FIN370T Wk. 5 – Apply: Exercise

If a firm has already paid an expense or is obligated to pay one in the future, regardless of whether a particular project is undertaken, that expense is a:

• obligated cost.
• committed cost.
• complementary cost.
• sunk cost.

To correctly project cash flows, we need to consider all of the factors EXCEPT:

• the likely impact that the new service or product will have on the firm’s existing products’ cost and revenues.
• All of the options are factors that need to be considered.
• the new product’s or service’s costs and revenues.
• use of assets or employees already employed by the firm.

A new project would require an immediate increase in raw materials in the amount $17,000. The firm expects that accounts payable will automatically increase $7,000. How much must the firm expect its investment in net working capital to increase if they accept this project?

• $24,000
• $7,000
• $17,000
• $10,000

Section 179 allows a business, with certain restrictions, to do which of the following?

• Expense the asset immediately in the year of purchase.
• Expense the asset using double declining balance depreciation during the life of the asset.
• Get a government grant to purchase the asset.
• Offset the tax liability with the cost of the asset in the year of purchase.

When looking at which of these types of projects, one must consider any cash flows that arise from surrendering old equipment before the end of its useful life?

• New projects
• Replacement projects
• Cost-cutting projects
• Incremental projects

You are trying to pick the least expensive car for your new delivery service. You have two choices: the Scion xA, which will cost $13,000 to purchase and which will have OCF of −$1,200 annually throughout the vehicle’s expected life of three years as a delivery vehicle; and the Toyota Prius, which will cost $23,000 to purchase and which will have OCF of −$550 annually throughout that vehicle’s expected five-year life. Both cars will be worthless at the end of their life. If you intend to replace whichever type of car you choose with the same thing when its life runs out, again and again out into the foreseeable future, and if your business has a cost of capital of 16 percent, what is the difference in the EAC of the two cars?

• $601.51
• $428.04
• $381.36
• $586.07

Compute the NPV for Project X with the cash flows shown as follows if the appropriate cost of capital is 9 percent.

• −$175.66
• $486.29
• −$2,013.18
• $9,824.34

Which of the following is a technique for evaluating capital projects that tells how long it will take a firm to earn back the money invested in a project plus interest at market rates?

• Payback
• Discounted payback
• Net present value
• Profitability index

Compute the PI statistic for Project X and note whether the firm should accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 10 percent.

• 10 percent, reject
• 26 percent, accept
• 22 percent, accept
• 96 percent, accept

Compute the PI statistic for Project Q and advise the firm whether to accept or reject the project with the cash flows shown as follows if the appropriate cost of capital is 12 percent.

Project Q

• The project’s PI is 5.70 percent and the project should be accepted.
• The project’s PI is 3.70 percent and the project should be accepted.
• The project’s PI is −8.70 percent and the project should be rejected.
• The project’s PI is −11.70 percent and the project should be rejected.

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