2024 – 1 Real cash flow occurring in year 2 is 60 000 If the inflation rate is 5 per year

1. Real cash flow occurring in year-2 is $60,000. If the inflation rate is 5% per year, the real rate of interest is 2%, calculate the cash flow for the year-2  

a. $60,000 

b. $55,422 

c. $66,150 

d. None of the above 

 

2. Proper treatment of inflation in the NPV calculation involves: I) Discounting nominal cash flows using the nominal discount rate II) Discounting real cash flows using the real discount rate III) Discounting nominal cash flows using the real discount rates  

a. I only 

b. II only 

c. III only 

d. I and II only 

 

3. A firm has a general-purpose machine, which has a book value of $300,000 and is sold for $500,000 in the market. If the tax rate is 35%, what is the opportunity cost of using the machine in a project?  

a. $500,000 

b. $430,000 

c. $300,000 

d. None of the above 

 

4. Capital equipment costing $250,000 today has 50,000 salvage value at the end of 5 years. If the straight line depreciation method is used, what is the book value of the equipment at the end of two years?  

a. $200,000 

b. $170,000 

c. $140,000 

d. $50,000 

 

5. A capital equipment costing $400,000 today has no (zero) salvage value at the end of 5 years. If straight-line depreciation is used, what is the book value of the equipment at the end of three years?  

a. $120,000 

b. $80,000 

c. $160,000 

d. $240,000 

 

6. For project Z, year – 5 inventories increase by $6,000, accounts receivables by $4,000 and accounts payables by $3,000. Calculate the increase or decrease in working capital for year-5.  

a. Increases by $6,000 

b. Decreases by $4,000 

c. Increases by $7,000 

d. Decreases by $7,000 

 

7. For project A in year-2, inventories increase by $12,000 and accounts payable by $2,000. Calculate the increase or decrease in net working capital for year-2.  

a. Decreases by $14,000 

b. Increases by $14,000 

c. Decreases by $10,000 

d. Increases by $10,000 

 

8. Working capital is one of the most common causes of misunderstanding in estimating project cash flows. The following are the most common errors: I) forgetting about working capital entirely II) forgetting that working capital may change during the life of the project III) forgetting that working capital is recovered at the end of the project IV) forgetting to depreciate the working capital  

a. I and II only 

b. I, II, and III only 

c. II, III and IV only 

d. I, II and IV only 

 

9. If the depreciation amount is 600,000 and the marginal tax rate is 35%, then the tax shield due to depreciation is:  

a. $210,000 

b. $600,000 

c. $390,000 

d. None of the above 

 

10. If the depreciation amount is $100,000 and the marginal tax rate is 35%, then the tax shield due to depreciation is:  

a. $35,000 

b. $100,000 

c. $65,000 

d. None of the above