MBA 621 M2QC QUESTIONS WITH VERIFIED
ANSWERS
Which of the following statements is FALSE?
Depreciation is not a cash expense paid by the firm.
Correct Answer Net Working Capital = Cash + Inventory + Payables - Receivables.
Since 1997, companies can "carry back" losses for two years and "carry forward" losses
for 20 years.
Earnings do not represent real profits. - Answers - Net Working Capital = Cash +
Inventory + Payables - Receivables.
Which of the following statements is TRUE?
I) Most projects will require the firm to invest in net working capital.
II) The main components of net working capital are cash, inventory, receivables, and
property, plant and equipment.
III) ΔNWCt = NWCt - NWCt - 1.
IV) In the final year of a project, the firm ultimately recovers the investment in net
working capital. - Answers - I & II only
I) Most projects will require the firm to invest in net working capital.
II) The main components of net working capital are cash, inventory, receivables, and
property, plant and equipment.
Which of the following statements is FALSE?
Depreciation expenses have a positive impact on free cash flow.
Free Cash Flow = (Revenues - Costs - Depreciation) × (1 - τc) - Capital Expenditures -
ΔNWC + τc × Depreciation.
The firm cannot use its earnings to buy goods, pay employees, fund new investments,
or pay dividends to shareholders.
, The depreciation tax shield is the tax savings that results from the ability to deduct
depreciation. - Answers - Free Cash Flow = (Revenues - Costs - Depreciation) × (1 - τc)
- Capital Expenditures - ΔNWC + τc × Depreciation.
Which of the following cash flows are relevant incremental cash flows for a project that
you are currently considering investing in?
I) The tax savings brought about by the project's depreciation expense
II) The cost of a marketing survey you conducted to determine demand for the proposed
project
III) Interest payments on debt used to finance the project
IV) Research and Development expenditures you will make in carrying out the project. -
Answers - I and IV only
I) The tax savings brought about by the project's depreciation expense
IV) Research and Development expenditures you will make in carrying out the project.
You are considering adding a microbrewery on to one of your firm's existing restaurants.
This will entail an investment of $40,000 in new equipment. This equipment will be
depreciated straight line over five years. If your firm's marginal corporate tax rate is
35%, then what is the value of the microbrewery's depreciation tax shield in the first
year of operation?
$2800
$14,000
$5200
$26,000 - Answers - $2800
First figure out the straight-line depreciation. $40,000/5 years = $8000 depreciation per
year. Then .35 × $8000 = $2800 depreciation tax shield per year
The Sisyphean Corporation is considering investing in a new cane manufacturing
machine that has an estimated life of three years. The cost of the machine is $30,000
and the machine will be depreciated straight line over its three-year life to a residual
value of $0.
The cane manufacturing machine will result in sales of 2000 canes in year 1. Sales are
estimated to grow by 10% per year each year through year three. The price per cane
that Sisyphean will charge its customers is $18 each and is to remain constant. The
canes have a cost per unit to manufacture of $9 each.
ANSWERS
Which of the following statements is FALSE?
Depreciation is not a cash expense paid by the firm.
Correct Answer Net Working Capital = Cash + Inventory + Payables - Receivables.
Since 1997, companies can "carry back" losses for two years and "carry forward" losses
for 20 years.
Earnings do not represent real profits. - Answers - Net Working Capital = Cash +
Inventory + Payables - Receivables.
Which of the following statements is TRUE?
I) Most projects will require the firm to invest in net working capital.
II) The main components of net working capital are cash, inventory, receivables, and
property, plant and equipment.
III) ΔNWCt = NWCt - NWCt - 1.
IV) In the final year of a project, the firm ultimately recovers the investment in net
working capital. - Answers - I & II only
I) Most projects will require the firm to invest in net working capital.
II) The main components of net working capital are cash, inventory, receivables, and
property, plant and equipment.
Which of the following statements is FALSE?
Depreciation expenses have a positive impact on free cash flow.
Free Cash Flow = (Revenues - Costs - Depreciation) × (1 - τc) - Capital Expenditures -
ΔNWC + τc × Depreciation.
The firm cannot use its earnings to buy goods, pay employees, fund new investments,
or pay dividends to shareholders.
, The depreciation tax shield is the tax savings that results from the ability to deduct
depreciation. - Answers - Free Cash Flow = (Revenues - Costs - Depreciation) × (1 - τc)
- Capital Expenditures - ΔNWC + τc × Depreciation.
Which of the following cash flows are relevant incremental cash flows for a project that
you are currently considering investing in?
I) The tax savings brought about by the project's depreciation expense
II) The cost of a marketing survey you conducted to determine demand for the proposed
project
III) Interest payments on debt used to finance the project
IV) Research and Development expenditures you will make in carrying out the project. -
Answers - I and IV only
I) The tax savings brought about by the project's depreciation expense
IV) Research and Development expenditures you will make in carrying out the project.
You are considering adding a microbrewery on to one of your firm's existing restaurants.
This will entail an investment of $40,000 in new equipment. This equipment will be
depreciated straight line over five years. If your firm's marginal corporate tax rate is
35%, then what is the value of the microbrewery's depreciation tax shield in the first
year of operation?
$2800
$14,000
$5200
$26,000 - Answers - $2800
First figure out the straight-line depreciation. $40,000/5 years = $8000 depreciation per
year. Then .35 × $8000 = $2800 depreciation tax shield per year
The Sisyphean Corporation is considering investing in a new cane manufacturing
machine that has an estimated life of three years. The cost of the machine is $30,000
and the machine will be depreciated straight line over its three-year life to a residual
value of $0.
The cane manufacturing machine will result in sales of 2000 canes in year 1. Sales are
estimated to grow by 10% per year each year through year three. The price per cane
that Sisyphean will charge its customers is $18 each and is to remain constant. The
canes have a cost per unit to manufacture of $9 each.
