Question 3 If an asset is sold for less than its purchase price but more than it

Question

Question 3

If an asset is sold for less than its purchase price but more than its depreciation book value:

the asset sale creates no taxable event

there is a tax computed using the ordinary income rate

there is a taxable event with a capital loss created

there is a loss to report for tax purposes

0.66667 points   

Question 5

A problem associated with the payback method is:

it uses the time value of money concept

it doesn't consider cash flows after the payback period

it assumes that all cash flows are invested at the cost of capital

it usually requires less time to compute than that required by the net present value method

0.66667 points   

Question 7

The project selection method most consistent with the goal of firm value maximization is:

IRR

payback method

both IRR and NPV

NPV

0.66667 points   

Question 8

You have purchased a machine for $120,000 and are depreciating it using a three-year MACRS schedule. You are in a 30% tax bracket and will be able to sell the machine for $50,000 at the end of year four. Calculate your cash flow from the sale of this machine.

$35,000

$30,000

$12,336

$28,784

0.66667 points   

0.66667 points   

Question 11

The relationship between NPV of a project and the required rate of return is:

random

negative

positive

determined by the relationship of NPV to IRR

0.66667 points   

Question 12

The payback period is best defined as:

the time period required for total revenue received to equal the initial investment

the time period required for the NPV to equal zero

the time it takes to receive cash flows sufficient to cover your initial investment

the time period required for the present value of all cash flows to equal the initial investment

0.66667 points   

Question 13

When the used asset is eventually sold for less than its depreciated book value:

then the difference is taxed as ordinary income

there is a capital gain tax

there are no tax effects

The firm's tax liability is reduced by the amount of the difference times the ordinary income tax rate

0.66667 points   

Question 14

Calculate the IRR for the following investment project:
Initial investment is $75,000; inflows are $20,000 for the next five years;
Range of IRR is between 9%-14%. (Round your answer to the nearest whole percentage)

9%

10%

14%

12%

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Question 15

If a new machine requires an increase in current assets from $50,000 to $60,000 and current liabilities from $30,000 to $50,000, the dollar change in net working capital is:

undefined

zero

negative

positive

0.66667 points   

Question 16

In cases of conflict among mutually exclusive projects, the one with highest:

cost of capital should be chosen

with mutually exclusive projects, NPV = IRR so the highest of either is appropriate

NPV should be chosen

IRR should be chosen

0.66667 points   

Question 17

$100,000

20,000

3,000

15,000

Change in operating expenses 5,000/year

$123,000

$120,000

$138,000

$128,000

0.66667 points   

Question 18

An externality can best be described as:

something that should not be considered in the capital budgeting process.

something that always represents a negative impact

an impact, positive or negative, that a new project would have on existing projects

an example of opportunity costs

0.66667 points   

Question 19

$60,000

$55,000

$62,000

$58,000

0.66667 points   

Question 20

Independent projects:

can be mutually exclusive under certain conditions

always have negative NPVs

do not compete with each other

do compete with each other

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Question 21

Which of the following situations would not be considered as an incremental cash flow for a proposed new machine?

externalities created by the project

tax changes

changes in overhead

prepaid rent expense

0.66667 points   

Question 22

In capital budgeting financing costs associated with incremental cash flows:

are not included in the cash flow figures because they are not relevant cash flows

need to be included in the cash flows that are discounted because they will not occur if the project is rejected.

lead to distortions in the capital budgeting decision

are factored into the discount rate

0.66667 points   

Question 23

Depreciation associated with a project will:

cause incremental cash flows to increase

only affect the fixed asset account as depreciation is a sunk cost

have no effect on incremental cash flows

cause incremental operating cash flows to decrease

0.66667 points   

Question 24

Given the following information, calculate the net present value:
Initial outlay is $50,000; required rate of return is 10%; current prime rate is 12%; and cash inflows at the end of the next 4 years are $60,000, $30,000, $40,000, and $50,000.

less than 0

equal to 0

$87,734

$93,542

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Question 25

For a higher than average risk project, the analyst:

adjusts the discount rate upward in the IRR calculation

uses a risk-free rate of interest as the required rate of return

always rejects the project

adjusts the discount rate upward in the NPV calculation

0.66667 points   

Question 26

The relevant cash flows in capital budgeting can best be described as:

externality cash flows

incremental cash flows

incremental after-tax net income

changes in fixed asset cash flows

0.66667 points   

Question 27

Given the following information, calculate NPV: Initial investment is $50,000; inflows at the end of the next four years are $12,000, $4,000, $12,000, $13,000; required rate of return is 8%.

$83,622

-$12,442

-$16,378

-$10,427

0.66667 points   

Question 28

NPV represents:

the percentage change represented by the project

the dollar change in firm value resulting from undertaking a project

the dollar profits added to the firm discounting at the cost of capital

the percentage return of the project

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Question 29

You have purchased equipment costing $100,000 and will depreciate it according to the schedule for a MACRS five-year asset. You have a 40% tax rate and sell the equipment for $25,000 at the end of six years. Calculate your taxes.

$15,000

$ 6,920

$ 3,080

$10,000

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Question 30

Calculate the payback period for the following investment: A machine costs $100,000 with installation costs of $15,000. Cash inflows are expected to be 26,000 per year for the next seven years.

5 years

3.85 years

greater than 6 years

4.42 years

A.

the asset sale creates no taxable event

B.

there is a tax computed using the ordinary income rate

C.

there is a taxable event with a capital loss created

D.

there is a loss to report for tax purposes

Explanation / Answer

3. B

5. B

6. D

11. B

12. C

13. D

14. B

16. C

17. C

18. C

20. C

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