FIN600 – MODULE 4 QUIZ 1

 

MODULE 4 QUIZ 1

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Question 1

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%?

Select one:a. $2,208.11b. $2,954.17c. $4,306.09d. $5,208.11 Correcte. $5,954.17

 

Question 2

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?

Select one:a. $1,200,000b. $1,840,000c. $1,890,000d. $2,010,000 Correcte. $2,060,000

 

Question 3

Including the option to expand in your project analysis will tend to:

Select one:a. Extend the duration of a project but not affect the project’s net present value.b. Increase the cash flows of a project but decrease the project’s net present value.c. Increase the net present value of a project. Correctd. Decrease the net present value of a project.e. Have no effect on either a project’s cash flows or its net present value.

 

Question 4

 Conducting scenario analysis helps managers see the:

Select one:a. Impact of an individual variable on the outcome of a project.b. Potential range of outcomes from a proposed project. Correctc. Changes in long-term debt over the course of a proposed project.d. Possible range of market prices for their firm’s stock over the life of a project.e. Allocation distribution of funds for capital projects under conditions of hard rationing.

 

Question 5

 Ernie’s Electrical is evaluating a project that will increase sales by $50,000 and costs by $30,000. The project will cost $150,000 and 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?

Select one:a. $3,300b. $5,000c. $8,300d. $13,200e. $18,300 Correct

Question 6

 

The Quick-Start Company has the following pattern of potential cash flows with its planned investment in a new cold weather starting system for fuel injected cars. Use the following facts to draw the decision tree for your analysis.

At time zero, they can either choose to invest $20,000,000 in order to test their new system or they can just do nothing.

At time one, if they have chosen to conduct the test, they will know what the results are.  There is a probability of 60% that the test will be a success, and a probability of 40% that the test will be a failure.

If the test is a success, they then must decide if they want to invest $100,000,000 in order to create a production facility.

If they invest, then they can expect revenues of $66,000,000 per year for four years (starting in year 2). Otherwise they can expect no additional revenues.

 If the company has a discount rate of 17%, should it decide to invest?

Select one:a. Yes, NPV = $2.2 millionb. Yes, NPV = $21.6 million Correctc. No, NPV = -$1.9 milliond. Yes, NPV = $ 8.6 millione. No, since more than one branch is NPV = 0 or negative, the firm must reject. Comments Comments:

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