Final Exam Finance Asean MBA

When making replacement decisions, the development of relevant cash flows is complicated when compared to expansion decisions, due to the need to calculate ________ cash inflows.

• conventional

• opportunity

• incremental

• sunk

Which of the following basic variables must be considered in determining the initial investment associated with a capital expenditure?

• incremental annual savings produced by the new asset

• cash flows generated by the new investment

• proceeds from the sale of an existing asset

• profits on the sale of an existing asset

The change in net working capital when evaluating a capital budgeting decision is ________.

• the change in fixed liabilities minus the change in fixed assets

• the increase in current assets

• the increase in current liabilities

• the change in current assets minus the change in current liabilities

A corporation is considering expanding operations to meet growing demand. With the capital expansion, the current accounts are expected to change. Management expects cash to increase by $20,000, accounts receivable by $40,000, and inventories by $60,000. At the same time accounts payable will increase by $50,000, accruals by $10,000, and long-term debt by $100,000. The change in net working capital is ________.

• an increase of $120,000

• a decrease of $60,000

• a decrease of $120,000

• an increase of $60,000

Use Table MACRS

A corporation is selling an existing asset for $21,000. The asset, when purchased, cost $10,000, was being depreciated under MACRS using a five-year recovery period, and has been depreciated for four full years. If the assumed tax rate is 40 percent on ordinary income and capital gains, the tax effect of this transaction is ________.

• $0 tax liability

• $7,560 tax liability

• $4,400 tax liability

• $7,720 tax liability

Cuda Marine Engines, Inc. must develop the relevant cash flows for a replacement capital investment proposal. The proposed asset costs $50,000 and has installation costs of $3,000. The asset will be depreciated using a five-year recovery schedule. The existing equipment, which originally cost $25,000 and will be sold for $10,000, has been depreciated using an MACRS five-year recovery schedule and three years of depreciation has already been taken. The new equipment is expected to result in incremental before-tax net profits of $15,000 per year. The firm has a 40 percent tax rate.

The cash flow pattern for the capital investment proposal is ________.

• a mixed stream and conventional

• a mixed stream and nonconventional

• a perpetuity and conventional

• an annuity and nonconventional

Cuda Marine Engines, Inc. must develop the relevant cash flows for a replacement capital investment proposal. The proposed asset costs $50,000 and has installation costs of $3,000. The asset will be depreciated using a five-year recovery schedule. The existing equipment, which originally cost $25,000 and will be sold for $10,000, has been depreciated using an MACRS five-year recovery schedule and three years of depreciation has already been taken. The new equipment is expected to result in incremental before-tax net profits of $15,000 per year. The firm has a 40 percent tax rate.

The book value of the existing asset is ________.

• $7,250

• $15,000

• $21,250

• $25,000

Cuda Marine Engines, Inc. must develop the relevant cash flows for a replacement capital investment proposal. The proposed asset costs $50,000 and has installation costs of $3,000. The asset will be depreciated using a five-year recovery schedule. The existing equipment, which originally cost $25,000 and will be sold for $10,000, has been depreciated using an MACRS five-year recovery schedule and three years of depreciation has already been taken. The new equipment is expected to result in incremental before-tax net profits of $15,000 per year. The firm has a 40 percent tax rate.

The tax effect on the sale of the existing asset results in ________.

• $800 tax benefit

• $1,000 tax liability

• $1,100 tax liability

• $6,000 tax liability

Cuda Marine Engines, Inc. must develop the relevant cash flows for a replacement capital investment proposal. The proposed asset costs $50,000 and has installation costs of $3,000. The asset will be depreciated using a five-year recovery schedule. The existing equipment, which originally cost $25,000 and will be sold for $10,000, has been depreciated using an MACRS five-year recovery schedule and three years of depreciation has already been taken. The new equipment is expected to result in incremental before-tax net profits of $15,000 per year. The firm has a 40 percent tax rate.

The initial outlay equals ________.

• $41,100

• $44,100

• $38,800

• $38,960

Cuda Marine Engines, Inc. must develop the relevant cash flows for a replacement capital investment proposal. The proposed asset costs $50,000 and has installation costs of $3,000. The asset will be depreciated using a five-year recovery schedule. The existing equipment, which originally cost $25,000 and will be sold for $10,000, has been depreciated using an MACRS five-year recovery schedule and three years of depreciation has already been taken. The new equipment is expected to result in incremental before-tax net profits of $15,000 per year. The firm has a 40 percent tax rate.

The incremental depreciation expense for year 1 is ________.

• $2,250

• $7,600

• $7,000

• $7,950