Question

Secne C have so 10. Which of the following should be igpored when desermining inoremental cash ow for a new prodaer rom existing products thr weouild be lost as a neut of some cutomers wicing to the new predut E None of the above (all ane relevant concema II. Your company panchased a piece of land five years ago for $250,000 and wuqenly added $200 000 a improvements. The curnrent book value of the property in 5375,000 and the cument markot vall is 5425 000 You B $175.000 C $225,000 D. $375,000 E. 5425,000 12. Which of the following is relevant is the calculation of deprociation sing MACKS 1. The salvage value of the asset I1. The cost of the asset Ill. The MACRS property class it falls in to A. I only B. II only C. III only D. I and IIl only E. II and III only 13. Which of the following stalement compared to straight-line depreciation, MACRS allowances A Higher depreciation chargas in the carly years of an aset's lie B. Lower operating cash flews in the carlier years of n set's C. Higher total cash flows (undiscounted) over the sset's ife D. All of the above

Answer 1

7]  A

Working capital = current assets - current liabilities

When inventory decreases, current assets decrease. Therefore it will decrease working capital

8] E - both B and D are correct

An increase in net working capital is equivalent to a cash outflow. This is because the increased working capital has to be financed through cash or short-term debt. It can also be seen as an increase in initial investment. An increase in net working capital means that the increased amount is blocked through the life of the project. Hence an increase in net working capital will decrease the NPV of the project. It would also increase the payback period.

9] D

This is an opportunity cost because the existing machine could have been used in some other project or process instead of this one.

10] D

This is an example of sunk costs. Sunk costs are those that have already been incurred and cannot be recovered, irrespective of whether the project is accepted or rejected. All other costs (options A, B, and C) are costs that would be incurred if the project is actually accepted. However the market analysis costs are already incurred and therefore should not be included when determining the incremental cash flows for a project