1. The net present value always provides the correct decision provided that ____________ (Points : 1) , Cash flow are constant over the asset’s life , The required rate of return is greater than the internal rate of return , Capital rationing is not imposed , The internal rate of return is positive , , ,2. Zellar’s, Inc. Is considering two mutually exclusive projects, A and B. Project A costs,$ 75,000 and is expected to generate $48,000 in year one and $45,000 in year two. Project B costs $80,000 and is expected to generate $34,000 on year one, $37,000 in year two, $26,000 in year three, and $25,000 in year four. Zellar, Inc.’s required rate of return for these projects is 10%. The net present value for Project B is ________ (Points : 1) , $18,097 , $21,378 , $34,238 , $42,000 , , ,3. Your company is considering a replacement of an old delivery van with a new one that is more efficient. The old van cost $30,000 when it was purchased 5 years ago. The old van is being depreciated using the simplified straight line method over a useful life of 10 years. The old van could be sold today for $5,000. The new van has an invoice price of $75,000, and it will cost $5,000 to modify the van to carry the company’s products. Cost savings from use of the new van are expected to be $ 22,000 per year for 5 years. At which time the van will be sold for its estimated salvage value of $15,000. The new van will be depreciated using the simplified straight line method over its 5 year useful life. The company’s statutory rate is 35%. Working capital is expected to increase by $3,000 at the inception of the project, but this amount will be recaptured at the end of year five. What is the incremental free cash flow for year one? (Points : 1) , $18,850 , $19,900 , $21,305 , $22,250 , , ,4. Your company is considering a replacement of an old delivery van with a new one that is more efficient. The old van cost $30,000 when it was purchased 5 years ago. The old van is being depreciated using the simplified straight line method over a useful life of 10 years. The old van could be sold today for $5,000. The new van has an invoice price of $75,000, and it will cost $5,000 to modify the van to carry the company’s products. Cost savings from use of the new van are expected to be $ 22,000 per year for 5 years. At which time the van will be sold for its estimated salvage value of $15,000. The new van will be depreciated using the simplified straight line method over its 5 year useful life. The company’s statutory rate is 35%. Working capital is expected to increase by $3,000 at the inception of the project, but this amount will be recaptured at the end of year five. What is the initial outlay required to fund this replacement project ? (Points : 1) , $81,500 , $78,500 , $74,500 , $71,000 , , ,5. Zellar’s, Inc. Is considering two mutually exclusive projects, A and B. Project A costs,$ 75,000 and is expected to generate $48,000 in year one and $45,000 in year two. Project B costs $80,000 and is expected to generate $34,000 on year one, $37,000 in year two, $26,000 in year three, and $25,000 in year four. Zellar, Inc.’s required rate of return for these projects is 10%. The internal rate of return for Project A is ________ (Points : 1) , 11.43% , 13.87% , 15.81% , 17.45% , , ,6. Zellar’s, Inc. Is considering two mutually exclusive projects, A and B. Project A costs ,$ 75,000 and is expected to generate $48,000 in year one and $45,000 in year two. Project B costs $80,000 and is expected to generate $34,000 on year one, $37,000 in year two, $26,000 in year three, and $25,000 in year four. Zellar, Inc.’s required rate of return for these projects is 10%. The profitability index for Project A is ________ (Points : 1) , 1.47 , 1.22 , 1.13 , 1.08 , , ,7. Clinton Company is financed 40 percent by equity and 60 percent by debt. If the firm expects to earn $20 million in net income and retain 40% of it, how large can the capital budget be before common stock must be sold? (Points : 1) , $8.0 million , $12.0 million , $20.0 million , $50.0 million , , ,8. Blue Jay Industries is considering the purchase of a new machine. It will replace an existing but obsolete machine that will be sold for $40,000. The existing machine is 8 years old, cost $150,000, had a 10 year useful life, and is being depreciated to zero using the straight line method. Blue Jay’s income tax rate is 40 %. What is the after tax salvage value of the old machine? (Points : 1) , $6,000 , $ 24,000 , $36,000 , $40,000 , , ,9. Jones Company has a target capital structure of 40% debt, 10% preferred stock, and 50% common equity. The company’s after tax cost of debt is 8%, its cost of preferred debt is 10%, its cost of retained earnings is 14%, and its cost of new common stock is 16%. The company stock has a beta of 1.2 and the company’s marginal tax rate is 35%. What is the company’s weighted average cost of capital if retained earnings are used to fund the common equity portion? (Points : 1) , 11.20% , 6.72% , 16.80% , 8.00% , , ,10. 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 exchange 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 , ,

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