1.Your forecast shows $500,000 annually in sales for each of the next three years. If your
second and third year predictions have failed to incorporate 5% expected annual
inflation, how far off in total dollars is your three-year forecast?
A) $25,000
B) $50,000
C) $52,550
D) $76,250
1st year:
=
$ 500,000
2nd year:
500,000 x 1.05
=
525,000
3rd year:
Revised forecast
525,000 x 1.05
=
551,250
1,576,250
Less: Initial forecast
–
1,500,000
Equals: Change in forecast
=
$
76,250
2.For a profitable firm in the 35% marginal tax bracket with $100,000 of annual depreciation
expense, the depreciation tax shield would be:
A) $10,500
B) $30,000
C) $35,000
D) $65,000
Depreciation tax shield = depreciation x tax rate
= $100,000 x .35
= $35,000
3.What is the amount of the annual depreciation tax shield for a firm with $200,000 in net
income, $75,000 in depreciation expense and a 35% marginal tax rate?
A) $26,250
B) $43,750
C) $70,000
D) $75,000
Depreciation tax shield = depreciation expense x marginal tax rate
= $75,000 x 35%
= $26,250
4. What is the amount of the operating cash flow for a firm with $500,000 profit before
tax, $100,000 depreciation expense, and a 35% marginal tax rate?
A) $260,000
B) $325,000
C) $360,000
D) $425,000
profit before tax
$500,000
taxes @ 35%
-175,000
net profit
$325,000
+ depreciation
100,000
cash flow from operations $425,000
5.What is the present value at a 10% discount rate of the depreciation tax shield for a firm in
the 35% tax bracket that purchases a $50,000 asset being depreciated straight-line
over a five-year life to a zero salvage value?
A) $10,866
B) $13,268
C) $17,500
D) $37,908
Annual depreciation tax shield = $10,000 x .35 = $3,500
1 
1
PV of tax shield = $3,500  
5
 .1 .1(1.1) 
= 3,500 [10 – 6.2092]
= 3,500 [3.7908]
= $13,267.80
6.A new, more efficient machine will last four years and allow inventory levels to decrease by
$100,000 during its life. At a cost of capital of 13%, how does the net working capital
change affect the project's NPV?
A) NPV increases by $38,668.
B) NPV increases by $61,330.
C) NPV increases by $100,000.
D) NPV increases by $138,668.
 1 

 1.134 
Net Present Value = 100,000 – 100,000 
= $100,000 – 100,000 [.6133]
= $38,668.13