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A project is expected to create operating cash flows of $26,000 a year for three years. The initial cost of the fixed assets is $54,000. These assets will be worthless at the end of the project. An additional $4,500 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 14 percent?

a)      $1,678.57

b)      $9,399.80

c)       $399.80

d)      $4,899.80

e)      $1,862.43


Scenario analysis is best described as the determination of the:

a)      Change in a project's net present value given a stated change in projected sales.

b)      Reasonable range of project outcomes.

c)       Most likely outcome for a project.

d)      Effect that a project's initial cost has on the project's net present value.

e)      Variable which has the greatest effect on a project's outcome.



You are analyzing a project and have developed the following estimates. The depreciation is $4,200 a year and the tax rate is 34 percent. What is the best case operating cash flow?

                                                Base case                            Lower bound                     Upper bound

Unit sales                            1,700                                     1,650                                     1,750

Sales price                           $ 31                                        $ 29                                        $ 33

Variable cost per unit     $ 17                                        $ 16                                        $ 18

Fixed cost                            $ 6,500                                  $ 5,000                                  $ 8,000


a)      $17,763

b)      $17,027

c)       $14,196

d)      $15,280

e)      $13,473




A 9-year project is expected to generate annual revenues of $114,500, variable costs of $73,600, and fixed costs of $14,000. The annual depreciation is $3,500 and the tax rate is 34 percent. What is the annual operating cash flow?

a)      $15,052

b)      $18,944

c)       $17,506

d)      $14,788

e)      $14,301


Which of the following are cash inflows from net working capital?

I. increase in accounts payable

II. increase in inventory

III. decrease in accounts receivable

IV. decrease in fixed assets

a)      III only

b)      I, II, and III only

c)       I and III only

d)      II only

e)      III and IV only



Lakeside Rides is adding a new roller coaster to its amusement park. The firm expects this addition to increase its overall ticket sales and increase attendance at its park. In particular, the firm expects to sell more tickets for its current roller coaster and experience extremely high demand for its new coaster. Sales for its boat ride are expected to decline but food and beverage sales are expected to increase significantly. Which of the following are considered side effects associated with the new roller coaster?

I. ticket sales for the new roller coaster

II. change in ticket sales for the existing coaster

III. change in ticket sales for the boat ride

IV. change in food and beverage sales

a)      I, II, and III only

b)      III only

c)       II and III only

d)      I only

e)      II, III, and IV only



A debt-free firm has net income of $128,400, taxes of $46,200, and depreciation of $21,300. What is the operating cash flow?

a)      $82,200

b)      $107,100

c)       $103,500

d)      $149,700

e)      $195,900



Glass Blowers, Inc. has a new project in mind that will increase accounts receivable by $18,000, decrease accounts payable by $6,000, increase fixed assets by $36,000, and decrease inventory by $11,000. What is the amount the firm should use as the initial cash flow attributable to net working capital when it analyzes this project?

a)      -$37,000

b)      -$45,000

c)       -$13,000

d)      -$1,000

e)      -$9,000


A pro forma financial statement is a financial statement that:

a)      Values all assets based on their current market values.

b)      Projects future years' operations.

c)       Compares the performance of a firm to its industry.

d)      Compares actual results to the budgeted amounts.

e)      Expresses all values as a percentage of either total assets or total sales.


Assume a firm has positive net earnings. The operating cash flow of this firm:

a)      Is unaffected by the depreciation expense.

b)      Is equal to net income minus depreciation.

c)       Must be negative.

d)      Increases when tax rates decrease.

e)      Ignores both depreciation and taxes.

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