Sample Quiz 3 . 1. Given the following cash flows for project A: C0 = -2000, C1 = +500 , C2 = +1500 and C3 = +5000, calculate the payback period. A) One year B) 2 years C) 3 years D) None of the above Answer : B 2. The IRR is defined as: A) The discount rate that makes the NPV equal to zero B) The difference between the cost of capital and the present value of the cash flows C) The discount rate used in the NPV method D) The discount rate used in the discounted payback period method Answer: A 3. Given the following cash flows for Project M: C0 = -2,000, C1 = +500, C2 = +1,500, C3 = +1455, calculate the IRR for the project. A) 10% B) 18% C) 28% D) None of the above E) Any of the above Answer : C 4. Project A has the following cash flows: C0 = +100, C1 = -120. What is the IRR? A) 10% B) 15% C) 20% D) None of the above Answer: C 5. In the lecture, how many approaches are discussed to calculate the cash flows from operations? A) one B) two C) three D) None of the above Answer: C 6. In Finance, depreciation is not actual cash flows but affects actual cash flows by A) B) C) D) reducing a firm’s tax payment increasing a firm’s tax payment not changing a firm’s tax payment None of the above Answer: A 7. Net Working Capital (simply referred to as working capital) is the: A) Difference between short-term assets and short term liabilities B) Difference between long-term assets and long term liabilities C) Difference between long-term assets and short term liabilities D) None of the above Answer: A 8. Net Working Capital should be considered in project cash flows because: A) They are sunk costs B) Firms must invest cash in short-term assets to produce finished goods C) Firms need positive NPV projects for investment D) None of the above Answer: B 9. The principal short-term assets are: A) Cash B) Accounts receivable C) Inventories D) All of the above E) None of the above Answer: D 10 . Proper treatment of inflation in the NPV calculation involves: A) Discounting nominal cash flows using the nominal discount rate B) Discounting real cash flows using the real discount rate C) Discounting nominal cash flows using the real discount rates D) A and B E) None of the above Answer: D Use the following to answer questions 11-13. A new project will generate sales of $74 million, costs of $42 million, and depreciation expense of $10 million in the coming year. The firm’s tax rate is 35%. 11. What is the tax payment in the coming year? A) $10 million B) $7.7 million C) $12 million D) None of the above Answer: B 12. What is the net profit (or net income or accounting profit) in the coming year ? A) $10 million B) $15 million C) $14.3 million D) None of the above Answer: C 13. What is the cash flow in the coming year? A) $24.3 million B) $30 million C) $19 million D) None of the above Answer: A Use the following to answer questions 14-20 Revenues generated by a new product are forecasted as follows: Year Revenues ______________________________ 1 $40,000 2 30,000 3 20,000 4 10,000 thereafter 0 _____________________________ Expenses are expected to be 40 percent of revenues, and working capital required in each year is expected to be 20 percent of revenues in the following year. The product requires an immediate investment of $50,000 in plant and equipment. Suppose the plant and equipment are depreciated over-four years to a salvage value of zero using straight-line depreciation. The tax rate is 40%. 14. What is the initial (year 0) investment in working capital ? A) $8,000 B) $10,000 C) $5,000 D) None of the above Answer: A 15. What is the initial (year 0) total investment in product ? A) $48,000 B) $58,000 C) $50,000 D) None of the above Answer: B 16. What is depreciation in each year ? A) $8,000 B) $10,000 C) $12,500 D) None of the above Answer: C 17. What is the cash flow in year 1? A) $28,000 B) $30,000 C) $21,400 D) None of the above Answer: C 18. What is the cash flow in year 4 ? A) $18,000 B) $10,600 C) $11,000 D) None of the above Answer: B 19. What is the cash flow in year 5 ? A) $800 B) 0 C) $500 D) None of the above Answer: B 20. What is the cash flow in year 2 ? A) $1,6800 B) $16,600 C) $15,600 D) None of the above Answer: D