CORRECT ANSWERS

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1. Zellars, Inc. is considering two mutually exclusive projects, A and B. Project A costs $95,000 and is expected to generate $65,000 in year one and $75,000 in year two. Project B costs $120,000 and is expected to generate $64,000 in year one, $67,000 in year two, $56,000 in year three, and $45,000 in year four. Zellars, Inc.'s required rate of return for these projects is 10%. The internal rate of return for Project A is (Points : 1) 
31.43%.
29.42%.
25.88%.
19.45%.




2. Nickel Industries is considering the purchase of a new machine that will cost $178,000, plus an additional $12,000 to ship and install. The new machine will have a 5-year useful life and will be depreciated using the straight-line method. The machine is expected to generate new sales of $85,000 per year and is expected to increase operating costs by $10,000 annually. Nickel's income tax rate is 40%. What is the projected incremental cash flow of the machine for year 1? (Points : 1) 
$54,800
$60,200
$66,350
$68,200




3. A project for Jevon and Aaron, Inc. results in additional accounts receivable of $400,000, additional inventory of $180,000, and additional accounts payable of $70,000. What is the additional investment in net working capital? (Points : 1) 
$580,000
$510,000
$270,000
$150,000

4. J & B Corp. is investing in a major capital budgeting project that will require the expenditure of $16 million. The money will be raised by issuing $2 million of bonds, $4 million of preferred stock, and $10 million of new common stock. The company estimates is after-tax cost of debt to be 7%, its cost of preferred stock to be 9%, the cost of retained earnings to be 14%, and the cost of new common stock to be 17%. What is the weighted average cost of capital for this project? (Points : 1) 
12.20%
13.12%
13.75%
14.23%


5. Zellars, Inc. is considering two mutually exclusive projects, A and B. Project A costs $95,000 and is expected to generate $65,000 in year one and $75,000 in year two. Project B costs $120,000 and is expected to generate $64,000 in year one, $67,000 in year two, $56,000 in year three, and $45,000 in year four. Zellars, Inc.'s required rate of return for these projects is 10%. The profitability index for Project A is (Points : 1) 
1.27.
1.22.
1.17.
1.12.


6. If depreciation expense in year one of a project increases for a highly profitable company, (Points : 1) 
net income decreases and incremental free cash flow decreases.
net income increases and incremental free cash flow increases.
the book value of the depreciating asset increases at the end of year one.
net income decreases and incremental free cash flow increases.


7. Porky Pine Co. is issuing a $1,000 par value bond that pays 8.5% interest annually. Investors are expected to pay $1,100 for the 12-year bond. Porky will pay $50 per bond in flotation costs. What is the after-tax cost of new debt if the firm is in the 35% tax bracket? (Points : 1) 
8.23%
4.55%
4.70%
7.45%


8. Higgins Office Corp. plans to maintain its optimal capital structure of 40 percent debt, 10 percent preferred stock, and 50 percent common equity indefinitely. The required return on each component source of capital is as follows: debt--8 percent; preferred stock--12 percent; common equity--16 percent. Assuming a 40 percent marginal tax rate, what after-tax rate of return must Higgins Office Corp. earn on its investments if the value of the firm is to remain unchanged? (Points : 1) 
12.40 percent
12.00 percent
11.12 percent
10.64 percent

9. Which of the following cash flows are not considered in the calculation of the initial outlay for a capital investment proposal? (Points : 1) 
increase in accounts receivable
cost of issuing new bonds if the project is financed by a new bond issue
installation costs
none of the above –

all are considered


10. Rent-to-Own Equipment Co. is considering a new inventory system that will cost $750,000. The system is expected to generate positive cash flows over the next four years in the amounts of $350,000 in year one, $325,000 in year two, $150,000 in year three, and $180,000 in year four. Rent-to-Own's required rate of return is 8%. What is the internal rate of return of this project?