Northern Kentucky University> FIN 605: Module 5 Quiz: Answered latest Fall 2024/25.

Module 5 Quiz The capital budgeting process is very important to the firm because it:  Highlights the impacts of a project on net income  Indicates the net cash flows available for employee education  Essentially plots the company’s future direction  Is used in working capital analysis Which of the following are (is) generally considered problems associated with cash flow estimation?  Uncertainty about the future cash flow and the introduction of bias into the estimation of cash flows  Uncertainty about the future cash flows  Uncertainty about the magnitude of fixed cost financing charges  The introduction of bias into the estimation of cash flows Capital foods has purchased an oven 5 years ago for $450,000. The oven is being depreciated over it's estimated 10-ywae life using the straight line method to salvage value if $5000. Capital is planning to replace the oven with a more automated one that will cost $150,000 installed. If the old oven can be sold for $30,000. Why is the tax liability? Assume a marginal tax rate of 40 percent.  $127,000  $25,000  $2,000  $900 A drill press costs $30,000 and is expected to have a 10 year life. The drill press will be depreciated on a straight-line basis over 10 years to a zero estimated salvage value. This machine is expected to reduce the firm’s cash operation costs by $4,500 per year. If the firm is in the 40 percent marginal tax bracket, determine the annual net cash flows generated by the drill press.  $5,700  $4,500  $3,900  $900 When calculating the net cash flow in a project’s expected final year,  Recovery of any working capital invested is disregarded  The remaining principal on any borrowed funs is considered  The sales proceeds from any land associated with the project is disregarded  The after-tax salvage value of any project equipment is considered The relationship between NPV and IRR is such that:  Both approaches always provide the same ranking of alternative investment projects None of the above  The IRR of a project is equal to the firm’s cost of capital if the NPV of a project is $0  If the NPV of a project is negative, the IRR must be greater than the cost of capital In Step Video is considering expanding its video rental library to 8,000 tapes. The purchase price of the additional videos will be $8,000 and the shopping cost is another $4,000. To house the tapes, the owner will have to spend another $10,000 for display shelves, increase net working capital to by $5,000 and interest expenses will add another $8000 to operating cost. What is the net investment in In Step for this project?  $84,000  $107,000  $95,000  $99,000 Which of the following is a basic principle when estimating a project’s cash flow?  Cash flows should be measured on a pretax basis  Cash flows should ignore depreciation because it’s a non-cash charge  Only direct effects of a project should be included in cash flow calculations  Cash flows should be measured on an incremental basis Ten years ago J-Bar Company purchased a lathe for $250,000. It was being depreciated on a straight-line basis to an estimated $25,000 salvage value over a 15 year period. The firm is considering selling the old lathe and purchasing a new one. The new lathe would cost $500,000. The firms’ marginal tax rate is 40 percent. Determine the net investment required to purchase the new lathe, if the old lathe is sold for $100,000.  $418,000  $397,500  $380,000  $400,000 Sale of an asset for less than book value creats an operating loss which effectively reduces the company's taxes by an amount equal to ___ times ___  One-half the loss, the company's marginal tax rate  One-half the loss, one minus the company's marginal tax rate  The loss, one minus the company's marginal tax rate  The loss, the company's marginal tax rate The determination of net cash flows (ncf) should never include  Changes in operating costs  Interest charges  Indirect effects  Changes in depreciation Raider Productions had to decide whether to build it's warehouse in Dallas or Houston. This decision falls into the class of:  Mutually exclusive projects  Marginal projects  Independent projects  Contingent projects The value of resources used in an investment project should be measured in terms of their  Acquisition cost  Historical cost  Depreciated cost  Opportunity cost A(n) ___ project is one whose acceptance is dependent on the adoption of one or more other projects.  Mutually exclusive  Contingent  Perfectly correlated  independent The decision by the Municipal Transportation Authority to either refurbish existing buses, to by new large buses, or to supplement the existing fleet with mini-buses is an example of:  Separable projects  Contingent projects  Mutually exclusive projects  Independent projects The management of Jasper Equipment Company is planning to purchase a new milling machine that will cost $160,000 installed. The old milling machine has been fully depreciated but can be sold for $15,000. The new machine will be depreciated on a straight-line basis over it’s 10 year economic life to an estimated salvage value of $10,000. If this milling machine will save Jasper $20,000 a year in production expenses, what are the annual net cash flows associated with the purchase of this machine? Assume a marginal tax rate of 40 percent.  $27,000  $15,000  $18,000  $21,000 What is the net investment for an extruder that costs $42,000, if shipping costs are $1,500 and installation is $4,800? Assume the efficient machine is replacing an older extruder with a book and market value of zero. The replacement investment will reduce operation costs by $6,600 a year. $54,900  $43,500  $51,000  $48,300 Determining the net investment (NINV) of a project includes explicit consideration of all of the following except:  Project cost plus installation and shipping costs  Increases in net working capital  Taxes associated with the sale of an existing asset and/or the purchase of a new one  Estimated net cash flow Shunt Technology will spend $800,000 on a piece of equipment that will manufacture fine wire for the electronics industries. The shipping and installation charges will be $240,000 and net working capital will increase $48,000. The equipment will replace an existing machine that has a salvage value of $75,000 and a book value of $125,000. If Shunt has a current marginal tax rate of 34 percent, what is the net investment?  $1,033,000  $996,000  $1,030,000  $1,163,000 Depreciation is based on the asset cost plus all of the following except  Increase inventory  Installation  Shipping costs  Cost of attached equipment acquired at the same time Little Giant is building a manufacturing plant that will require a cash outlay of $300,000 for the initial purchase of a building, $450,000 for remodeling the first year, and $710,000 for new equipment in the second year. If the firm’s cost of capital is 12 percent, what is the present value of the net investment at time 0?  $300,000  $1,267,720  $1,132,070  $1,460,000 In estimating the net investment, an outlay that has already been made is known as a(n)___  Cash outflow  Opportunity cost  Sunk cost  Expansion cost If the net present value of an investment project is positive then the:  Project’s rate of return is greater than the firm’s cost of capital  Project would be unacceptable under the internal rate of return method  Project would acceptable under the payback method  All of the above are correct Depreciation ____ reported profits and it ____ taxes are paid by a firm.  Increases, reduces  Increases, increases  Reduces, increases  Reduces, reduces