Multiple Choice Answers

A corporation is considering expanding operations to meet growing demand. With the capital expansion, the current accounts are expected to change. Management expects cash to increase by $20,000, accounts receivable by $40,000, and inventories by $60,000. At the same time accounts payable will increase by $50,000, accruals by $10,000, and long-term debt by $100,000. The change in net working capital is
a. a decrease of $40,000.
b. a decrease of $120,000.
c. an increase of $120,000.
d. an increase of $60,000.
A corporation has decided to replace an existing asset with a newer model. Two years ago, the existing asset originally cost $30,000 and was being depreciated under MACRS using a five-year recovery period. The existing asset can be sold for $25,000. The new asset will cost $75,000 and will also be depreciated under MACRS using a five-year recovery period. If the assumed tax rate is 40 percent on ordinary income and capital gains, the initial investment is ________.
a. $42,000
b. $54,240
c. $52,440
d. $50,000
Should Tangshan Mining company accept a new project if its maximum payback is 3.5 years and its initial after tax cost is $5,000,000 and it is expected to provide after-tax operating cash infl ows of $1,800,000 in year 1, $1,900,000 in year 2, $700,000 in year 3 and $1,800,000 in year 4?
a. No.
b. Yes.
c. It depends.
d. None of the above

Consider the following projects, X and Y where the firm can only choose one. Project X costs $600 and has cash flows of $400 in each of the next 2 years. Project Y also costs $600, and generates cash fl ows of $500 and $275 for the next 2 years, respectively.
Which investment should the fi rm choose if the cost of capital is 25 percent?
a. Project Y.
b. Project X.
c. Neither.
d. Not enough information to tell.
Two approaches for dealing with project risk to capture the variability of cash inflows and NPVs are
a. scenario analysis and simulation.
b. sensitivity analysis and scenario analysis.
c. sensitivity analysis and simulation.
d. none of the above.