PRACTICE QUESTIONS: Question 1 A project generates a revenue of $100.00 today for a service to be performed one year from today at a cost of $110.00. Which discount rate will make

PRACTICE QUESTIONS:
Question 1
A project generates a revenue of $100.00 today for a service to be performed one year from today at a cost of $110.00. Which discount rate will make the NPV greater than zero?
a.
8% APR
b.
11% APR
c.
9% APR
d.
10% APR

Question 2
A project has the following cash flows:
0
1
2
3
($500)
$100
$200
$250
What is the project’s NPV if the interest rate is $6%?
a.
$22.44
b.
($537.78)
c.
($17.76)
d.
$482.24
Question 3
A project requires an initial outlay of $100,000, and is expected to generate annual net cash inflows of $28,000 for the next 5 years. Determine the payback period for the project.
a.
0.28 years
b.
3.57 years
c.
17.86 years
d.
1.4 years
Question 4
An outlay of $180,000 is expected to yield the following cash flows:
Year Net Cash Flow
1 75,000
2 55,000
3 60,000
4 25,000
5 15,000
6 10,000
The cost of capital is 12 percent. What is the payback period?
a.
3 years
b.
2.5 years
c.
2 5/6 years
d.
3 1/3 years
Question 5
An investment project requires an outlay of $100,000, and is expected to generate annual cash inflows of $28,000 for the next 5 years. The cost of capital is 12 percent. Determine a net present value for the project.
a.
$77,884
b.
$100,940
c.
$40,000
d.
$940
Question 6
Capital Foods purchased an oven 5 years ago for $45,000. The oven is being depreciated over its estimated 10-year life using the straight line method to a salvage value of $5,000. Capital is planning to replace the oven with a more automated one that will cost $150,000 installed. If the old oven can be sold for $30,000, what is the tax liability? Assume a marginal tax rate of 40 percent.
a.
$900
b.
$2,000
c.
$127,000
d.
None of the above
Question 7
Felix Industries purchased a grinder 5 years ago for $15,000. It is being depreciated on a straight-line basis over 15 years to an estimated salvage value of zero. It could be sold now for $6,000. The firm is considering selling it and purchasing a new one. The new grinder would cost $25,000 installed and would be depreciated on a straight-line basis over 10 years to a zero estimated salvage value. The company’s marginal tax rate is 40%. Determine the net investment if the old grinder is sold and the new one purchased.
a.
$19,000
b.
$16,600
c.
$17,400
d.
None of the above/cannot be computed
Question 8
Jim Bo’s currently has annual cash revenues of $240,000 and annual operating expenses of $185,000 including $35,000 in depreciation. The firm’s marginal tax rate is 40 percent. A new cutting machine can be purchased for $120,000 that will increase revenues by $50,000 per year while operating expenses would increase to $205,000, including $42,000 in depreciation. Compute Jim Bo’s annual incremental after-tax net cash flows.
a.
$19,000
b.
$20,800
c.
$93,000
d.
$25,000
Question 9
LISP Inc. is planning to purchase a new mixer/dubber for $50,000. The new equipment will replace an older mixer that has been fully depreciated but has a salvage value of $5,000. Compute the net investment required for this project. Assume a marginal tax rate of 40 percent.
a.
$47,000
b.
$45,000
c.
$48,000
d.
None of the above
Question 10
An asset originally cost $630,000 and will be depreciated straight-line over seven years. It will be used for a five year project at which time the asset will be sold for $221,000. What is the after tax cash flow from the sale of the asset if the tax rate is 34%?
a.
$14,000
b.
$13,940
c.
$207,060
d.
$221,000