1.

The changes in a firm's future cash flows that

are a direct consequence of accepting a project
are called _____ cash flows.
A. incremental
B. stand-alone
C. after-tax
D. net present value
E. erosion

6-1
The annual annuity stream of payments with the
same present value as a project's costs is called
the project's _____ cost.
A. incremental
B. sunk
C. opportunity
D. erosion
E. equivalent annual

6-2
The depreciation method currently allowed
under U.S. tax law governing the accelerated
write-off of property under various lifetime
classifications is called _____ depreciation.
A. FIFO
B. MACRS
C. straight-line
D. sum-of-years digits
E. curvilinear

6-3
The increase you realize in buying power as a
result of owning a bond is referred to as the
_____ rate of return.
A. inflated
B. realized
C. nominal
D. real
E. risk-free

6-4
The increase you realize in buying power as a
result of owning a bond is referred to as the
_____ rate of return.
A. inflated
B. realized
C. nominal
D. real
E. risk-free

6-5
One purpose of identifying all of the incremental cash flows
related to a proposed project is to:
A. isolate the total sunk costs so they can be evaluated to
determine if the project will add value to the firm.
B. eliminate any cost which has previously been incurred so
that it can be omitted from the analysis of the project.
C. make each project appear as profitable as possible for the
firm.
D. include both the proposed and the current operations of a
firm in the analysis of the project.
E. identify any and all changes in the cash flows of the firm
for the past year so they can be included in the analysis.

6-6
All of the following are anticipated effects of a proposed
project. Which of these should be included in the initial
project cash flow related to net working capital?
I. an inventory decrease of $5,000
II. an increase in accounts receivable of $1,500
III. an increase in fixed assets of $7,600
IV. a decrease in accounts payable of $2,100
A. I and II only
B. I and III only
C. II and IV only
D. I, II, and IV only
E. I, II, III, and IV

6-7
The pre-tax salvage value of an asset is equal to the:
A. book value if straight-line depreciation is used.
B. book value if MACRS depreciation is used.
C. market value minus the book value.
D. book value minus the market value.
E. market value.

6-8
Tax shield refers to a reduction in taxes created by:
A. a reduction in sales.
B. an increase in interest expense.
C. noncash expenses.
D. a project's incremental expenses.
E. opportunity costs.

6-9
Marshall's & Co. purchased a corner lot in Eglon City five years
ago at a cost of $640,000. The lot was recently appraised at
$810,000. At the time of the purchase, the company spent
$50,000 to grade the lot and another $4,000 to build a small
building on the lot to house a parking lot attendant who has
overseen the use of the lot for daily commuter parking. The
company now wants to build a new retail store on the site. The
building cost is estimated at $1.2 million. What amount should be
used as the initial cash flow for this building project?
A. $1,200,000
B. $1,840,000
C. $1,890,000
D. $2,010,000
E. $2,060,000
6-10
Jamestown Ltd. currently produces boat sails and is considering
expanding its operations to include awnings for homes and travel
trailers. The company owns land beside its current manufacturing
facility that could be used for the expansion. The company bought this
land ten years ago at a cost of $250,000. Today, the land is valued at
$425,000. The grading and excavation work necessary to build on the
land will cost $15,000. The company currently owns some unused
equipment valued at $60,000. This equipment could be used for
producing awnings if $5,000 is spent for equipment modifications.
Other equipment costing $780,000 will also be required. What is the
amount of the initial cash flow for this expansion project?
A. $800,000
B. $1,050,000
C. $1,110,000
D. $1,225,000
E. $1,285,000 6-11
Your firm purchased a warehouse for $335,000 six years ago. Four
years ago, repairs were made to the building which cost $60,000. The
annual taxes on the property are $20,000. The warehouse has a current
book value of $268,000 and a market value of $295,000. The
warehouse is totally paid for and solely owned by your firm. If the
company decides to assign this warehouse to a new project, what
value, if any, should be included in the initial cash flow of the project
for this building?
A. $0
B. $268,000
C. $295,000
D. $395,000
E. $515,000

6-12
You own a house that you rent for $1,200 a month. The maintenance
expenses on the house average $200 a month. The house cost $89,000
when you purchased it several years ago. A recent appraisal on the
house valued it at $210,000. The annual property taxes are $5,000. If
you sell the house you will incur $20,000 in expenses. You are
deciding whether to sell the house or convert it for your own use as a
professional office. What value should you place on this house when
analyzing the option of using it as a professional office?
A. $89,000
B. $120,000
C. $185,000
D. $190,000
E. $210,000

6-13
Jamie's Motor Home Sales currently sells 1,000 Class A motor homes,
2,500 Class C motor homes, and 4,000 pop-up trailers each year. Jamie
is considering adding a mid-range camper and expects that if she does
so she can sell 1,500 of them. However, if the new camper is added,
Jamie expects that her Class A sales will decline to 950 units while the
Class C campers decline to 2,200. The sales of pop-ups will not be
affected. Class A motor homes sell for an average of $125,000 each.
Class C homes are priced at $39,500 and the pop-ups sell for $5,000
each. The new mid-range camper will sell for $47,900. What is the
erosion cost?
A. $6,250,000
B. $18,100,000
C. $53,750,000
D. $93,150,000
E. $118,789,500
6-14
Ernie's Electrical is evaluating a project which will increase sales by
$50,000 and costs by $30,000. The project will cost $150,000 and will
be depreciated straight-line to a zero book value over the 10 year life of
the project. The applicable tax rate is 34%. What is the operating cash
flow for this project?
A. $3,300
B. $5,000
C. $8,300
D. $13,300
E. $18,300

6-15
Kurt's Kabinets is looking at a project that will require $80,000 in fixed
assets and another $20,000 in net working capital. The project is
expected to produce sales of $110,000 with associated costs of
$70,000. The project has a 4-year life. The company uses straight-line
depreciation to a zero book value over the life of the project. The tax
rate is 35%. What is the operating cash flow for this project?
A. $7,000
B. $13,000
C. $27,000
D. $33,000
E. $40,000

6-16
Peter's Boats has sales of $760,000 and a profit margin of 5%. The
annual depreciation expense is $80,000. What is the amount of the
operating cash flow if the company has no long-term debt?
A. $34,000
B. $86,400
C. $118,000
D. $120,400
E. $123,900

6-17
Le Place has sales of $439,000, depreciation of $32,000, and net
working capital of $56,000. The firm has a tax rate of 34% and a profit
margin of 6%. The firm has no interest expense. What is the amount of
the operating cash flow?
A. $49,384
B. $52,616
C. $54,980
D. $58,340
E. $114,340

6-18
A project will increase sales by $60,000 and cash expenses by $51,000.
The project will cost $40,000 and will be depreciated using straight-
line depreciation to a zero book value over the 4-year life of the
project. The company has a marginal tax rate of 35%. What is the
operating cash flow of the project using the tax shield approach?
A. $5,850
B. $8,650
C. $9,350
D. $9,700
E. $10,350

6-19
Sun Lee's Furniture just purchased some fixed assets classified as 5-
year property for MACRS. The assets cost $24,000. What is the
amount of the depreciation expense for the third year?

A. $2,304
B. $2,507
C. $2,765
D. $4,608
E. $4,800

6-20
You just purchased some equipment that is classified as 5-year property
for MACRS. The equipment cost $67,600. What will the book value of
this equipment be at the end of three years should you decide to resell
the equipment at that point in time?
A. $19,468.80
B. $20,280.20
C. $27,040.00
D. $48,131.20
E. $48,672.00

6-21
You just purchased some equipment that is classified as 5-year property
for MACRS. The equipment cost $67,600. What will the book value of
this equipmentYou own some equipment which you purchased three
years ago at a cost of $135,000. The equipment is 5-year property for
MACRS. You are considering selling the equipment today for $82,500.
Which one of the following statements is correct if your tax rate is
34%?

A. The tax due on the sale is $14,830.80.

B. The book value today is $8,478.
C. The book value today is $64,320.
D. The taxable amount on the sale is $38,880.
E. You will receive a tax refund of $13,219.20 as a result of this sale
6-22
. Ronnie's Custom Cars purchased some fixed assets two years ago for
$39,000. The assets are classified as 5-year property for MACRS.
Ronnie is considering selling these assets now so he can buy some
newer fixed assets which utilize the latest in technology. Ronnie has
been offered $19,000 for his old assets. What is the net cash flow from
the salvage value if the tax rate is 34%?

A. $16,358.88
B. $17,909.09
C. $18,720.00
D. $18,904.80
E. $19,000.00

6-23
. Ronnie's Custom Cars purchased some fixed assets two years ago for
$39,000. The assets are classified as 5-year property for MACRS.
Ronnie is considering selling these assets now so he can buy some
newer fixed assets which utilize the latest in technology. Ronnie has
been offered $19,000 for his old assets. What is the net cash flow from
the salvage value if the tax rate is 34%?

A. $16,358.88
B. $17,909.09
C. $18,720.00
D. $18,904.80
E. $19,000.00

6-24
A project is expected to create operating cash flows of $22,500 a year
for three years. The initial cost of the fixed assets is $50,000. These
assets will be worthless at the end of the project. An additional $3,000
of net working capital will be required throughout the life of the
project. What is the project's net present value if the required rate of
return is 10%?
A. $2,208.11
B. $2,954.17
C. $4,306.09
D. $5,208.11
E. $5,954.17

6-25
A project will produce operating cash flows of $45,000 a year for four
years. During the life of the project, inventory will be lowered by
$30,000 and accounts receivable will increase by $15,000. Accounts
payable will decrease by $10,000. The project requires the purchase of
equipment at an initial cost of $120,000. The equipment will be
depreciated straight-line to a zero book value over the life of the
project. The equipment will be salvaged at the end of the project
creating a $25,000 after-tax cash flow. At the end of the project, net
working capital will return to its normal level. What is the net present
value of this project given a required return of 14%?
A. $3,483.48
B. $16,117.05
C. $27,958.66
D. $32,037.86
E. $49,876.02
6-26
Thornley Machines is considering a 3-year project with an initial cost
of $618,000. The project will not directly produce any sales but will
reduce operating costs by $265,000 a year. The equipment is
depreciated straight-line to a zero book value over the life of the
project. At the end of the project the equipment will be sold for an
estimated $60,000. The tax rate is 34%. The project will require
$23,000 in extra inventory for spare parts and accessories. Should this
project be implemented if Thornley's requires a 9% rate of return? Why
or why not?
A. No; The NPV is -$2,646.00.
B. Yes; The NPV is $27,354.00.
C. Yes; The NPV is $32,593.78.
D. Yes; The NPV is $43,106.54.
E. Yes; The NPV is $196,884.40.

6-27
Jackson & Sons uses packing machines to prepare its products for
shipping. One machine costs $136,000 and lasts about 4 years before it
needs replaced. The operating cost per machine is $6,000 a year. What
is the equivalent annual cost of one packing machine if the required
rate of return is 12%? (Round your answer to whole dollars.)
A. $38,556
B. $50,776
C. $79,012
D. $101,006
E. $154,224

6-28
Bruno's, Inc. is analyzing two machines to determine which one it
should purchase. The company requires a 14% rate of return and uses
straight-line depreciation to a zero book value. Machine A has a cost of
$290,000, annual operating costs of $8,000, and a 3-year life. Machine
B costs $180,000, has annual operating costs of $12,000, and has a 2-
year life. Whichever machine is purchased will be replaced at the end
of its useful life. Which machine should Bruno's purchase and why?
(Round your answer to whole dollars.)
A. Machine A; because it will save the company about $8,600 a year
B. Machine A; because it will save the company about $132,912 a year
C. Machine B; because it will save the company about $200,000 a year
D. Machine B; because it will save the company about $11,600 a year
E. Machine B; because its equivalent annual cost is $199,759

6-29
. Kay's Nautique is considering a project which will require additional
inventory of $128,000 and will also increase accounts payable by
$45,000 as suppliers are willing to finance part of these purchases.
Accounts receivable are currently $80,000 and are expected to increase
by 10% if this project is accepted. What is the initial project cash flow
needed for net working capital?
A. $75,000
B. $91,000
C. $99,000
D. $136,000
E. $181,000

6-30
Lottie's Boutique needs to maintain 20% of its sales in net working
capital. Lottie's is considering a 3-year project which will increase
sales from their current level of $110,000 to $130,000 the first year and
$145,000 a year for the following two years. What amount should be
included in the project analysis for the last year of the project in
regards to the net working capital?
A. -$35,000
B. -$7,000
C. $0
D. $7,000
E. $35,000

6-31
 Margarite's Enterprises is considering a new project. The project will
require $325,000 for new fixed assets, $160,000 for additional
inventory and $35,000 for additional accounts receivable. Short-term
debt is expected to increase by $100,000 and long-term debt is
expected to increase by $300,000. The project has a 5-year life. The
fixed assets will be depreciated straight-line to a zero book value over
the life of the project. At the end of the project, the fixed assets can be
sold for 25% of their original cost. The net working capital returns to
its original level at the end of the project. The project is expected to
generate annual sales of $554,000 and costs of $430,000. The tax rate
is 35% and the required rate of return is 15%.
What is the initial cost of this project?
A. $325,000
B. $420,000
C. $425,000
D. $520,000
E. $620,000 6-32
 Margarite's Enterprises is considering a new project. The project will
require $325,000 for new fixed assets, $160,000 for additional
inventory and $35,000 for additional accounts receivable. Short-term
debt is expected to increase by $100,000 and long-term debt is
expected to increase by $300,000. The project has a 5-year life. The
fixed assets will be depreciated straight-line to a zero book value over
the life of the project. At the end of the project, the fixed assets can be
sold for 25% of their original cost. The net working capital returns to
its original level at the end of the project. The project is expected to
generate annual sales of $554,000 and costs of $430,000. The tax rate
is 35% and the required rate of return is 15%.
What is the amount of the earnings before interest and taxes for the first year of this
project?
A. $38,500
B. $59,000
C. $67,000
D. $76,500 6-33
 Margarite's Enterprises is considering a new project. The project will
require $325,000 for new fixed assets, $160,000 for additional
inventory and $35,000 for additional accounts receivable. Short-term
debt is expected to increase by $100,000 and long-term debt is
expected to increase by $300,000. The project has a 5-year life. The
fixed assets will be depreciated straight-line to a zero book value over
the life of the project. At the end of the project, the fixed assets can be
sold for 25% of their original cost. The net working capital returns to
its original level at the end of the project. The project is expected to
generate annual sales of $554,000 and costs of $430,000. The tax rate
is 35% and the required rate of return is 15%.
What is the amount of the after-tax cash flow from the sale of the fixed assets at the
end of this project? (Round your answer to whole dollars.)
A. $28,438
B. $37,918
C. $52,813
D. $60,009 6-34
 Margarite's Enterprises is considering a new project. The project will
require $325,000 for new fixed assets, $160,000 for additional
inventory and $35,000 for additional accounts receivable. Short-term
debt is expected to increase by $100,000 and long-term debt is
expected to increase by $300,000. The project has a 5-year life. The
fixed assets will be depreciated straight-line to a zero book value over
the life of the project. At the end of the project, the fixed assets can be
sold for 25% of their original cost. The net working capital returns to
its original level at the end of the project. The project is expected to
generate annual sales of $554,000 and costs of $430,000. The tax rate
is 35% and the required rate of return is 15%.
What is the cash flow recovery from net working capital at the end of this project?
A. $95,000
B. $147,812
C. $195,000
D. $247,812
E. $295,000 6-35