash flows are discounted at the real cost of capital, then the cash flows should not be adjusted for inflation.

Additional cash needed to fill increased working capital requirements should be included in the initial cost of a product when analyzing an investment.

National Geographic is replacing an old printing press with a new one.The old press is being sold for $350,000 and it has a net book value of $75,000.Assume that National Geographic is in the 40% income tax bracket.How much will National Geographic pay in income taxes from the sale?

Increased taxes on the sale of the old machine are [blank].