Multiple choice

1. If the depreciable investment is $600,000 and the MACRS 5-Year class schedule is: Year-1: 20%; Year-2: 32%; Year-3: 19.2%; Year-4: 11.5%; Year-5: 11.5% and Year-6: 5.8% Calculate the depreciation for Year-2.  

a. $120,000 

b. $192,000 

c. $96,000 

d. $115,200 

2. If the depreciable investment is $1,000,000 and the MACRS 5-Year class schedule is: Year-1: 20%; Year-2: 32%; Year-3: 19.2%; Year-4: 11.5%; Year-5: 11.5% and Year-6: 5.8% Calculate the depreciation tax shield for Year-2 using a tax rate of 30%:  

a. $224,000 

b. $60,000 

c. $96,000 

d. $300,000 

3. A project requires an initial investment of $200,000 and is expected to produce a cash flow before taxes of 120,000 per year for two years. [i.e. cash flows will occur at t = 1 and t = 2]. The corporate tax rate is 30%. The assets will be depreciated using MACRS - 3 year schedule:(t = 1, 33%); (t = 2: 45%); (t = 3: 15%); (t = 4: 7%). The company's tax situation is such that it can make use of all applicable tax shields. The opportunity cost of capital is 12%. Assume that the asset can be sold for book value. Calculate the NPV of the project: (Approximately)  

a. $22,463 

b. $19,315 

c. $16,244 

d. None of the above 

4. A project requires an initial investment of $200,000 and is expected to produce a cash flow before taxes of 120,000 per year for two years. [i.e. cash flows will occur at t = 1 and t = 2]. The corporate tax rate is 30%. The assets will be depreciated using MACRS - 3 year schedule: (t = 1, 33%); (t = 2: 45%); (t = 3: 15%); (t = 4: 7%). The company's tax situation is such that it can make use of all applicable tax shields. The opportunity cost of capital is 11%. Assume that the asset can be sold for book value. Calculate the IRR for the project: (approximately)  

a. 12.00% 

b. 11.00% 

c. 17.73% 

d. None of the above 

5. You have been asked to evaluate a project with infinite life. Sales and costs are projected to be $1000 and $500 respectively. There is no depreciation and the tax rate is 30%. The real required rate of return is 10%. The inflation rate is 4% and is expected to be 4% forever. Sales and costs will increase at the rate of inflation. If the project costs $3000, what is the NPV?  

a. $500.00 

b. $1629.62 

c. $365.38 

d. None of the above 

6. A project requires an investment of $900 today. It has sales of $1,100 per year forever. Costs will be $600 the first year and increase by 20% per year. Ignoring taxes calculate the NPV of the project at 12% discount rate.  

a. $65.00 

b. $57.51 

c. $100.00 

d. Cannot be calculated as g > r 

7. Two machines, A and B, which perform the same functions, have the following costs and lives.    

Which machine would you choose? The two machines are mutually exclusive and the cost of capital is 15%.  

a. Machine A as the EAC is $1789.89 

b. Machine B as the EAC is $1922.88 

c. Don't buy either machine 

d. Accept both A and B 

8. Two mutually exclusive projects have the following NPVs and project lives.    

If the cost of capital is 15%, which project would you accept?  

a. A 

b. B 

c. Both A and B 

d. Reject both A and B 

9. OM Construction Company must choose between two types of cranes. Crane A costs 

$600,000, will last for 5 years, and will require $60,000 in maintenance each year. Crane B costs $750,000 and will last for seven years and will require $30,000 in maintenance each year. Maintenance costs for cranes A and B are incurred at the end of each year. The 

appropriate discount rate is 12% per year. Which machine should OM Construction 

purchase?  

a. Crane A as EAC is $226,444 

b. Crane B as EAC is $194,336 

c. Crane A as the PV is $816,286 

d. Cannot be calculated as the revenues for the project are not given 

10. You are considering the purchase of one of two machines required in your production 

process. Machine A has a life of two years. Machine A costs $50 initially and then $70 per year in maintenance. Machine B has an initial cost of $90. It requires $40 in maintenance for each year of its 3 year life. Either machine must be replaced at the end of its life. Which is the better machine for the firm? The discount rate is 15% and the tax rate is zero.  

a. Machine A as EAC for Machine A is $100.76 

b. Machine B as EAC for Machine B is $79.42 

c. Machine A as PV of costs for Machine A is $163.80 

d. Machine B as PV of costs for Machine B is $181.33