School

American Military University **We aren't endorsed by this school

Course

FINANCE FINC600

Subject

Finance

Date

Oct 22, 2023

Pages

4

Uploaded by EarlCapybara3151 on coursehero.com

WEEK 3 QUIZ
1.
A 5-year project requires $65,000 of fixed assets that will be
depreciated using straight-line depreciation to a zero book value
over the life of the project. If the firm requires a minimum
average accounting return of 11.65 percent, what must be the
minimum average net income for the project to be accepted?
Multiple Choice
$8,001.29
$3,786.25 Correct
$7,572.50 Incorrect
$5,504.73
$4,029.14
Explanation
Average accounting return = .1165 = Average net income / ($65,000 + 0) / 2
Average net income = $3,786.25
2.
It will cost $28,900 to acquire a small ice cream cart. Cart sales
are expected to be $10,500 a year for three years. After the
three years, the cart is expected to be worthless. What is the
payback period?
Multiple Choice
2.75 years Correct
2.46 years
2.07 years
Never
2.68 years
Explanation
Payback period = $28,900 / $10,500 = 2.75 years
3.
The payback method

Multiple Choice
requires each firm to set a firmwide cash flow cutoff period.
ignores the time value of money. Correct
is superior to the NPV method.
considers all relevant cash flows.
discounts all cash flows properly.
4.
Thornley Co. is considering a 3-year project with an initial cost of
$636,000. The equipment is classified as MACRS 7-year
property. The MACRS table values are .1429, .2449, .1749, .
1249, .0893, .0892, .0893, and .0446 for Years 1 to 8,
respectively. At the end of the project, the equipment will be
sold for an estimated $279,000. The tax rate is 35 percent, and
the required return is 17 percent. An extra $23,000 of inventory
will be required for the life of the project. Annual sales are
estimated at $379,000 with costs of $247,000. What is the total
cash flow for Year 3?
Multiple Choice
$406,208.19
$423,008.24
$315,189.32 Correct
$319,208.19
Explanation
Depreciation
Year
3
= $636,000 × .1749 = $111,236.40
Operating cash flow
3
= ($379,000 − $247,000 − $111,236.40)(1 − .35) =
$13,496.34
Book Value
Year
3
= $636,000 × (1 − .1429 − .2449 − .1749) = $278,122.80
Aftertax salvage value = $279,000 − .35 × ($279,000 − $278,122.80) = $278,692.98
C0
3
= $13,496.34 + $23,000 + $278,692.98 = $315,189.32
5.
A project requires $1.08 million of new equipment that will be
depreciated straight-line to zero over the project's 4-year life.
The equipment is expected to be sold at the end of the project
for 33 percent of its original cost. Net working capital equal to
12 percent of sales is required and will be recouped at the end
of the project. Annual sales are projected at $487,500 with
annual costs of $302,400. What is the recovery amount
attributable to net working capital at the end of the project?

Multiple Choice
$58,500 Correct
$25,555
$42,550
$22,212
$40,100
Explanation
NWC recapture = .12 × $487,500 = $58,500
6.
Data, Inc., purchased some fixed assets four years ago at a cost
of $21,650 and is selling them today at a price of $4,500. The
assets are classified as 5-year property for MACRS. The MACRS
table values are .2000, .3200, .1920, .1152, .1152, and .0576 for
Years 1 to 6, respectively. What is the current book value of
these assets?
Multiple Choice
$6,309.19
$4,016.67
$3,741.12 Correct
$1,247.04
$8,420.02
Explanation
Book value
Year
4
= $21,650 × (1 − .2 − .32 − .192 − .1152) = $3,741.12
7.
Denver Mart is considering a project with a life of five years and
an initial cost of $136,000. The discount rate is 11 percent. The
firm expects to sell 2,200 units a year with a cash flow per unit
of $26. The firm will have the option to abandon this project
after three years at which time it expects it could sell the project
for $48,000. The firm is interested in knowing how the project
will perform if the sales forecast for Years 4 and 5 of the project
are revised such that there is a probability of 50 percent that the
sales will be 1,000 units and a probability of 50 percent they will
be 2,500 units a year. What is the net present value of this
project given your sales forecasts?
Multiple Choice
$62,025 Correct

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