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CORPORATE FINANCE EXAM QUESTIONS AND ANSWERS #18.
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CORPORATE FINANCE EXAM QUESTIONS AND ANSWERS #18This is the process of estimating expected future cash flows of a project using only the
relevant parts of the balance sheet and income statements. - correct answer pro forma
analysis
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 - correct answer sunk
cost
Effects that arise from a new product or service that increase sales of the firm's existing
products or services are referred to as - correct answer complementary effects.
Effects that arise from a new product or service that decrease sales of the firm's existing
products or services are referred to as - correct answer substitutionary effects.
Which of the following is NOT included when calculating the depreciable basis for real
property? - correct answer financing fees
A decrease in net working capital (NWC) is treated as a - correct answer cash inflow
Suppose you sell a fixed asset for $90,000 when its book value is $95,000. If your
company's marginal tax rate is 40%, what will be the effect on cash flows of this sale
(i.e., what will be the after-tax cash flow of this sale)? - correct answer $92,000
You are trying to pick the least-expensive machine for your company. You have two
choices: machine A, which will cost $50,000 to purchase and which will have OCF of -
$3,500 annually throughout the machine's expected life of three years; and machine B,
which will cost $75,000 to purchase and which will have OCF of -$4,900 annually
throughout that machine's four-year life. Both machines will be worthless at the end of
their life. If you intend to replace whichever type of machine 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 14 percent, which one should you choose? - correct
answer Machine A
You have been asked by the president of your company to evaluate the proposed
acquisition of a new special-purpose truck for $75,000. The truck falls into the MACRS
three-year class, and it will be sold after three years for $13,000. Use of the truck will
require an increase in NWC (spare parts inventory) of $5,000. The truck will have no
effect on revenues, but it is expected to save the firm $20,000 per year in before-tax
operating costs, mainly labor. The firm's marginal tax rate is 40 percent. What will the
operating cash flow for this project be during year 3? - correct answer $16,443.00
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